Economic Instability and Implicit Threats

The Vietnamese economy is in the hardest time. Inflation is at 20 per cent annually (consumer price index increased 100 per cent from 1995 to date and in 2007 and early 2008, the CPI already grew 30 per cent). The trade deficit may equal 26 per cent of GDP this year. Finally, the non-transparency of the national economy is a serious concern. These are implicit threats that may cause economic instability if the Government lacks policies to deal with them. However, the Government has promptly introduced many policies and accepted the growth slowdown to tame inflation and stabilise the national economy. This is a good signal, although it will cause serious difficulties for enterprises and small investors in the near term.

 

 

Is inflation in Vietnam simply a short term goods scarcity or is it an actual monetary phenomenon? The answer is both, according to economists. The food price increased by some 15 per cent annually in previous years, but already rose 30 per cent in the first three months of 2008. This is a consequence of farming output shrinkage and the solution depends on production conditions and weather conditions at the end of this year or early next year. However, the price of processed foods also increased by 30 per cent annually and this phenomenon is caused by the cost push and the central bank injected a large amount of cash into circulation in previous years. In fact, credit grew 50 per cent in recent times. The price of some commodities even rose over 10 per cent in March. Inflation directly affected all walks of life and is making the economy unstable.

 

The payment balance and current account balance in 2007 have not been announced but the trade deficit totalled US$12.4 billion, or 17.5 per cent of GDP. Assuming that there is no change in components forming the current account balance, the total current account deficit is from minus 10 per cent to minus 15 per cent of nominal GDP.

 

In addition, the trade deceit in Vietnam was already US$7.4 billion in the first quarter of 2008. Therefore, the trade deficit is forecast to reach US$29 billion this year. This will cause a current account deficit of 30 per cent this year in the event that other factors remain unchanged. Even assuming growth in other foreign currency sources such as overseas remittance, the current account deficit may still be minus 25 per cent of GDP.

 

The current account deficit proves the difference in savings and investment ratios. Vietnam is lending “savings” from foreign countries to finance domestic investments (equalling the deficit size). This does not matter if the lending is effectively invested because it can create incomes to settle debts for foreigners. However, such a trade deficit level together with the soaring price of securities, credit and inflation suggests that the economy is overheated and that investment and consumption is above capacity.

 

WTO entry has opened many opportunities for Vietnamese and international companies, which rushed to grasp the chances but the economy was able to absorb only a small proportion of investment capital. The effective investment, in turn, depends on the development of the financial environment, legal environment and knowledge of investors.

The non-transparency increases risks to the economy. Inflation and current account deficit is closely monitored by investors to measure economic stability. The inflation and trade deficit are serious concerns now.

There are no official statistics about short-term indirect capital sources injected into Vietnam because of non-transparency. The latest figure is the forex reserve of some US$20 billion as of May 2007, an increase of US$7 billion against late 2006. With such a trade deficit amount, US$11 billion is estimated to be channelled into Vietnam, 15 per cent of GDP. However, how much has been injected into the economy? There is no way to approach this figure. When the economy is growing, the stock market will boom but a small volume of investors demand transparency. However, when there are threats, investors will change their minds.

Hence, in a non-transparent environment, when a bad situation occurs, investors may quickly change their outlook from good to worst and the result is the rapid withdrawal of capital out of the economy.

 

In some cases, not only in recession, it is not necessary to exchange economic growth slowdown for safe inflation and trade deficit. The government has accepted this option and is introducing many policies to tighten the monetary market to curb inflation. More importantly, the government strives to keep credit growth to less than 30 per cent this year. Lowering credit growth and stabilising inflation are basic elements to bring sustainable development to Vietnam.

 

Tightening monetary and fiscal policies are only the conductor to stability. To resolve the trade deficit, the Government needs tighter policies because the export began slowing down in the first quarter and in the next quarters. For instance, the policy on limiting car import is a right step. However, this has negative effects on the stock market in the near term. The economy cannot reach all goals at the same time and sacrificing growth speed is a strategy for sustainable growth.