More trouble ahead, economists warn

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Bringing inflation down to single digits easier said than done

A man pulls boxes of goods at a market in
Ho Chi Minh City in October. The government said it will continue to give priority to controlling inflation and stabilizing the economy in 2012.

Vietnam faces a difficult year ahead and is unlikely to be able to keep inflation to below 10 percent, economists say, warning of arduous global economic conditions in 2012.

Bringing inflation from around 19 percent at present to single digits within a year is not a simple task, and will in fact be a "miracle" if it is achieved, they said.

Pham Chi Lan, a former government advisor, said among the economic challenges that Vietnam is likely to face in 2012, inflation will be the toughest.

She said despite tightened monetary polices, inflation was not effectively controlled. Annual inflation forecasts have been revised several times in 2011, eventually straying quite far from the original target, which was set at just 7 percent.

"The problem was that the tightening of monetary policy in 2011 was not accompanied by fiscal tightening. It didn't bring about positive results because the government's spending was still too large," she said.

Economist Nguyen Minh Phong from the Hanoi Socioeconomic Research Institute said Vietnam's economy will continue to be under pressure from the global economic recession and the difficulties it has to face can be even worse than predicted.

Inflation and interest rates may remain high while banks can face rising bad debts and liquidity problems, Phong said, adding that the exchange rate and gold prices are not stable yet.

"Although there have been signs of credit being eased by banks, many obstacles hindering production and business activities remain," he said. "The risk of macroeconomic instability can grow into a serious challenge without aggressive and effective measures."

As the government plans to pursue an anti-inflationary monetary policy, it would not be easy to obtain loans, particularly large ones, he said.

Commercial banks have liquidity problems of their own, he said. When banks pressure property developers to pay debts, it may cause home prices to fall sharply. In the end, declines in housing values would hurt the banks themselves since the loans are also backed by the same properties as collateral.

"Economists are now worried about a second wave of global economic crisis that can come in 2012," Phong said.

He noted that economic difficulties and risks faced by Vietnam next year can discourage necessary reforms.

The government announced a plan to restructure the economy in October, identifying reforms in public investment, state-owned enterprises and the banking sector as priorities for 2012.

Another respected economist, Le Dang Doanh, said the restructuring plan came amid concerns that the global economy could worsen next year, undermined by the Eurozone crisis and the slowdown in the US and China.

The restructuring is almost just a plan now, without anything concrete emerging yet, he said.

Doanh said the economic growth target of 6.5 percent will be very difficult to meet.

But Lan believed the goal was within reach, saying export growth will be strong enough to drive the economy despite unfavorable external factors.

She said the restructuring can be tough for the economy but at the end of the day it will benefit businesses.

"I think businesses have to withstand these tough times first before the economy is improved in a more sustainable way. They should not be pessimistic," Lan said.

"The economic restructuring will eventually create opportunities for businesses, when the economy gets back to the right orbit with fairer and more transparent conditions," she said. "Those who have a good foundation for development will be able to make use of the opportunities arising from the restructuring."

For the government, one of the priorities for next year should be dealing with public investment, she said.

Once the government's investment has been cut back, more financial resources will be available for businesses, Lan said, adding that private companies are actually contributing the most to the economy.

Doanh agreed that reducing public investment will help allow capital to flow to manufacturing and agricultural sectors. Effective business projects will then enhance the efficient use of credit, he said.


The Politburo, the policymaking body of the Party, aims to create a "fair business environment" for entrepreneurs in the country as it recognizes their importance in the economy, according to a resolution on the government's website.

The nation will make socio-economic development plans public and "transparent" to help reduce business risks for entrepreneurs, according to the Politburo statement dated December 16. It also encourages an increase in the number of medium-sized firms as well as consolidation and merging of companies in order to build strong brands capable of competing regionally by 2020, the release said.

"It affirms that Vietnam respects the role of different economic sectors," including private businesses, Nguyen Duc Kien, deputy head of the National Assembly's economic committee, said by phone from Hanoi on Monday.

The resolution is the Politburo's first related to entrepreneurs, Kien said. The move further highlights the growing influence of entrepreneurs in the economy, after the nation in January officially allowed private business owners into the Party for the first time.

The country seeks to "build a large and strong group of entrepreneurs who have national spirit, political awareness, business culture, high social responsibility," and good management skills, the statement said. (Bloomberg)

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