Inflation Slows Vietnam Growth

“The effective implementation of Resolution 11 will slow Vietnam’s near-term economic growth rate, however, the Government has to implement it as it takes time for the inflation numbers to come down,” said the Asian Development Bank (ADB) at a press briefing to introduce its Asian Development Outlook (ADO) 2011 in Hanoi.

 

The ADB has revised down its growth forecast for Vietnam in 2011 to 6.1 percent from 7 percent projected in September 2010. It expected growth to pick up again to 6.7 percent in 2012 as a more stable economic environment stimulates consumption and investment. Inflation is anticipated to remain high through 2011, averaging 13.3 percent, before moderating to average 6.8 percent in 2012.

 

ADB Country Director for Vietnam, Ayumi Konishi, said, “Because monthly inflation rate was very low between April and September last year, it will not be easy for the month on month rate to stay below last year’s level - this means that even with successful implementation of Resolution 11, Vietnam’s inflation rate measured by ‘year on year’ basis, will still continue to increase, and not decrease, in the next few months. Bringing down ‘year on year’ inflation rate to a single digit by the end of this year will require an average monthly rate of below 0.4 percent. This is very difficult, but still achievable.”

 

Concerns among the general population over loss of purchasing power, together with a slide in the local dong, boosted purchases of gold and US dollars. Foreign currency deposits climbed 21 percent in 2010. The currency came under steady depreciation pressure from about midyear, reflected in the spread between the black market rate and the reference rate of the State Bank of Vietnam (SBV) which increased to over 10 percent in January 2011. The SBV devalued the dong by 9.3 percent in February 2011, and narrowed the trading band for the dollar to dong exchange rate from ±3 percent to ±1 percent. From November 2009 to February 2011, the authorities devalued the dong, in four steps, by a total of about 20 percent against the US dollar

 

Lack of clarity over the direction of monetary policy further eroded confidence. The SBV started to withdraw monetary stimulus from late 2009, raising its base rate and ending interest rate subsidies and caps, but in 2010 it urged banks to moderate lending-rate rises. With inflation accelerating, the SBV in November 2010 raised policy rates again. That tightening seemed insufficient to counter what was by then double-digit inflation and market expectations of further dong depreciation.

 

The SBV’s capacity to support the dong was constrained by relatively low holdings of foreign exchange reserves, estimated at $12.4 billion at end-2010 (about 1.9 months of import cover).

 

ADO 2011 said growth picked up to 6.8 percent in 2010, supported by recovery in the global economy, the residual impact of domestic fiscal stimulus in 2009, and an accommodative monetary policy. Strong consumption growth of 9.7 percent stimulated private sector investment. By sector, industry expanded by 7.7 percent and the services sector grew by 7.5 percent. A rebound in exports last year, reflecting recovery in global trade, reined in the deficit in merchandise trade to US$7.1 billion on a balance-of-payments basis, from US$8.3 billion in 2009. Customs data showed that imports from China increased by 23 percent and exports there shot up by 49 percent. However, inflation hit double-digit rates by year-end, and the currency slid.

 

Overall, though, the change in policies this year has reduced domestic risks. The medium-term outlook remains favourable, with the proviso that macroeconomic stability is restored and maintained. Vietnam remains an attractive destination for foreign investors, and is well positioned to benefit from economic developments in China. Rising labour costs there will divert some FDI to other developing Asian economies, and growing domestic Chinese consumption will increase its demand for imports.

 

ADO 2011 said the immediate challenge is to restore stability in the economy by fully implementing the policy directives of February 2011.

 

“Maintaining price stability and economic growth in the longer term requires further improvements in efficiency, particularly in the state-owned sector; development of the financial system; and heavy investment in infrastructure and education to address supply-side bottlenecks,” the report recommended.

 

State-owned firms are a drag on the economy. They absorb many of the available resources but their efficiency is much lower than private firms. Hence, better performance from them would stimulate economic growth and release budget resources for more productive uses. Regardless of ownership, putting them on a commercial footing, exposing them to competition, and holding them financially accountable, particularly for non-core activities, would improve their efficiency.

 

Mr Konishi said: “Focusing on improving corporate governance and operational efficiency of state owned enterprises will enable them to contribute effectively to Vietnam’s sustainable rapid economic growth. Vietnam should focus on improving the efficiency of its economic systems, in order for it to deepen its regional integration and global value chains. Stability and efficiency will be the foundation of Vietnam’s sustainable economic growth, and we are very confident about the strong potential of Vietnam over the medium term.”

 

Further reforms are needed to safeguard the financial system (the SBV took the important step of raising minimum capital requirements in 2010). Supervision of banks would be strengthened if the capacity of the SBV to provide regulatory oversight were upgraded and if a risk-based supervision framework were adopted (shifting from a compliance-based approach). A move toward international standards for bank provisioning would also strengthen banks’ stability.

 

Notably, timely publication of economic and financial data would help to build public and investor confidence.