Vietnam's monetary policy turning the corner

Prime Minister Nguyen Tan Dung and the State Bank of Vietnam's (SBV) vigilance in combating inflation will only intensify following recent word that consumer prices climbed 17.51 percent y/y in April–the fastest pace in 28 months.  Moreover the rise was somewhat expected, per analysts with VinaCapital, given a 18-24% fuel price hike in late February; a 15.3% hike in power prices effective in March; pass-through from a weaker VND; and lagged impact of strong credit growth.  Likewise, however, the SBV's aggressive response since mid-February–a macro stabilization effort it labels “cautious and tight”–could see a delayed yet forceful impact that should allow nimble investors to strategically enter 5y CDS as well as sovereign credit beginning mid-year.  Aside from finally explicitly eschewing growth in favor of price stability (a virtuous policy if there ever was one for emerging market leaders), PM Dung mandate has seen the SBV raise interest rates across the board–refinancing, discount and reverse-repo rates (now most vital to interbank rates and also the rate at which the central bank lends money via the open market) sit at 13, 12 and 13 percent–though at least until inflation's delta softens look for further tightening to 2008 levels when rates peaked at 13, 15 and15 percent respectively.  Curtailing credit growth (especially dollar related) is also a stated aim as the SBV announced earlier this month it would  hike reserve ratios by 2 percentage points in May (to a range of 3-6 percent) to discourage the use of foreign currency in the banking system. Thus while ongoing inflation and liquidity concerns should keep bond prices pressured in the near-term, and cause CDS  spreads to widen on further balance of payment and dong depreciation concerns, structural flows (FDI and remittances) remain robust and it appears that the government has finally committed itself to sending a clear and consistent signal about prioritizing economic stability over growth and stabilizing expectations (a black market and gold trading clamp down, for instance).  Inflation may yet spike up however, as fuel prices will likely need to rise even more given rampant smuggling into Cambodia.  Ho Chi Minh Securities, for instance, gives a FY2011 CPI forecast now of 17.9% with an August y/y peak of 19.2%.