“Looking forward, we expect growth to pick up more quickly in the second half and the growth of the year will be 5.5 percent. Yet, we have noted increasing downside risks to our forecast due to both the unfavourable global growth environment and the slower-than-expected rate of domestic credit expansion,” said ANZ Bank in its recent Vietnam Economic Update Report.
The government’s policies have shifted back to growth. Policy rates have been cut five times so far this year by a cumulative 500bps. Additionally, the government pledged to push up state spending significantly in the second half (H2). This move brought H1 growth to 4.3 percent and will affect the target of 6.0 percent in 2012. Credit growth is expected to recover in the last six months, a contrast to the contraction in H1. Greater availability of credit will boost domestic demand and production as these two factors are much lower than long-term trends.
Besides, financial support measures will help accelerate growth. The Government launched a business support package worth VND29 trillion, mostly in the form of tax reliefs for the second quarter, and planned to increase the public spending to VND21 trillion (US$1 billion) a month for the rest of the year, or more than 3 percent of GDP. Given these factors, GDP growth is forecast at over 5 percent in the third quarter and more than 6 percent in fourth quarter. The growth for 2012 will thus reach 5.5 percent.
Inflation seems under control. June CPI inflation fell to 6.9 percent y/y from 8.3 percent in May as both food and fuel prices decelerated. We think inflation will continue to trend lower in the third quarter and bottom out in the fourth to nearly 7.0 percent by year-end. This development represents a significant reduction in inflation from initial forecasts for 2012, as well as the decline in domestic growth and the prospect of global commodity prices.
Furthermore, we forecast moderate pressures on the current account will return in the second half but the balance of payment will likely record a surplus for 2012 as a whole. Slowing domestic demand reduced imports and significantly narrowed trade gap. In case domestic demand growth rises rapidly and robustly, a larger deficit trade balance is anticipated. But, abundant overseas remittances help ease pressures on current account. Meanwhile, overseas remittances and FDI disbursement inflows have remained healthy.
In the last six months, pressures from trade balance will be moderate. Therefore, the overall balance of payments recorded a surplus of US$6-7 billion in 2012, an increase of US$3 billion in 2011 (The Government forecasted a surplus of US$5 billion in the first quarter.)
However, despite monetary easing, inflation (excluding fuel and food prices) is very hard to control and still at high level (8.1 percent year on year in June). This shows that the recent decline in inflation growth mainly comes from supply factors and recurrence of escalating demand risks. So, inflation outlook for 2013 needs to be cautiously forecasted.
In case of excessive monetary loosening, trade deficit and inflation at dangerous level will increase pressures on the depreciation of Vietnamese dong. Prolonged high inflation in previous years has eroded confidence in dong and so many domestic investors may want to switch back to US dollars or gold if inflation rebounds in the coming time.
Quynh Anh
Vietnamese
