Economic Stagnation Fears Loom Large

Vietnam’s GDP growth reached 4.89 per cent in the first quarter of this year, higher than the same period of 2012 with 4.75 per cent. But, economic difficulties are reflecting in slowing agricultural and industrial production indicators.

 

According to a report by the Ministry of Planning and Investment, as of the end of March 2013, agriculture - forestry - fishery sectors expanded 2.24 per cent; industry and construction sectors increased 4.93 per cent (industrial sector increased 4.59 per cent and construction sector advanced 4.79 per cent);and service sector leaped 5.65 per cent. Except for service sectors, all growth rates were lower than the same period of 2012.

 

Agriculture - the backbone of the economy - had lower first-quarter growth than previous years. The index of industrial production (IIP) in the first quarter of 2013 climbed just 4.9 per cent from a year ago, lower than the growth of 5.9 per cent in the same quarter of 2012. This worrying signal indicates potential economic stagnation.

 

In couple with shrinking market and weakening purchasing power, capital is the biggest difficulty of enterprises. According to the State Bank of Vietnam (SBV), as of March 21, 2013, the total means of payment increased more than 3 per cent, and outstanding loans rose 0.03 per cent from the end of2012.

 

Credit growth slowed because affordable loans remained out of reach. Indeed, interest rate is just one side of the matter. More importantly, huge inventories and bad debts undermined capital absorption of enterprises. Growing inventories and weakening purchasing power fundamentally discouraged enterprises from promote production and business activities. Banks also had to seek out qualified customers to lend when capital is abundant

 

Purchasing power weakened because economic downturn dented incomes of citizens and wage earners while increased unemployment. According to the data from the Ministry of Planning and Investment, total retail sales of goods and services in the first quarter of this year augmented 4.5 per cent over the same period of 2012, which expanded4.7 per cent. Weakening demand slowed down consumer price index (CPI) and affected all economic sectors. This is a worrying signal.

 

The business community experienced a rough quarter. As many as 2,272 companies filed for bankruptcy while 13,011 firms suspended operations, an increase of 26.1 per cent from the same period of 2012.

As usual, CPI dips in March after advancing in January and February which fall on the Lunar New Year festival. According to the economic restructuring, Vietnam’s March CPI was down 0.19 per cent against February. CPI growths in March and in January - March period were low in comparison with the same periods of 2012. This was the first month in seven the monthly CPI growth carried the negative sign.

 

Slowing CPI is resulted from various factors. Credit growth was very low while deposits surged. Food prices slumped on global trends. If Vietnam had not purchased rice for stockpile, the prices would have drop further than 4.7 per cent in the quarter. Total retail revenue of goods and services crept just 3.6 per cent in the first two months, the lowest two-month growth in many years. Besides, power, coal and petroleum prices were almost unchanged in the period. The recent petroleum price hike to the all-time high will be translated in April CPI.

 

Low CPI eases burdens on enterprises because input prices do not change much and suddenly. Low CPI is also the reason for the State Bank of Vietnam (SBV) to slash interest rates more. Citizens will also feel comfort of price stability, particularly the poor and wage earners.

 

But, not long after the March CPI was announced, petroleum prices were raised despite global price slumps. The Ministry of Finance and the Ministry of Industry and Trade announced gasoline prices would be added VND362 - 1,430 to each litre sold from March 28. This move is forecast to add 0.06 per cent to April and leave continued impact in May.

 

At a press conference on April 1, Mr Vo Van Quyen, Director of Domestic Market Department under the Ministry of Industry and Trade, said the rise in fuel prices will certainly push up CPI growth and consumer goods prices. However, the degree of impact on prices will be minor given low CPI growth in the past three months.

 

Slowing CPI potentially entails sudden price rises in some essential commodities like petroleum products. Fears of economic stagnation still exist because of weakening consumer purchasing power, low credit growth, and low growth of industrial production.