Things will get worse before they get better

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There's not much in the way of good news on the economic front.


Clothes on sale at a ­­­shop in Hanoi last week. Vietnam is fighting to beat back raging inflation.

Despite repeated revisions of growth and inflation targets, the former downwards and the latter upwards, they are not likely to be met, experts say.

The anticipated rise in prices of goods and services in both domestic and international markets, and ineffective investments are likely to keep inflation high.

"The prices of goods may rise sharply in the last quarter when firms buy more materials and equipment to increase production late in the year," said Cao Sy Kiem, former governor of the State Bank of Vietnam. "It is impossible to stay within the government's inflation cap of 15 percent this year."

The government, early in June, revised inflation and growth forecasts for the second time in less than a month. At the end of 2010, the target was to keep inflation down to just 7 percent in 2011.

Kiem said natural disasters in later months could push food prices up further.

Meanwhile, the reduction of public investment in ineffective projects, one way to lower inflation, is not being handled well.

"We have not yet clearly defined which projects need to be cut, and the discipline shown in implementation has been inadequate," Kiem said, adding that inflation this year may soar to 20 percent, close to the record of about 22 percent in 2008.

Inflation surged 20.82 percent year-on-year in June, up from May's 19.78 percent, according to the General Statistics Office. That was the fastest in more than two and a half years, and it has been attributed to higher prices of food, education, transportation, housing, and building materials. The Consumer Price Index is up 13.29 percent since the end of 2010.

"On a year-on-year basis, inflation could surge further to 22 percent in the third quarter before easing to 20 percent in the fourth quarter," said Tai Hui, the Singapore-based head of Southeast Asian research at Standard Chartered Plc. "We expect inflation to return to single digits in the second quarter of 2012."

Vietnam's inflation rate was the highest in the world after Venezuela among economies tracked by Bloomberg. Venezuela's consumer prices rose 24.8 percent in May.

The Minister of Investment and Planning, Vo Hong Phuc, recently said his ministry would propose to lift the inflation target for this year to 17-18 percent from the current 15 percent.

"The 15 percent target was set based on optimistic forecasts when prices started falling and world market prospects improved," he said. "But now things have changed. According to ministry's research agencies, prices will continue to rise until September, before slightly easing for some time and surging again in the final months of the year."

Tough times

Tran Dinh Thien, head of the Vietnam Economics Institute, said inflation has been high in Vietnam for the last few years due to large state budget deficits, a widening trade gap and low investment efficiency.

Vietnam will not be able to control inflation effectively unless it deals with these issues, he said.

"The government should distribute and use capital sources in an effective manner," Thien said. "It should continue to tighten public investment and state budget spending, and set aside more capital for supporting production."

The risk of macroeconomic instability is still high, said Le Xuan Nghia, deputy head of the National Financial Supervisory Committee, explaining business conglomerates were not performing well, giving rise to a high volume of bad debts.

The expansion of public debt is also a big challenge for the country, Nghia said. Vietnam's public debt of the past three years equals that of the previous seven years, he noted.

To effectively control inflation over the next few years, the country should lower its annual state budget deficit to 3.5 percent of GDP from the anticipated 4 percent in 2011, keep credit growth to below 15 percent from the targeted 20 percent this year, said economist Vo Tri Thanh of the Central Institute for Economic Management. "Vietnam's credit now is very large, estimated at more than US$120 billion," he said.

Experts believe that in this inflation fight, some firms would have to shut down because of capital shortages and other difficulties, and unemployment is likely to increase. However, the most important task now is macroeconomic stabilization, they stressed.

Kiem said one-third of workers at small firms could lose their jobs this year, at least temporarily. He said 30 percent of small firms stopped operating at the end of 2010. Now, only one-third of small-and medium-sized businesses are able to access bank credit, he added. Kiem is chairman of the Small and Medium Enterprises Association.

Tai Hui said the government's push to stabilize prices is being watched closely, with the banking and business communities concerned about high borrowing costs.

As tighter monetary policy translates into higher lending rates and lower credit availability for corporations, banks' non-performing loans were growing at an alarmingly high rate of 1-2 percent per month, he said.

However, the most important task now is to lower lending interest rates to facilitate production, said economist Bui Kien Thanh. "Firms can run their businesses only when lending interest rates are below 10 percent."

The current high interest rate is very dangerous for the economy, as businesses cannot develop production, contributing to widening trade deficit and reducing the state's foreign currency reserves, he said. "The State Bank of Vietnam should lend funds to commercial banks at low interest rates, at 2-3 percent, so they have sufficient capital to lend to firms at lower interest rates."

To this end, the central bank should manage cash flow so that it can be channeled into effective projects, not non-production sectors, Thanh said. "The capital supply should be maintained at a suitable level, so it is not too big to cause inflation, or too small to kill enterprises."

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