Between a rock and a hard place

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Government faces tough choice in balancing inflation and growth concerns

  A customer looks at boxes of tea along an aisle at a supermarket in Hanoi. Vietnam's annual inflation rate last month quickened to 6.48 percent in September, from 5.04 percent in August. Photo: Reuters

Experts say the rise in inflation seen in September is not a cause for concern and that there is no need for the government to tighten its monetary policy in response.

Instead it should allow money to flow faster into local businesses, they say.

Tran Du Lich, member of the National Financial and Monetary Policy Advisory Council, said consumer prices saw an unusual monthly increase of 2.2 percent last month, but the hike was mainly caused by increases in prices for healthcare services and educational products which will not happen again.

Even if fuel prices continue to rise in the final three months of the year, it is highly unlikely that full-year inflation will rise past 8.5 percent, and will remain well within the target range of the government, he said.

"So there is no reason for us to panic, tighten lending and put more pressure on economic growth and on businesses," Lich said.

In fact, it would be "dangerous" if inflation risks are overstated, causing anxiety and pushing up prices, he said.

Annual inflation quickened to 6.48 percent in September, from 5.04 percent in August, which was the lowest since December 2009, official data show.

Vu Viet Ngoan, chairman of the National Financial Supervisory Committee, said the sudden inflation jump last month has prompted expectations and comments that the government should tighten monetary policy. He also said that this was not necessary.

"Fiscal and monetary policies don't have to go through any major change. What's important is price management and efforts to prevent panic-driven inflation and keep gold and forex market from heating up," he said. "If the market is managed properly, inflation will be under control."

Elaborating further, Ngoan said the government should not back down on its plan to inject VND21 trillion (US$1 billion) into the economy each month through the end of the year to drive growth. Banks need to keep offering loans to businesses to ensure an annual credit growth of at least 8 percent this year, he said.

Loans expanded only 2.35 percent in the first nine months, which means credit could not reach companies and that's why they are still struggling, he maintained.

Inflation, while still a concern, has eased significantly from the double-digit rates of last year. Economists feel the more urgent task now is to save local companies.

The State Bank of Vietnam in July ordered commercial lenders to reduce interest rates on outstanding loans to 15 percent and ease credit access for small companies. It has cut policy rates five times this year.

Tax reliefs have been offered, which the Finance Ministry says helped revive some 6,100 companies that had to shut down temporarily earlier this year.

But Deputy Finance Minister Do Hoang Anh Tuan admitted that in general, businesses in Vietnam are still facing difficulties and need more support. The ministry has therefore decided to give them until April next year to make their value-added-tax payment, he said.

Tran Dinh Thien, director of the Central Institute for Economic Management, said many companies have shut down, but that may be just the tip of the iceberg. Many more have cut back on production and laid off workers, but the exact number is still not known.

Most companies in the country are struggling with huge loans, high interest rates and large inventories, Thien said.

The government said last week that while its policy can keep inflation at 8 percent, it would not be easy to achieve the economic growth target.

"The government is determined to achieve 5.2 percent GDP growth this year, but it will be very difficult because that means each of the three remaining months has to record a 6.5 percent growth," Minister Vu Duc Dam, head of the government office told the press.

With the return of inflation, experts are not expecting another rate cut. ANZ said in a note late last month that new inflation data will complicate the central bank's monetary policy decisions. "Rising inflation momentum will limit the State Bank of Vietnam's scope to ease monetary policy further," the bank said.

And not all experts agree that inflation is no longer a concern.

October's consumer price index is expected to rise between 0.8 percent and 1.5 percent from September, the Hanoi Moi newspaper reported Monday, citing experts from the finance and the trade ministries. The goal to keep inflation in single digits will be a tough task, they said, noting that food prices, which have remained stable so far, may surge towards the end of the year.

Luu Bich Ho, a former chief policy advisor for the Ministry of Planning and Investment, said price increases are not the only factors that fueled inflation last month. The government's money injection also contributed to the acceleration of the consumer price index, he said.

Chances are slim that inflation will exceed 10 percent, but a quick jump can be expected if cash continues to flow into the market but cannot be absorbed, he warned.

Nguyen Dinh Cung of the Central Institute for Economic Management said measures to support businesses and boost the economy are basically the ones that go against the goal of controlling inflation.

So if these measures are taken excessively and ineffectively, they will bring back inflation and instability, he said.


The Asian Development Bank Wednesday cut Vietnam's growth forecasts, saying the pace of economic expansion will likely be influenced by progress in addressing finance sector vulnerabilities in the country.

The economy will expand 5.1 percent this year, compared with an earlier estimate of 5.7 percent, according to the Asian Development Outlook 2012 Update. It also reduced the country's inflation projection to 9.1 percent from 9.5 percent.

By the end of 2013, inflation is forecast to quicken to 9.4 percent because of increases in global food prices and pickup in domestic demand, while fiscal policy is likely to be relaxed, the Manila-based lender said. It also lowered Vietnam's growth forecast next year to 5.7 percent from 6.2 percent.

"Uncertainties about the size of non-performing loans and the risk profile of some bank balance sheets, particularly those with exposure to unprofitable and overstretched state-owned enterprises, raises questions about their capital adequacy," the bank says. "The growth outlook centers on these finance sector risks that could intensify until the non-performing loan problem is addressed decisively."

On the positive side, ADB noted that capital inflows and the stable exchange rate enabled Vietnam's central bank to increase foreign reserves to a level sufficient to cover an estimated 2.4 months of imports, the highest since at least 2010.

Asia, excluding Japan, will expand 6.1 percent this year, compared with an earlier estimate of 6.6 percent, ADB forecast.

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