HANOI Inflation may have finally peaked in Vietnam. Now comes the hard part for policymakers.
It is too early to start unwinding tight monetary policy but pressure to do so will no doubt rise quickly if, as some economists expect, inflation starts to ease in the next month or so.
The stability of Vietnam's beleaguered $100-billion economy and its attractiveness to investors hinge on whether policymakers stick to their guns, economists say. Also on the line is the credibility of freshly-reappointed Prime Minister Nguyen Tan Dung and his new central bank chief, Nguyen Van Binh.
"The biggest risk to the economy at this stage is a crisis of confidence in policymaking that impacts foreign exchange rates and leads to a significant deterioration in the asset quality of the banking system," said Johanna Dee Chua, chief Asia-Pacific economist at Citi.
Most of Asia has been grappling with rising prices, yet Vietnam's economy has been singularly susceptible. This is the country's second bout with inflation in excess of 20 percent in three years, underscoring the dangers of the government's traditional pro-growth policy bias.
The annual consumer price index hit 23 percent in August, the 12th consecutive month to see a rise.
But monthly inflation showed its smallest increase in a year, giving some economists hope that price pressures had peaked.
Even if inflation is set to ease, the situation remains delicate, given uncertainty about the global economy and commodity prices, a new minimum wage hike that takes effect in October, and the continued effects of February's 8.5 percent currency devaluation plus first-half power and fuel price increases.
"High inflation remains the biggest challenge to the economy in the next 12 months," said Hai Pham, an analyst at ANZ.
If inflation expectations are not managed, the currency will likely come under renewed downward pressure, undermining efforts to stabilize the economy.
CONTROLLED IN PRINCIPLE
Policymakers so far have remained on message about fighting inflation.
Dung, the prime minister, met economists at the weekend and told them that "in principle, the priority is to control inflation," the government website reported.
In the past week or so, though, there have been signs of a possible shift under way from a focus on controlling prices via tight monetary policy toward leaning more on price controls.
Tran Hoang Ngan, an influential economist and member of a committee of experts that advises the government, said monetary policy's usefulness "had been fully brought into play."
"Maintaining high interest rates and closing off credit are no longer the driving forces curbing inflation," Ngan was quoted as saying in the newspaper Nguoi Lao Dong this week. "The problem is in managing and controlling prices of goods."
The government has said it wants to better monitor and regulate prices of essential goods including petrol, steel, power, ports, milk, medicine, school and hospital fees.
Price controls in the past have upset foreign business groups, and if the shift means monetary tightness is sacrificed, it could spell trouble.
"The best thing they can do now is that they must be consistent, very consistent, with monetary policy," said Pham The Anh of the National Economics University.
The State Bank of Vietnam raised the refinance rate five times between November last year and this May, to 14 percent from 8 percent. The reverse repurchase rate for 7-day open-market operations was hiked to 15 percent from 7 percent in the same period.
But the central bank sent a confusing signal last month when it cut the reverse repurchase rate by a full percentage point.
Economists say the State Bank was likely playing catch-up with the interbank market, where some rates were already coming off highs, rather than launching an easing campaign. The central bank never fully explained its move, which it denied represented monetary easing.
Companies and banks have been vocal about their inability to function normally with interest rates in the 20 percent range and central bank governor Binh, in response, announced plans to push down commercial lending rates by a percentage point or two by the end of September.
There is also talk of boosting lending to food producing sectors and possibly easing restrictions on the flow of credit into the real estate sector.
Some in Vietnam who have lived through months of tight monetary conditions argue that prohibitively high rates must come down precisely to end the inflation cycle.
RIGHT TIME TO CUT RATES?
"I think we've effectively taken the air out of the demand side," said Andy Ho, managing director and head of investment at VinaCapital Investment Management Ltd.
"It is the right time to bring down interest rates so businesses can produce more goods and bring more supply onto the market and bring prices down."
Others think lowering commercial lending rates is playing with fire.
"If lending interest rates are reduced in September as the central bank's governor recently suggested, then higher credit and money growth fuelling higher inflation will ensue," said ANZ's Hai.
Ratings agency Fitch, which was joined by Moody's and Standard & Poor's last year in cutting Vietnam's sovereign currency credit rating, warned on August 8 that another downgrade could occur if there was "backsliding" on the tightening package and a failure to rein in inflation.
"The key is to make sure that whatever fine-tuning they do today doesn't undo the effect of the policies of the last six to nine months," said VinaCapital's Ho.
(Editing by Richard Borsuk)