Vietnam Suspends Gold Imports
Mike "Mish" Shedlock

Inflation is soaring in Vietnam. The cure is simple. All Vietnam has to do is stop the expansion of money and credit. Vietnam is instead looking at trade deficits and gold.

Voice of America is reporting Inflation, Trade Deficit Cause Worry in Vietnam.

Just a few months ago, Vietnam was touted as the new China, with its fast-growing economy drawing billions of dollars in foreign investment. But then came an inflation problem that seems to have gotten out of control. Now the government is wrestling with a slew of problems that threaten to knock the country's economic success off the rails. Matt Steinglass reports from Hanoi.

Vietnam's trade deficit shot up to $14 billion in the first five months of 2008, from $11 billion for all of last year. The influx of foreign currency puts pressure on the Vietnamese dong to strengthen.

But that would make Vietnamese exports more expensive, hurting local industries. So the government held down the exchange rate by buying dollars with dong, which inflated the supply of dong, contributing to inflation.

Peter Ryder, head of the investment group Indochina Capital, says that reassured investors, but perhaps not enough.

"The big, big issue in my mind is, are they going to be able to get away with just gradually devaluing the currency, is that the best thing to do? Or should they just kind of go 'whack'? Just do [devalue by] 20 percent at one time? Or are they just going to kind of let the air out of the tire [slowly devalue the currency]?"

Analysts at the investment banks Merrill Lynch, Deutsche Bank, and Morgan Stanley have warned that unless the government raises interest rates, devalues the dong, shuts down insolvent banks, and cuts government spending, it could face a currency crisis.

Vietnam's communist authorities have temporarily suspended all gold imports in a bid to tackle the country's spiralling trade deficit and help support the depreciating local currency, the dong.

With Vietnamese investors rushing into gold as a hedge against skyrocketing inflation, Hanoi - which sets an annual quota for gold imports - has withdrawn licences for further imports, traders said yesterday.

The decision comes as record imports of gold bars have made Vietnam the world's biggest market for gold bullion, surpassing India and China and helping to deepen Vietnam's trade deficit.

"We've seen high demand as Vietnamese investors have taken a rational decision that this is a hedge against higher inflation, and a weak dollar," said John Shrimpton, a director at Dragon Capital, a Ho Chi Minh City-based boutique investment bank.