The Asian Development Outlook (ADO), a leading report of Asian Development Bank (ADB), has recently lowered Vietnam's growth rate forecast to 5.1 percent in 2012 and 5.7 percent in 2013, when the foreign market as well as local credit market remains weak. Inflation is forecast to reach seven percent in late 2012, bringing the average annual inflation rate to 9.1 percent, lower than the previous report due to a sharp plunge in food price and weaker than expected domestic demand.
Vietnam: Inflation lower than forecast
According to the report, in late 2013, inflation rate will accelerate to 9.4 percent due to an increase in global food prices and local domestic demand while the fiscal policy is loosened.
The report expects that the economic growth rate might depend on the resolution of vulnerable issues in the financial sector. A cycle of high credit growth rate followed by tightening measures leading to a low growth rate, together with the weakening of the real estate market, has created tremendous pressure for the banking industry.
ADB also expresses their support for the plan to reform the financial sector and state-owned corporations and has a high regard for notable achievements such as merging several weak banks in Vietnam. However, ADB also expresses its doubt on when the Government will take follow-up actions and how this plan of actions will be executed.
Mr Tomoyuki Kimura, Director of ADB Vietnam, believes that Vietnam needs to avoid implementing conflicting policies as in the past. The Government’s commitment to draft a trustworthy reform plan and actions with definite deadlines will help the lending market to recover and improve the confidence in the market.
ADB’s analysis also shows that a dubious bad debt number and risky balance sheets of several banks, especially banks which dealt with loss-making state-owned corporations investing in multiple industries, have put a question mark on the banks’ inherent capital safety. The growth forecast depends on the risk in the financial sector; these risks might increase until the bad debt issue is completely resolved. The report also emphasises a need for Vietnam to make the reform process more transparent.
“Publishing information regarding the progress of the reform plan can help lend credibility to the Government’s determination to execute the plan. The publicised financial information of banks and state-owned corporations will send a strong signal about the Government’s commitment to reform,” Mr Tomoyuki Kimua commented.
Last year, the tightening policy meant to curb inflation and stabilise foreign exchange rate dragged down the growth rate. The Government has started to loosen its fiscal and monetary policy when the GDP figure continued to dive in the first half of 2012. However, the 2012 and 2013 forecast numbers are lower than these in the April 2012 report by ADO. The inflation was also lower than expected. Government agencies are beginning to regulate risks in the financial sector, lest a high level of risk will dampen growth.
Two economic powerhouses in Asia also see a reduced growth rate
In the report, ADB has significantly reduced its 2012 and 2013 growth forecast for the emerging countries in Asia and believes that after many years with high growth rate, the region will have to prepare itself for a long period of medium growth rate given the decrease in global demand.
Accordingly, ADB forecasts that the accumulated GDP in the region will decrease to 6.1 percent in 2012 and 6.7 percent in 2013, considerably lower than the 7.2 percent figure in 2011. The low growth rate of two giants, People’s Republic of China and India, together with the global meltdown, has reduced people’ confidence in the market.
Nevertheless, the expected slowdown can reduce the price pressure when inflation rate decreases from 5.9 percent in 2011 to 4.2 percent in 2012 and 2013 with the assumption that global food and energy prices remain stable.
China is expected to attain a 7.7 percent growth rate this year and 8.1 percent in 2013, a considerably lower forecast compared to the 9.3 percent forecast figure in 2011. The slowdown in China is impacting other countries in East Asia when the regional export turn-over is reduced. The low demand from industrial nations results in negative consequences for the export industry in East Asia. The growth rate in the region is forecast to be 6.5 percent in 2012 and 7.1 percent in 2013.
India will see a decline in its GDP figure from 6.5 percent in 2011 to 5.6 percent in 2012. The growth prospect of India is revised downward, mainly due to the weak investment prospect, which is expected to slow the South Asia’s economic growth rate in 2012 down to 6.4 percent.
The growth rate in the Southeast Asia region is expected to increase by more than five percent in 2012, mainly due to Thailand’s recovery after a serious flood in 2011. A higher spending level in the Government will also contribute to the economic growth in Malaysia and Philippines, while investment and personal consumption will recover given a lower inflation rate.
ADB opines that even if the maximum level of damage is dealt on the Asian economy, almost all economies in the region can utilise fiscal and monetary policies to help counter the effects. Nevertheless, the current focus is not on monitoring the region demand, but rather on resolving medium-term issues such as a low demand outside the region.
Quynh Chi
Vietnamese
