It is not advisable to rashly push policies to exhaustively exploit economic resources. In the long term, macroeconomic stability and inflation control are still the targets that we must reach, said Dr Nguyen Duc Thanh, Director of the Vietnam Institute for Economic and Policy Research (VEPR) at a press conference opened to announce the Vietnam Macroeconomic Report of the First Quarter 2016 in Hanoi.
Careful with liquidity traps of the economy
Dr Nguyen Duc Thanh said the economic growth in the first quarter of 2016 slowed down to 5.46 per cent from the growth of 6.12 in the same period of 2015. Notably, foreign deposits unexpectedly rose to US$7.3 billion in the quarter, fanning concerns over a so-called liquidity trap of the economy when there is an abundant source of foreign currencies at banks, he said.
Mr Pham Van Dai, Head of Macro Research Team, VEPR, said that local banks previously took deposits from foreign banks because Vietnam's economy had weak capital base and scale. However, when China devalued its yuan and Vietnam also followed the step with its dong devaluation, banks mobilised US dollars but they could not lend because companies did not want to borrow the greenback when it appreciated. Therefore, the only way for banks to take a margin was placing the money at foreign banks. He noted that this trend may still exist in the short term since the dollar interest rate has been brought to zero - an end to termed deposits. And, the guise of anti-dollarisation adopted by the State Bank of Vietnam (SBV) needs to be carried out consistently to restore confidence in dong. Then, the economy can actually absorb all foreign currency deposit placed at foreign banks.
Dr Vu Dinh Anh said many monetary and financial institutions have lowered economic growth forecasts for Vietnam in 2016. The World Bank (WB) revised down Vietnam’s GDP growth forecast from 6.5 per cent to 6.2 per cent in 2016 in its latest East Asia Pacific Economic Update. The WB projected that Vietnam’s economic growth will slow to 6.2 per cent in 2016 and 6.3 per cent in the next two years while inflation will hover at 3.5 per cent. The WB recommended continued economic restructuring with caution and sustainability, increased discipline in financial markets, public spending redirected to public services such as education, health, social protection and environmental protection from infrastructure.
Grasping opportunities from trade agreements
Dr Thanh said the economy did not grow as fast as expected in the first quarter but it may still outperform expectations in 2016 if Vietnam can grasp opportunities from free trade agreements (FTAs) and accelerated public administration reform. He said, to ensure macroeconomic stability in the coming period, policymakers must look into and anticipate inflationary risks in order to control the money supply at an appropriate level. Targeted credit growth of 18 - 20 per cent in 2016 may risk losing the rein in inflation as in recent years. The anti-dollarisation is being carried out but an appropriate policy is needed to activate dollar flows in the economy, he added.
Former Trade Minister Truong Dinh Tuyen said as deposit rates have looked up, lending rates may soon be raised up. An increase in interest rates will place pressures on exchange rate and inflation. Therefore, the banking sector should have policies to rein in interest rates. One of solutions is to restrict real estate loans. The cap of 40 per cent of short-term deposits allowed for long-term loans is necessary but it should not be applied to all banks at the same time. In addition, lenders can use the open market to refinance enterprises, thus helping ease interest rate pressures. Although the economic picture was not as bright as expected in the first quarter, it was not pessimistic, he noted. Furthermore, if the Government actually advances economic restructuring, the growth rate may be even slightly lower than the past year but it is a prerequisite for ensuring sustainable and healthy growth in the future. This is the sacrifice of short-term growth for long-term sustainable development momentum.
Economist Le Dang Doanh said Vietnam’s FTAs with other countries and regions in the world have opened up more opportunities and challenges as well. This requires Vietnam to accept strong reforms for success. Given its high and strong political will, the new Government is believed to overcome challenges and achieve new successes. However, it will need to anticipate emerging risks to control money supply, coupled with short-term budget reduction solutions. It will also need a comprehensive and effective strategy to streamline its bureaucracy and to reduce recurrent expenditures in the new cabinet term, he stressed.
Anh Phuong
Vietnamese
