Vietnam’s Economy Slows down: ADO 2012

Confronted at the start of 2011 with soaring inflation and rapidly depleting foreign reserves, the government adopted a package of monetary and fiscal tightening measures - Resolution 11 - that were sustained through the year. Policy tightening started to rein in inflation and damped economic growth, to 5.9 percent for the year as investment fell and consumption growth moderated, more than offsetting an improvement in net exports.

 

The government, attempting to expand the economy while bringing down high inflation, targets a modest acceleration in GDP growth in 2012 (to 6.0–6.5 percent) and much lower inflation (under 10 percent). Fiscal and monetary statements suggest some easing in policy settings. The budget indicates that on-budget public spending could rise by about 6 percent in real terms (compared with a decline in 2011) and the fiscal deficit target in 2012 is widened slightly from last year to 4.8 percent of GDP.

 

The SBV is targeting credit growth of 15–17 percent in 2012, slightly faster than 14.3 percent recorded in 2011, and the goal for growth in M2 money supply is 14–16 percent, up from last year’s outcome of 12.1 percent. The authorities have directed banks to continue to limit lending for property, securities, and consumer credit to 16 percent of loan portfolios.

 

Preliminary data indicate that GDP grew by 4.0 percent in the first quarter of 2012, decelerating from 6.1 percent in the fourth quarter of 2011. Industrial production increased by 4.1 percent year on year. Credit contracted by 2.5 percent during the first 2 months of this year. In further signs of sluggish economic activity, merchandise imports grew by 7 percent in the first quarter.

 

Private consumption in 2012 will get support from easing inflation. Investment will likely remain subdued, given uncertainties about the health of the financial sector, and government capital spending is expected to be flat. Growth in exports will slow from 2011, owing to weaker world trade, although Vietnam should benefit from the expected gradual pickup in the United States, its biggest export market.

 

On the balance of these factors, GDP is forecast to grow by 5.7 percent in 2012. Growth is expected to pick up to 6.2 percent in 2013, owing to the improved global outlook for trade and investment and likelihood of easier monetary policy next year.

 

Inflation is forecast to trend down this year, reflecting the policy tightening and high base set for the consumer price index in 2011. Weather conditions for agriculture were generally favourable in the first quarter of 2012 and global food prices are projected to ease this year. However, the government raised administered fuel prices by 3–12 percent in March. Average inflation this year could ease to just under double digits, provided policy settings are kept sufficiently firm. (Core inflation, which excludes food and energy, will be more persistent, though.) Year average inflation in 2013 is seen quickening to 11.5 percent, in tandem with economic growth and on expectations of higher global food prices and hikes in domestic electricity and fuel costs.

 

The current account is forecast to record a deficit equivalent to 1.5 percent of GDP in 2012 and 2.2 percent in 2013, largely due to subdued exports.

 

This outlook would be at risk if the government were to ease policies at a pace unsettling the foreign exchange market. Real savings of dong depositors have been eroded by negative interest rates over a prolonged period. The cumulative “errors and omissions” in the balance of payments, estimated at US$18 billion in 2009 - 2011, reflects large volumes of foreign currency and gold outside the banking system.

 

Lowering interest rates too quickly could put the dong under renewed pressure. This would undermine macroeconomic stabilization efforts, erode investor and consumer confidence, and undermine foreign reserves. Vulnerabilities in the banking system also pose a risk. Business confidence and the financial system would be shaken if problems at small banks were to spread.

 

While foreign reserves have been rebuilt, they are still low, making the economy vulnerable to external shocks. On the fiscal side, the costs of recapitalizing banks, restructuring state-owned enterprises (SOEs), and raising civil service wages to compensate for rapid inflation puts at risk public capital spending.

 

The authorities will need to accelerate reforms of SOEs if they are to raise the efficiency of this large sector of the economy, a prerequisite for lifting average GDP growth to 7–8 percent, the target of the Socioeconomic Development Strategy 2011-2020. Reform efforts so far have focused on small to medium-sized SOEs. The government has committed to draw up restructuring plans for 21 large state groups to make them more commercially oriented. It wants to reduce by about half the number of SOEs to 690 by 2015, and then to 200 by 2020, through full or part privatization.

 

Concerned about SOEs expanding into areas unrelated to their core businesses, the government has banned them from making such investments. Increased transparency of the financial performance of state enterprises would provide a strong signal to the market that the government was committed to reforms.