Vietnam's Rising Inflation and Asset Booms: an External Explanation
ECONOMIC POLICY DEBATE Vietnam 's Rising Inflation and Asset Booms: An External Explanation
Kenichi Ohno
ABSTRACT Vietnam is experiencing a rising inflation and volatility in asset markets in recent years. The main reason for this is a large inflow of foreign exchange relative to economic size, which generates liquidity surplus, economic overheating and accumulation of international reserves. Exchange overvaluation is also occurring but it is partly offset by the falling US dollar to which the Vietnamese Dong is almost pegged. This type of economic boom is commonly observed in capital-receiving countries around the world. Aggressive public investment of the Vietnamese government is contributing further to economic buoyancy. Reform of macroeconomic management and the monitoring of incoming capital are called for as Vietnam integrates into the global financial market. Global influences such as high oil and other commodity prices, as well as shocks due to floods and animal epidemics, also affect Vietnamese inflation but the main policy response should be directed to the management of large capital inflows. Key words: inflation, exchange rate, asset bubble, financial liberalization, capital account crisis.
Introduction
This paper provides analyses and proposals concerning Vietnam 's current macroeconomic problems including inflation and asset market instability. The main idea presented here is that Vietnam must look outward to understand and find solutions to these problems rather than discuss them in purely domestic terms. The current situation of Vietnam somewhat resembles that of Thailand prior to the 1997 Asian Financial Crisis. Vietnam 's economic management
must be revised to incorporate new complexities as the country moves from financial isolation to international financial integration.
The inflation puzzle
Let us start by asking this question: why has Vietnam 's inflation been higher than most neighboring countries in recent years? After the very
Kenichi Ohno
ABSTRACT Vietnam is experiencing a rising inflation and volatility in asset markets in recent years. The main reason for this is a large inflow of foreign exchange relative to economic size, which generates liquidity surplus, economic overheating and accumulation of international reserves. Exchange overvaluation is also occurring but it is partly offset by the falling US dollar to which the Vietnamese Dong is almost pegged. This type of economic boom is commonly observed in capital-receiving countries around the world. Aggressive public investment of the Vietnamese government is contributing further to economic buoyancy. Reform of macroeconomic management and the monitoring of incoming capital are called for as Vietnam integrates into the global financial market. Global influences such as high oil and other commodity prices, as well as shocks due to floods and animal epidemics, also affect Vietnamese inflation but the main policy response should be directed to the management of large capital inflows. Key words: inflation, exchange rate, asset bubble, financial liberalization, capital account crisis.
Introduction
This paper provides analyses and proposals concerning Vietnam 's current macroeconomic problems including inflation and asset market instability. The main idea presented here is that Vietnam must look outward to understand and find solutions to these problems rather than discuss them in purely domestic terms. The current situation of Vietnam somewhat resembles that of Thailand prior to the 1997 Asian Financial Crisis. Vietnam 's economic management
must be revised to incorporate new complexities as the country moves from financial isolation to international financial integration.
The inflation puzzle
Let us start by asking this question: why has Vietnam 's inflation been higher than most neighboring countries in recent years? After the very
References: n International Monetary Fund (2006a), "Vietnam: 2006 Article IV Consultation-Staff Report," IMF Country Report no.06/421, November. International Monetary Fund (2006b), "What Drives Inflation in Vietnam? A Regional Approach," prepared by Patrizia Tumbarello, in Vietnam: Selected Issues, IMF Country Report no.06/422, pp.4-34, November. International Monetary Fund (2007), "Statement by Mr. Shogo Ishii, Assistant Director, Asia and Pacific Department," at the Consultative Group Meeting for Vietnam, Hanoi, December 6-7. Yoshitomi, Masaru, and Kenichi Ohno (1999), "Capital-Account Crisis and Credit Crunch," Asian Development Bank Working Paper No.2, Tokyo. Volume 2 - Number 2 - 2008 n n n 10 Vietnam Economic management review