Prolonged strengthening of dollar could cause import of inflation into Vietnam

Oanh, who is fond of imported cosmetics and foods, is distressed to find that every product costs a lot more than a month ago.

"An imported 100ml bottle of perfume that used to cost me only VND3 million ($67) is now nearly VND3.5 million," she says.

Lan Anh of HCMC’s Go Vap District says she has to spend an additional VND1 million to buy a phone since sellers are charging an extra VND100,000 for every $100 (VND2.48 million).

"A VND24.8-million iPhone now costs me an extra VND1 million."

The director of a seafood import company in HCMC estimates that every US$100,000 purchase now costs VND70-100 million more than when the contract was signed.

The soaring freight costs have also caused prices of imported seafood to climb 10% year-on-year, he says.

"If the dollar continues to rise, we will have to readjust prices and import volumes," he adds with a sigh.

International airfares too are affected by the exchange rate. Buyers now have to pay an extra VND80,000 for every $100.

Thus, a $500 ticket will cost customers VND400,000 more than it did a month ago.

"This might seem small for individual customers, but for group travelers or tour groups, it pushes tour prices up to much higher levels than before," a flight booking agent in HCMC’s Binh Thanh District says.

Many sellers are concerned that the higher prices will negatively affect their businesses.

Nguyen Thi Trang, who runs an imported cosmetics and pharmaceuticals store in HCMC’s District 2, says if the dollar strengthens further against the dong she might have to cut imports starting next month.

With demand already low due to the economic downturn, the stronger dollar and rising shipping costs will surely result in losses, she explains.

Hanh, who owns a business that imports clothes, shoes and footwear from the EU, says, with people already tightening their belts, even a slight increase in prices could make them reluctant to buy.

In the first two months of the year her store got 20% fewer customers than in the same period last year, she says.

"My customer base might continue to decline, especially as [imported] goods become increasingly expensive."

So far this year the dong has depreciated by 2.25% against the greenback.

This decline has been anticipated and factored into most businesses’ forecasts, and so there would not be too severe an impact even if the dong depreciates by 2-3%, experts say.

But a depreciation of more than 5% would almost surely cause inflation due to rising prices if imports, according to experts.

"If the dong’s depreciation rate reaches 7-8%, the prices of imported goods could increase by 10-15%, leading to inflation and rising interest rates," economist Prof. Dinh Trong Thinh of the University of Commerce says.

Though a weaker domestic currency can stimulate exports, the increases in import prices could result in complex macroeconomic changes, he says.

But he is confident the State Bank of Vietnam’s monetary policies will keep the fluctuation in the 2-3% range.

Concurring with him, Tran Hoang Son, director of market strategy at VPBank Securities Company, says the exchange rate typically fluctuates by 2% every year.

"If the fluctuations are maintained at around this level, the economy will not face any significant impacts."

In the unlikely case the dong depreciates by more than 3%, the economy will experience major impacts, he says.

With the U.S. expected to cut interest rates by mid-year and Vietnam’s trade surplus, remittances and FDI growing, economists expect the exchange rate to stabilize later this year.