VietNamNet Bridge – The government plans to pump huge amounts of capital into circulation to rescue the real estate market and settle bad debts. Will this make the high inflation return?

Factors give inflation a push

The Resolution No. 02 released on January 7 on some measures to help ease difficulties for enterprises said that VND20-40 trillion would be lent at low interest rates in order to rescue the real estate market from sinking.

State owned commercial banks would reserve some 3 percent of total outstanding loans to lend to low income earners so that they can buy the apartments or houses with the areas of less than 70 square meters which have the sale prices of below VND15 million per square meter.

The State has also decided to slash the land leasing fee by 50 percent, and lower the VAT output tax rate by 30-50 percent commencing from July 1, 2013 to June 30, 2014 for the investors who develop housing projects for the poor.

The Ministry of Finance has been asked to join forces with the relevant ministries and branches to disburse VND10 trillion dong for the program on upgrading canals and irrigation, developing rural transport and aquaculture infrastructure items.

Meanwhile, the State Bank of Vietnam is drawing up a plan on setting up the Vietnam Asset Management Company VAMC, under which VAMC would buy banks debts and make payment in bonds. The bonds could be used to mortgage at the State Bank for loans. As such, this is a way of pumping more cash into the national economy, which is also considered a factor that pushes the inflation.

Analysts said that the money disbursed in the fourth quarter of 2012 under the business support programs would be brought into circulation and show their effects as of 2013. This means that the increase in the money supply which aims to push up the economic growth would give a push to the inflation.

High inflation would burden businesses

Analysts have found an economic law in Vietnam which has been existing since 2008, when the global economic crisis broke out--that in order to fight against the “storm,” Vietnamese police makers have been regulating the national economy with the policies on tightening and then loosening the monetary policies. The tightening and loosening then led to the two-year high inflation alternating with one-year low inflation in succession.

Though the loosened policies have not taken effect, the high inflation rate in January 2013 caused a big surprise to many analysts. The consumer price index (CPI) reached 1.25 percent, the second sharpest increase over the last five years.

The lowest CPI increase in February in the last five years was 1.2 percent, while the highest was 3.6 percent. February 2013 is the Tet month, therefore, the CPI increase in the first two months of the year would not be lower than 2.5 percent; this has raised a worry that the six percent inflation rate threshold in 2013 may be broken.

The Hong Kong and Shanghai Banking Corporation (HSBC), in its latest report, also said that in 2013, Vietnam needs to be watchful over the inflation rate.

HSBC said the core inflation of Vietnam is still high at 12.6 percent in January, higher than the 12.2 percent in December 2012. The higher core inflation rate, plus the oil price increase would mean that the CPI may increase sharply, if the food prices increase.

Compiled by C. V