Regional Inflation
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Regional Inflation

The Nation reports:

As Vietnam’s inflation rate soared to 25 per cent in May, the highest since 1992, there are rising concerns that this may result in a financial crisis and a hefty devaluation of the currency like Thailand experienced in 1997.

“There is talk that Vietnam’s currency crisis could rival Thailand’s currency crisis in 1997,” said website UOBKayHian.

A Thai financial executive said if Vietnam were to devalue its currency as a way out of economic distress, it might lead to competitive devaluation among other regional currencies, including the baht.

Vietnam’s dong dropped to its lowest in a week after the central bank set a weaker reference rate.

The currency is headed for a fifth weekly loss as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings lowered their outlook on the nation’s debt to negative, citing a slow government response to inflation.

BP: For the problems of comparing inflation between countries see this Thai Crisis post, but that aside inflation is about expectations so with higher inflation in many regional economies a well and inflation is lower in Thailand then exports might benefit. I will be interested to see how well Thailand does out of the higher food prices and how well they are sustained for the next 2-3 months. It might either be the saving grace or a false miracle.

The problem with a devaluation is that it will make petrol prices more expensive although if there is a regional devaluation and petrol prices are more expensive throughout the region together with more expensive petrol prices in Indonesia and Malaysia and now India, you will get reduced consumption, but with the size of these economies cumulatively being rather small on the world scale it will likely not have a dramatic impact on the price of oil – oil was up yesterday.* It will really take some bigger flow on effects with China and other countries who subsidize petrol removing their subsidies – see Thai Crisis post and accompanying The Economist link for more, but with the price of oil increasing you might get breaking point at some point and there might be significant flow-on effects on the price of oil if there is reduced consumption.

btw, the Thai Baht has fallen in the last month from 31 too 33 baht to the dollar, how much further will it fall?

*benzene was up to 41 baht a litre yesterday in Thailand and there is talk it might go up to 42 or 43 next week.