Fuel Price Increase Puts Disinflation At Risk

July 2008 | Economic Analysis

BMI View: Vietnam's decision to raise domestic fuel prices by 31% is a dangerous move. While the increase in petrol, diesel and fuel oil prices will help to reduce the fiscal and trade deficits, it also jeopardises the ongoing deceleration in inflation and has shaken public and investor confidence in the dong. Indeed, the black market price of Vietnam's currency shot up from VND16,700/US$ to VND17,500/US$ on the back of the price hikes as inflationary worries were rekindled. We believe the unofficial exchange rate could fall as low as VND18,000/US$ in the short term before continuing its convergence with the official rate, which climbed to VND16,610/US$ today on the back of continued central bank intervention.

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