Vietnam Economy Falls into Deflation

As of April 30, 2012, nearly 82,000 out of more than 600,000 companies went bust and more than 16,000 registered to suspend operations. In the first four months of 2012 alone, nearly 18,000 businesses collapsed, increasing nearly 9.5 percent over the same period in 2011. Lawmaking National Assembly’s Chairman Nguyen Sinh Hung raised his concern over deflation at the meeting of the National Assembly Standing Committee.

 

Dr Dinh Thi My Loan, Vice President of Vietnam Retailers Association, said deflationary threat is now challenging the Vietnam’s economy. Retailing is a very vibrant sector but it turns quite quiet and sees negative growth in recent months. Many wholesalers and retailers went out of business in the largest number. The consumer price index (CPI) rose just 0.05 percent in April 2012, its lowest in two years, and fell in nine consecutive months. Hanoi and Ho Chi Minh City saw negative growths.

 

Dr Le Dang Doanh pinpointed worrisome risks of deflation "hidden" in expressions we have thought to be positive. For example, inflation was curbed, trade deficit was controlled and export restored stability but trade gap was narrowed because businesses reduced importation of materials for production. They did not use foreign currencies to import, resulting to a rise in foreign exchange reserves.

 

“With growth, inflation can be resolved, but, without growth, things get worse because this gives rise to production stagnation, rampant unemployment, and unpredictable social subsequence,” he said.

 

Agreeing on this standpoint, economist Bui Kien Thanh said that the negative credit growth (minus 2.13 percent) in the first three months was unusual in many years. This shows that our economy is stagnating and falling into deflation. It is much more difficult to cure deflation than inflation because deflation causes businesses to collapse. Once dead, no medicine can cure.

 

This is one of solutions to put a brake on deflation. According to experts, recent solutions like the tax-based bailout package worth of VND29 trillion (US$1.4 billion) and interest rate cut have not helped. The State Bank of Vietnam (SBV) alone is unable to stimulate credit. The tax break package only means sentimentally. To deal with this woe, a concerted coordination of many agencies and ministries is required.

 

Dr Bui Kien Thanh proposed the centre of future policies must further support exportation. China has recently provided comprehensive supports for exporters, from returning VAT and lowering interest rates to building factories and warehouses and alleviating transportation costs, to make its export cheaper and more competitive on global markets.

 

For that reason, according to Mr Thanh, what we can do should do immediately. Inventories must be addressed for enterprises to rotate funds by exempting VAT, not deferring, because price cut is important to stimulating consumption. If VAT is delayed only, prices cannot be reduced after only 4 or 5 months when the tax payment is due.

 

Besides, banks necessarily accept inventories as collaterals for loans, thus enabling businesses to continue production and reduce prices. “Currently, many companies have orders but they do not dare to accept because they lack working capital and interest rates are too high. Whatever deemed good needs to be done. The business support package initiated by the Ministry of Finance does not meet actual demand. We need synchronous monetary - fiscal policies to supporting ailing businesses and the Ministry of Industry and Trade must join the course,” added Mr Thanh.

 

Dr Le Dang Doanh said the Government essentially admits economic stagnation and urgently finds helpful measures to bring the economy out of the trouble. In addition to reducing interest rates, businesses need to be funded by banks. Once money is more available, people will tend to buy more and inventories will then decline.

 

“Contradictorily, banks have excess capital to lend but businesses cannot borrow. This contradiction needs to be resolved in order to buy bad debts incurred by corporate customers, helping businesses resume operation and repay interests. If incongruity is not dealt with, economic stagnation will prolong,” said Mr Doanh.