Vietnam economy in 2010

Vietnam economy in 2010 is a series of too far events with big numbers. Among them are the 3 most important events including high interest rate, crazy gold price and high inflation

1/ Interest rate: High! Terribly high! The interest rate announced each month from the Central Bank just fluctuates around 9% [note that that interest rate has no practical value]. In fact, at the end of 2010, Techcombank raise its saving interest rate to 17%. Average rate: 14%. Why is high interest rate dangerous? And why is there such a cartel like Bank Association in a free market? High interest rate helps accumulate capital, but it also prevents investors from getting cheap capital. High interest rate means investors have to take risky investments. An economy full of non-risk-averse is like a casino. Knowing that, why do banks still join the race to the top interest rate? Because there are too many banks in Vietnam, and capital is not enough for all of them. They have to raise deposit interest rate in order to get more money, so that they can lend and earn profit. One bank raises the rate make others to react, and so on. That is what is called competition in the old Classical Economics. However, high interest does more harm than good to the economy. Therefore, the Bank Association has its member agree on a common rate to avoid harmful competition. This action can be regarded as monopoly. But we have to accept this, because in Vietnam the primary capital is from market 1. Later, only the quality of service is the key because Vietnamese people are going to use less cash by depositing more. That will be a huge capital for bank. The small gap of interest rate among banks won’t matter anymore.

Price of gold: Peak! And break all the records. 13 years ago, 1 “luong” gold had the value of 5 milion VND. Now, 37. More than 7 times. There is no investments that has such a high return like that. Gold is special commodity. In theory, gold is risky with high value, but everyone still chooses gold. Why? The expectation of a recession leads to the gold-flu. The recent crisis has made other assets less attractive than gold. Gold [and before, Yen] has always been a heaven for investors. Thus, in 2010, the price of gold rose dramatically, and Vietnam can’t do anything to stop it. However, we haven’t succeeded in what we can do, to limit the damage caused by gold to the economy. Everyone buys gold. It is a waste of resources. Because, gold doesn’t bring any output to the economy. Bond, stock… are similar, but at least they are capital instrument. Gold? Worthless. About USD, Vietnam is a special case in 2010. When every countries in the world worries about their currency rose so high in relative with USD, VND fell. Reason: expectation and trust in VND was down. Is it good or bad? It’s good for export and it’s bad for the CPI.

CPI: double the target planned before. 11,75%. What does it mean? It means a bowl of noddle costing 20k in 2009 will cost 23k in 2010. Of course it’s not that bad, but it’s the nature of CPI. There are some commodities having its price go up, some goes down. Generally, everything goes up 11,75%. CPI has a more popular name called inflation. Inflation is commonly said to be bad. But, is it really bad? To answer this question, we have to know the root of inflation. Inflation only occurs when the government injects too much money into the market. So where is the money? It is in the salary, investments, income… It means income rose alone with the inflation. So, now we had more money to buy more expensive goods. It’s a zero-sum. Nothing happens. But is it really that simple? Unfortunately, the income doesn’t rise as fast as the price. With developing countries, desired inflation should be under 10%. So, in 2010, Vietnam has suffered from inflation, but not too terrible. Another question is what makes the price go up so fast last year? Many reasons, from the world and ourselves too. The world suffers from inflation too, not only us. QE2 from US does have some impact. Small scaled currency war. Crisis. EU zone in danger. Gold price. Oil. High Interest rate… and many factors. These have contributed to a flopping inflation in 2010.


Kz