INFLATION OUTLOOK for 2005: VIETNAM AND THE WORLD

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INFLATION OUTLOOK for 2005VIETNAM AND THE WORLD
Lazaros Molho IMF-Washington lmolho_at_imf.org

• Susan J. Adams
• IMF-Hanoi
• sadams_at_imf.org

Not for quotation or distribution without
permission of authors.
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OUTLINE OF DISCUSSION Factors affecting Inflation

• World Economic Outlook
• Asia Regional Outlook
• Commodity Price Trends and Outlook
• Vietnams Inflation Story 2004-2005
• Questions?

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I. World
World
Economic
Economic
Outlook
Outlook
IMF, April 2005
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World Real GDP Growth (Annual percent change)
Projections
Trend, 19702004
1970
80
90
2000
75
85
95
05
10
Source IMF staff estimates.
5
Global Outlook World (Real GDP percent change
from four quarters earlier)
Projections
Emerging markets
World
Industrial countries
98
2000
04
06
1996
02
Source Haver Analytics.
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Consumer Prices (Annual percent change)
Projections
Developing countries (median)
Advanced economies
75
1970
85
80
90
95
2000
05
10
Source IMF staff estimates.
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Headline Inflation (Annualized percent change of
3-month moving average over previous 3-month
average)
Emerging markets
World
Industrial countries
01
Jan. 2005
2000
02
03
Source Haver Analytics.
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Core Inflation (Annualized percent change of
3-month moving average over previous 3-month
average)
Emerging markets
World
Industrial countries
01
Jan. 2005
2000
02
03
Source Haver Analytics.
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World Real Long-Term Interest Rate (Percent)
Projections
75
1970
85
80
90
95
2000
05
10
Source IMF staff estimates.
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Long-Term Interest Rates (Basis points)
United Kingdom
United States
Euro area
Japan
02
Mar. 25, 2005
2001
03
Source Bloomberg Financial Markets, LP.
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Emerging Market Spreads (Basis points)
Brazil
EMBI
2000
Mar. 25, 2005
1998
02
Source Bloomberg Financial Markets, LP.
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Global Trade (In SDR terms 3-month moving
average)
Emerging markets
World
Industrial countries
2000
01
Mar. 2005
04
1999
02
03
Source Haver Analytics.
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Global Private Consumption (Percent change from a
year ago)
Emerging markets
World
Industrial countries
2000
01
04 Q4
1999
02
03
Source Haver Analytics.
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II. Emerging
Asia
Regional
Outlook
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Global Outlook Emerging Asia (Real GDP percent
change from four quarters earlier)
Emerging Asia
Projections
China and India
NIEs
ASEAN-4
2000
04
98
02
1996
06
Source Haver Analytics.
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Emerging Asia Current Account (Percent of GDP)
Projections
ASEAN-4
NIEs
China
India
95
10
2000
1990
05
Source IMF staff estimates.
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Emerging Asia Gross Private Saving (Percent of
GDP)
2004 Value
Average 1980-96
India
NIEs
China
ASEAN-4
Source IMF staff calculations. .
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Emerging Asia Reserve Accumulation,
2002-04 (Billions of U.S. dollars)
Financial and Capital account
Current account
India
NIEs
China
ASEAN-4
Sources CEIC Data Company Limited and staff
calculations. .
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III. Commodity
Price Trends
and Outlook
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Nominal Commodity Prices
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Real Commodity Prices (1995 100)
Projections
Oil prices
Non-oil Commodity prices
75
1970
85
80
90
95
2000
05
10
Source IMF staff estimates.
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Oil Market Outlook

• The IMFs average petroleum spot price (APSP) has
  fallen by 4-5 per barrel from peak at 10/04.
• Recently, however, oil prices have rebounded and
  remain high and volatile.
• With little excess capacity, the oil market is
  very sensitive to shocks.
• Bottom Line ASPS for 2005 lt 44 per barrel
• ASPS for 2006 gt 41 per barrel.

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Non-Fuel Commodities

• Prices have increased by over 6 percent in US
  terms for Jan 2004-Jan 2005.
• Metals prices have increased by 15 percent, due
  to strong demand from China that has depleted
  2005 inventory.
• Other commodity prices are not expected to
  rebound in 2005.

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Other Non-Fuel Commodities that are Key for
Vietnam

• Coffee Prices for robusta have dropped
  recently due to the first rains in Vietnam coffee
  producing provinces creating expectations of
  larger supply.
• Rice Slight price increase expected due to both
  higher demand and weaker world supply.
• Steel Chinas steel imports are expected to
  rise by 15 percent this year, putting pressure on
  world steel prices.

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IV. Vietnams
Inflation
Story
2004-2005
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Inflation Developments and Outlook

• Inflation in 2004 rose sharply to 9.7 and
  remains well above its trend rate of 2.
• On an annualized monthly seasonally adjusted
  basis
• Inflation peaked in March at over 22 percent,
  with growth of food price inflation at nearly 50
  percent while non-food inflation remained flat.
• Inflation declined to about 3½ percent in
  November, as food prices came down to less than 2
  percent while non-food inflation increased,
  mostly reflecting oil price hikes.
• However, since November inflation has resumed its
  upward trend.

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Inflation Developments
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Seasonally adjusted inflation rates edged up in
recent months.
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Inflation Outlook in 2005

• Inflation is expected to remain high in 05 the
  worst regressive tax on the poor.
• Inflationary risks include continued high
  growth of monetary aggregates and/or fiscal
  stimulus additional wage pressure further rises
  in international commodity prices adverse
  weather conditions (drought) and a widespread
  outbreak of the avian flu.

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RELATIVE CPI WEIGHTS and RISK FACTORS in 2005
Affected by Rice prices, weather, avian flu
Affected by Steel prices
Affected by Oil prices
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OTHER FACTORS

• Wage pressures related to inflation last year,
  plus civil service salary increases approved
  10/04, could cause second round effects.
• Some sectors may operate close to capacity,
  leading to overheating and increased prices.
• MONETARY POLICYCREDIT EXPANSION last year was 42
  percent---this so far is not closely correlated
  with inflation, but what are the limits,
  especially when real GDP is targeted to be 8.6
  percent in 2005?

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INFLATION SCENARIOS
???
7.5
6.5
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