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ANZ: Risks to Vietnam’s economy fade
The ANZ bank has, in its recent report on Vietnam’s economic performance, confirmed that the risks facing the Southeast Asian country have receded, but it still expects the State Bank of Vietnam to continue reducing its prime interest rate and remain cautious.
According to the bank’s Chief Economist, Paul Gruenwald and the Director for Currency & Rates Strategy, Tamara Henderson, the steep global slowdown has, to a certain extent, helped Vietnam in its efforts to rein in an overheated economy.
The ANZ report, released late last week, showed that Vietnam’s GDP growth in the first quarter fell to a record low of 3.1 percent, down sharply from the 8-9 percent recorded in late 2006 and 2007.
As Vietnam’s growth in recent years has been mainly driven by domestic demand and its financial sector still operates outwith the global market, “Vietnam, like Indonesia and the Philippines, has been able to continue to grow, albeit at a reduced pace,” said economist Gruenwald.
According to Tamara Henderson, the two main risks that Vietnam has been facing since mid-2008 are rising inflation and a burgeoning deficit, but for now at least, these issues do not pose a threat.
Inflation has fallen sharply since September 2008 and this is attributed to the swift and substantial reversal in global commodity prices during the third quarter of last year, said Henderson, stating that Vietnam’s trade balance has also turned around quickly.
“Vietnam recorded a (rare) quarterly trade surplus in the first quarter of this year,” she added, citing the three-month trade surplus figure of 1.6 billion USD against the 8.4 billon USD figure in the same period last year.
She pointed out that exports have been one positive development in Vietnam. Indeed, as of now, the country is the only emerging economy in Asia that has posted a positive growth in exports, albeit very modest.
The bank expected that Vietnam’s GDP would bottom out in the first quarter of this year, which reflects the stable growth of global trade and manufacturing, as well as the positive effects of the government’s fiscal stimulus.
Helped by the stimulus plan, construction has shown some signs of bouncing back, registering a rise of 6.9 percent in the first quarter.
“In terms of the plan’s effectiveness, the heavy state presence in the financial and industrial sectors may give Vietnam an advantage similar to China, by kick-starting the financial markets and manufacturing,” ANZ economists said in the report.
However, they warned that the absence of policies to either slow down demand or increase the economy’s capacity, the risk of a repeat of mid-2008 is very real, although not in the immediate term.
“As such, we expect the State Bank of Vietnam to cut the base rate to 6.5 percent by mid-year- ensuring that the monetary conditions remain sufficiently loose to support a recovery in growth in 2009. This is a period when global demand will contract overall,” the economists said, expecting the Vietnamese authorities to maintain a weak currency policy to support exports.
The bank forecasts that Vietnam’s GDP will grow by 4.5 percent, the lowest since the late 1980s.
“Looking further ahead, we do not see a quick return to the heady days of 2006-2007. But our GDP growth forecast of 4.5 percent places Vietnam near the front of the pack that is emerging in Asia,” the two economists said in the report.
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