Consumer price index (PCI) declined 0.26 percent in June, the first drop after 38 straight months of gains. For the time being, it is a good signal but, according to economic experts, it may herald deflation. This also distresses businesses in Vietnam, especially small and medium ones.
Dilemma
Economic uncertainties are wrecking on producers of essential goods. Pham Chi Cuong, Chairman of Vietnam Steel Association (VSA), said: Production costs of steelmakers are high because inputs like lending rates, freight rates and material prices soar. He said a tonne of steel requires a production cost of VND15.2 million. Given current selling price of VND18 million a tonne, plus 10 percent VAT, transport fees, commissions for agents, and promotions, most steelmakers do not make any profit now.
However, according to Cuong, steelmakers are unlikely to hike selling prices soon because the purchasing power is now very weak. Even, some are suffering a loss of VND200,000 - 300,000 on each tonne sold.
Similarly, carmakers have not found out a way-out although they have significantly slashed selling prices. Unfortunately, sales have not improved much. According to statistics, auto sales dropped 60 percent from a year ago. Meanwhile, rising costs in midst of poor sales forced many producers to scale down output, lay off workers, cut advertisement expenses and other services.
Real estate companies are also in the same situation. Nearly 40,000 completed apartments in Hanoi and Ho Chi Minh City are left vacated although they reduce prices and offer attractive promotions.
Mr Cao Si Kiem, Chairman of Vietnam Small and Medium Enterprises Association, said: As purchasing power has decreased dramatically, companies have to decrease prices to boost sales. This reality has sent companies into dilemma because inputs increase while sales slump. Many companies are reportedly on the brink of collapse.
Dealing with unexpected inflation
Remarking on a possible deflationary cycle, Nguyen Duc Thang, Director of Price Department under the General Statistics Office (GSO), said: The drop in CPI, the first in many months, was caused by shrinking consumption resulted from tightened monetary policy in the fight against rising inflation. However, this process caused unwanted side-effects. In fact, falling purchasing power and production stagnation were already warned as threats in 2012.
Dr Tran Du Lich said that deflation will cause many impacts on the economy, particularly employment and social security. He pointed out that if CPI does not rise 7-8 percent this year, GDP growth cannot exceed 6 percent. Hence, instead of trying to deal with inflation, Vietnam should focus on responding to unwanted inflation.
Dinh Thanh
Vietnamese
