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Inflation Fears After Vietnam Boosts Wages


Vietnam on Friday announced a 12.3% increase to the minimum wage for public servants and employees of state-owned enterprises, stoking concerns that the economy risks overheating as inflation spirals toward double digits.
Starting in May, the minimum wage will increase to 730,000 dong ($38.25) a month from 650,000 dong, the government said in a statement. Monthly pension payouts will rise by the same amount from May.
The news comes just two days after data showed consumer prices in Vietnam surging 9.46% on-year in March to a 12-month high, as costs for housing, building materials and transport all swelled.
The State Bank of Vietnam on Thursday brushed aside speculation that inflationary pressure would force it to tighten monetary policy to cool demand, announcing on its Web site that it will keep its benchmark rate steady at 8% for April. The central bank last raised rates Dec. 1.
"I would expect that (the wage increase) would exacerbate the worsening inflation problem" in Vietnam, ING chief Asia economist Tim Condon said, adding that he expects another devaluation of the dong soon.
The economy is recovering more quickly in Vietnam than in some other parts of Southeast Asia, with state media reporting Friday that first quarter gross domestic product grew 5.83%. But the economy remains burdened by high inflation and a stubbornly wide trade deficit.
While the government aims to bring inflation below 7% this year, the December rate hike so far has proved largely ineffective at reining in inflation - perhaps because authorities have twice devalued the dong in recent months.
The central bank recently said flexibility in the exchange rate will be needed in coming months to boost exports, reduce Vietnam's trade deficit and improve its international balance of payments. An official with the Ministry of Industry and Trade told Dow Jones Newswires this week that the trade deficit will widen to $1 billion in March, up 25% from a month earlier.
The government expects the trade deficit to remain around $12 billion for 2010, close to last year's $12.4 billion but down from $17.5 billion in 2008.
Economists say monetary policy also will need to be tightened to cool the economy, restrain demand-side inflation and help make dong-denominated assets more attractive to foreign investors. HSBC said this week it expects the central bank to raise interest rates by 100 basis points in the next few weeks.
Fitch Ratings weighed in earlier this month, warning that it may cut Vietnam's credit ratings deeper into junk territory because of weakening domestic confidence in the dong. Balance-of-payment support is needed before trust can be restored, Fitch said.
Economist Le Dang Doanh, a former adviser to the Vietnamese prime minister, said Friday's minimum wage hike was needed to shield workers from recent price surges.
"However, it will boost production costs and will definitely contribute to price increases in the future," he said.
Barclays Capital said in a report this week that inflation is expected to climb into double digits in April and then continue accelerating as food-related prices remain biased upward, the weak dong adds to imported price pressure and construction costs will stay elevated.