Vietnam’s Economy to Recover Gradually in Second Half

According to Minister of Planning and Investment Vo Hong Phuc, Vietnam’s economy is facing three challenges; namely the high consumer price index (CPI), lending interest rate and trade deficit, from which the Vietnamese economy will continue to reel for the rest of the year.

 

According to statistics, so far this year the consumer price index has risen 13.29 percent. In May, the Government was determined to curb the consumer price index at 15 percent for the year, meaning prices could only rise around 2 percent in the last half of the year. This is an impossible mission, he said, adding that researchers at the ministry had given out their most optimistic CPI forecasts of 17-18 percent this year, because prices are still under pressure from the continued rise in world prices and the exchange rate. The exchange rate has been kept stable for a long time, but in recent time it has become more volatile and the US dollar is expected to gain further against the Vietnamese dong toward the end of the year, Mr Phuc said.

 

Besides, prohibitively high interest rates have cut into economic performance, he said. The Government and the central bank are still applying a 14 percent cap on savings deposit rates, but the increasingly strong competition for funds to improve liquidity has forced banks to negotiate with their customers to offer a higher deposit rate for the local currency, between 4-5 per cent, with lending interest rate at 22-24 per cent. According to Mr Phuc, the government and the central bank should pay more attention to the problem in the future, because with weaknesses in the banking system, the interest rates will hardly decrease. 

 

The trade deficit will remain a great challenge for the economy. The National Assembly approved a trade gap equivalent to 18 percent of export revenue, while the Government wanted it at 16 percent, Minister Phuc said. However, Minister Phuc said, the figure in the first six months of the year has already exceeded 18 percent, thus threatening the country’s Balance of Payments, foreign reserves, and macroeconomic balances.

The World Bank’s (WB) annual publication reporting on the Vietnamese economy in the first half of the year has been released, focusing on recent changes in the Vietnamese economy and assessments of macroeconomic instability. The report builds a model to forecast economic instability, the Virtual Instrumentation & Measurement Information System (VIMIS) is based on the fluctuation of four variables, namely nominal exchange rate, foreign exchange reserve, inflation and nominal interest rates. The result of the measurement showed that the current macroeconomic instability has been nearly the same as the instability in the middle of 2008, but has not exceeded it. However, the report warned that the instability this year would be different with 2008. In 2008 the instability was serious but decreased rapidly. Now, with the hot growth rate, the instability may remain from November of 2010 to February of 2011, pushing the national economy into further difficulties.

The report highlighted the continuous efforts of the Government to stabilise the macro economy and said that the Government had succeeded in stabilising the macro-economy in recent months. After the 11^th National Party Congress, and the end of the Lunar New Year in early February, relevant agencies worked out measures to deal with the problems the national economy is facing. The devaluation of the dong by 9.3 per cent against the US dollar on February 11, 2011 and the stimulus package was partly stated in Government Resolution 11, which was approved on February 24, 2011. The report said Resolution 11 includes tightened consistent monetary policies and targets, and the Government’s plans on restructure and reform of State-run enterprises, improvement of market information and protection of the poor from shocks due to possible economic instability in the future.

 

However, the report said the Government’s efforts to stabilise the macro economy are only the first step. Though people still worry about economic instability, they admitted that the Government’s Resolution 11 is a reliable plan to stabilise the economy. For the first time in three years, the dong exchange at local commercial banks was lower than the official exchange rate of reference. The State Bank of Vietnam started buying foreign currency in the inter-banking market, aiming to raise foreign currency reserves. Vietnam’s credit risk on the global market has improved in recent times. However, there remain many risks in the banking system which could reverse the results the country gained in the past three months.

 

According to Minister Phuc, the priority of the Vietnamese Government is curbing inflation, but Vietnam should keep a stable growth rate. Vietnam always wants the growth rate at 6 per cent. This is a reasonable rate, helping stabilise the macro economy and generating jobs for local people, especially the poor. Without growth, unemployment will be higher.

 

The WB report said though the country has gained some achievements, local agencies and ministries should continue following up measures and policies approved in Resolution 11. In fact, there remains in the application of Resolution 11: weaknesses in management of public investments, half-hearted reform of State-run enterprises and poor market information forecast. Economic growth is forecast to slow in the second and third quarter of 2011, leading to the possibility of loose monetary policies and stagnant reform, which would push the national economy into more serious difficulties. Moreover, this is a good opportunity for agencies to win the confidence of the public by implementing Resolution 11 well, and especially fulfilling three important goals: curbing inflation to one digit; removing imbalance in exchange rates; and raising foreign exchange reserve at minimum level equivalent to two and a half months of imports.

 

According to the report, the Vietnamese economy will gradually recover in the second half of the year. Inflation will hit record levels in the second quarter and then reduce to around 15 per cent by the end of this year when the tightened monetary policies show effectiveness. The current account deficit is forecast to make up 5 per cent GDP and the foreign currency market will recover its stability in the near future. Once the macro economy is recovered and stable, capital flight will decrease in 2011, facilitating the State bank of Vietnam to store up foreign currency. The country’s GDP will strongly recover by the end of the year, after slowing down in the first and second quarter. The report forecast that national economic growth in 2011 will slow down to 6 per cent and likely recover in 2012. Key problems hindering the recovery include suddenly ending stabilisation measures, weaknesses of the banking system and State-owned enterprises, rising goods prices in the world market and European debt crisis and its negative impacts on other regions of the world.