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Low aggregate demand helps restrain inflation

    Inflation does not pick up although the country has spent Vietnam dong buying US$10 billion this year as the aggregate demand of the economy stays low, according to the National Financial Supervisory Commission (NFSC).

    The foreign exchange reserve has risen again, equal to 2.5 months of import at the end of the third quarter, as calculated by the World Bank (WB). As such, the forex reserve of Vietnam has significantly grown against 1.7 months of import at end-2011 and 1.8 months of import by the end of this year’s first quarter.

Ample foreign exchange reserve, less pressure on foreign exchange rate and proper balance of payments are results of export growth, import reduction and big remittance inflow.

The increase in foreign exchange reserve is attributed to the fact that the State Bank of Vietnam has used a huge amount of cash to buy U.S. dollar.

Specifically, the central bank has bought a considerable US$10 billion since this year’s beginning, meaning over VND200 trillion has been injected into the market, according to NFSC.

The foreign currency amount that the central bank has bought year to date is equivalent to the sum bought in the one-year period between 2007 and 2008, said WB and NFSC.

This poses a question why Vietnam does not suffer high inflation in 2012 like in the previous period.

The reason is seriously weakened aggregate demand, said WB and NFSC.

WB remarked the domestic demand was falling while inventory was shooting up, proven by the fact that import of raw materials and intermediate goods like fertilizers, animal feeds and cotton has been very weak.

NFSC added investment demand had sharply declined as credit capital flow was choked off.

Moreover, purchasing power in this year-end shopping season is still poor, slowing down the growth in total retail sales of goods and services.

The total retail sales of goods and services had increased 17.9% year-on-year by end-October and 16.4% as of end-November. Meanwhile, the year-on-year growth rate was 23.1% in last year’s October, 23.5% in November and 24.2% in December.

The decline in the aggregate demand and poor capital absorptive capacity are objective factors helping restrain the growth in the consumer price index this year.

The foreign exchange reserve of Vietnam, though having improved, remains low. According to WB, Vietnam’s foreign exchange reserve is equivalent to 2.3 months of import, versus 7.2 months of Indonesia, eight months of Singapore, 8.5 months of Malaysia and 13 months of the Philippines.

This is one of the many indicators that the macro-economy still has risks waiting ahead.

Source: thesaigontimes