Vietnam inflation, trade progress may be temporary

TN News

Email Print

Diesel sellers wait for customers at a fishing port at Vietnam's Ly Son Island. Domestic price pressures are rising in Vietnam, after petrol and oil prices were increased by 10 percent on March 7, and again by 4 percent on April 20.

Dramatically improved inflation, now down to 10.5 percent compared with 23 percent less than a year ago, increases the appeal of Vietnam as an investment destination. While progress has been significant, more needs to be done, especially since a lot of the improvement has been due to good fortune.

Vietnam's year-on-year inflation rate is the slowest it has been since October 2010, and appears poised to return to single digits. Much of the improvement is due to temporary factors or those outside the control of policymakers favorable base effects and lower commodity prices, especially for food and fuel.

Meanwhile, domestic price pressures are rising. Petrol and oil prices were increased by 10 percent on March 7, and again by 4 percent on April 20. A VND220,000 (US$10) increase in the minimum wage is also due on May 1, which will be the fourth increase in four years.

The International Monetary Fund, in its latest regional outlook for Asia Pacific, released April 27, has also warned about increased price pressures in the region owing to generally accommodative monetary policy coupled with an expected pickup in growth momentum later this year.

The rebound in capital inflows this year is also likely to rekindle price pressures. Vietnam's stock market index has increased 35 percent in 2012, the best performance after Venezuela, while Vietnam-focused stock funds became the only emerging-market equity assets in Asia to lure investors every week this year, according to Emerging Portfolio Fund Research.

The State Bank of Vietnam has targeted sharply reduced broad money and credit growth of 12 percent and 15-17 percent, respectively. The IMF estimates that broad-money growth has slowed markedly, to 12.6 percent in October 2011 (the latest available), from nearly 30 percent in January 2011. Domestic credit to the private sector was 125 percent of GDP in 2010 (the latest available), compared with 71 percent in 2006, and about 29 percent for Indonesia and the Philippines.

The fiscal authorities have been moving in the opposite direction, increasing, instead of trimming, the country's large budget gap. The Finance Ministry reported a budget deficit of 4.8 percent of GDP for March 2012 twice the size of the deficit in September 2011 and larger than the fiscal gap of 4.6 percent of GDP reached during the height of the global financial crisis in March 2009.

Vietnam's trade balance has improved, recording surpluses in US dollar terms during March and April, compared with deficits in excess of $1 billion as recently as October. Still, there is a long way to go to rebuild foreign exchange reserves to a comfortable level. According to World Bank data, Vietnam's foreign-exchange reserves reached as low as 35 percent of total external debt in 2010 (the latest available), down sharply from 103 percent in 2007.

Meanwhile, analysis by Hai Pham at ANZ Banking Group suggests that Vietnam's trade balance is largely a function of trade with China. Hence, as growth in China recovers, one can expect Vietnam to return to trade deficits, given its increasing reliance on Chinese machinery and other manufacturing inputs.

So far, investors have been willing to ignore Vietnam's burgeoning fiscal gap, focusing instead on positive developments on the inflation front. In turn, lower inflation rates have helped the authorities keep the official exchange rate steady, to marginally stronger, against the US dollar since November.

The non-deliverable forward market is signaling negligible pressure on the dong at 20,925 to the US dollar compared with the official exchange rate of 20,865.

Any slippage back to a scenario of higher inflation and wider trade gaps as is likely could prompt a sharp reversal in investor confidence. Even now, foreign direct investment disbursements are down 0.3 percent at $3.6 billion year-to-date, according to Vietnam's Foreign Investment Agency.

By Tamara Henderson
Tamara Henderson is an economist for Bloomberg based in Singapore.

More Business News