FINANCIAL TIMES

24-9-15

Vietnam moves from hyperinflation to . . . zero

Patrick McGee

In a potent symbol of spreading deflation, zero price rises have now washed up in Vietnam for the first time since records began.

The Southeast Asian nation joins an illustrious, and none too exclusive, club hovering on the brink of deflation: other members include old hand Japan and the UK.

Dominic Rossi, chief investment officer of Fidelity Worldwide Investment, has labelled the trend, reflecting weak demand, lower commodity prices and a decline in costs for manufactured goods, the “third deflationary wave”.

Consumer price inflation in Vietnam, whose multi-zero banknotes are testament to years of hyperinflation, fell short of market forecasts for a rise of 0.8 per cent in September. The zero reading was the lowest in almost 10 years of data.

That marks a big swing for a country long-suffering from uncontrollable price rises that peaked at 774 per cent in 1988. As one UN study put it: “If the price level taken in 1976 was 100, that of 1981 would be 313, that of 1984 would be 1,400; that of 1985 would be 2,390.”

Vietnam has had considerable success taming inflation, but just two years ago prices were rising at an annual pace of more than 6 per cent. Four years ago the rate was 22 per cent.

The problem now is that the country’s inflation target remains about 5 per cent. Back in May, when prices were rising at a pace of just 1 per cent, deputy prime minister Nguyen Xuan Phuc said 5 per cent was still the target, though he acknowledged the nation’s competitiveness was weakening.

According to the Asia ex-Japan consumer price index compiled by Bloomberg, the rate for the whole region hovered around 2 per cent in the second quarter, about half the rate in early 2012 and a two-thirds below the rate in 2011.

After China devalued the renminbi on August 11, Vietnam responded by widening the trading band for the dong, twice, from 1 per cent to 3 per cent, to allow the currency to fall and support exports. The currency has since lost 3 per cent to 22,486 per dollar.

Nguyen Bich Lam, head of the General Statistics Office, said those moves should lift CPI by 0.7 per cent by year-end. He said Vietnam should aim for 5-8 per cent inflation to support growth.

The fall in inflation is mostly a result of the drop in oil prices. Prices in the transport category were down 13.1 per cent over 12 months. But food prices were also down 1.8 per cent and housing and construction material prices were down 1.7 per cent