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A rock and a hard place
Inflation this year is expected to go well over 8 per cent due to issues in foreign exchange policies, the trade deficit, and State expenditure.
Despite the government’s plan to keep it at 8 per cent, the consumer price index (CPI) in 2010 is expected to go higher; to way above the projected GDP growth rate of 6.7 per cent. “The possibility of [the CPI] being above 8 per cent is very real,” said Mr. Ha Van Hien, Chairman of the National Assembly Economic Committee (NAEC).
Former Governor of the State Bank of Vietnam, Mr. Cao Sy Kiem, expects inflation to almost certainly surpass 8 per cent. “It may approach double digits if urgent measures to deal with weaknesses in monetary and fiscal policies and the trade deficit are not implemented,” he said.
Foreign exchange rate policy is a questionable phenomenon behind inflation this year. The State Bank of Vietnam (SBV) has devalued the Vietnam dong (VND) three times against the US dollar (USD) since last November, totalling 11 per cent, from VND17,034 to VND18,932. As a large amount of inputs for production in Vietnam are imports, any devaluation will immediately lead to increases in production costs and retail prices.
Inflation increased immediately after the devaluation. With the VND being devalued in February and September, the month-on-month CPI in the two months were 1.96 per cent and 1.31 per cent, respectively, and a 20-month record in the first case and a six-month record in the second case.
While the SBV continues to say that the government does not intend to devalue the VND, the fact is that a weak dong helps to promote exports and limit imports. This factor is stronger this year than in other years, given that a devaluation war is being seen around the world. As a result, the VND is seen to be kept low to maintain the competitiveness of Vietnam’s exports.
The usual reasons for inflation are also being repeated, such as the broad trade deficit and large State budget expenditure.
A broad trade deficit has put major pressure on foreign exchange rates and, therefore, inflation. The deficit weakens the VND against foreign currencies, particularly the USD, and when it is devalued it triggers higher inflation. “Vietnam’s import surplus is high and maintained over too long a time, leading to a balance of payment deficit for two consecutive years,” said Mr. Vu Viet Ngoan, Deputy Head of the NAEC. “If Vietnam continues with a high import surplus I think the economy will struggle to balance its foreign reserves.”
The country’s total trade deficit in 2010 is projected to be $13.6 billion, accounting for less than 20 per cent of export turnover. Main imports include machinery, equipment, spare parts and input materials for production, accounting for over 90 per cent of the total.
Large State expenditure is another factor. “Loose fiscal policies remain, which are seen in the big spending of the outstanding budget from 2009 and borrowing from the future budget in 2011,” said senior economist Mr. Tran Du Lich. “When investment and credit increase, imports and import surpluses are certain to increase.”
The State budget deficit this year is estimated at VND117.1 trillion ($6 billion), accounting for 5.95 per cent of GDP, according to the government’s report to the National Assembly. That includes excessive spending on both investment and administrative expenditure, which increased 15.5 per cent and 6.3 per cent, respectively, against initial budget planning.
Although the government reasoned that excessive spending was in support of economic growth following the global financial crisis, some people are concerned that the money has not been spent effectively, contributing to pushing up inflation. “The problem is that investment is not used effectively,” said former SBV Governor Mr. Kiem.
Remaining questions
The main issues in the closing months of the year are whether the VND will be devalued once more and what measures the government will implement to control the CPI.
In early November, one US dollar was selling for VND20,900 on the black market, while the official rate at the SBV was VND19,500. Speculation is that the black market rate will increase to around VND21,000 - 22,000 before the year is out.
This will be a distinct possibility come December, when domestic demand for dollars increases Dr.amatically due to the need to meet payment deadlines on imports. The official rate will therefore be under major devaluation pressure if foreign exchange reserves are not strong and proper measures are not introduced. At the moment, foreign exchange reserves are short of the safe level of 12 weeks of import value. “As the supply of USD in the market is basically lower than demand, it is hard to bring down the exchange rate to less than VND20,000,” said Mr. Kiem.
“However, there are large amounts of USD being held by individuals and enterprises, at least USD7 - 8 billion, which the SBV could attract using a raft of measures. But we must also be flexible in monetary policies. When all market measures have been implemented but are still failing [to cool down pressures on the foreign exchange rate], then the exchange rate should be changed.”
Measures to control inflation over the final months of the year are now being implemented. Since June and July some large supermarket and distribution chains in Hanoi and Ho Chi Minh City have received direct subsidies from local budgets to sell food at regulated prices, which are around 10 per cent lower than market prices. But local budget funds available for direct price subsidies are rather small. Hanoi has just VND350 billion ($17.9 million) and Ho Chi Minh City VND380 billion ($19.8 million).
Many retail outlets under the program have been found to be selling food at higher prices than those at ordinary markets. In December in other years prices have increased strongly due to high demand from the approaching Tet lunar new year holidays.
Other administrative measures, meanwhile, are also to be deployed to control inflation. “The government is trying to ensure sufficient supply of goods to the market,” said Minister of Finance Vu Van Ninh. “That is the most important measure. Local authorities will examine and inspect prices and apply proper punishment [on people or enterprises] in cases of unreasonable price increases. This will be a strong measure and have a major impact.”
Future control
Experts say that continuously high inflation is evidence of fundamental weaknesses in Vietnam’s economy, including an over reliance on capital injection for economic growth and imported inputs for production.
Consequently, in taming inflation in the near future it will be hard to also avoid slowing down economic growth.
In its 2010 review and 2011 plan submitted to the National Assembly in late October, the government placed priority on stabilising the economy with a top target of controlling inflation in 2011. Main measures include promoting exports, particularly to Japan, China and ASEAN, encouraging the consumption of domestic products, cutting the State budget deficit to 5.5 per cent of GDP from 5.95 per cent this year, and increasing control over prices and speculation of fundamental products.
However, even State officials acknowledge that it takes time for the economy to be restructured and for the underlying reasons for high inflation to be eliminated. “It will take a rather long time for Vietnam to reduce its import surplus,” said Minister of Industry and Trade Vu Huy Hoang. “The reason is that Vietnam is investing heavily in building production capacity for the coming years. In the economy’s plan for 2011-2015, which has not yet been approved, the import surplus should be reduced to 14 per cent of export turnover and in the years after 2015 the balance of payments must be on parity.”
Meanwhile, economists suggest a total restructure of the economy to build a solid foundation for economic stability in the future, including controlling inflation. “From 2011 Vietnam should put priority on developing long-term factors for economic development,” said Mr. Kiem. “Firstly, the focus should change from scale to depth; efficiency instead of speed. Secondly, schemes, resources and infrastructure should be reorganised in this direction to provide the foundations for building roadmaps for technology development and competitiveness improvements.”
“We expect Vietnam to expand strongly in 2011, with growth forecast to accelerate to 7.2 per cent from 6.7 per cent in 2010. This makes it one of the few Asian economies where growth is expected to pick up next year in real GDP terMs..
In 2011 we expect inflation to return to double digits, reaching 10.5 per cent versus our previous forecast of 8.5 per cent. This reflects upside risks to global commodity prices as well as strong domestic demand. We also expect further VND devaluation, which will add to inflationary pressure.”
“Vietnam - Risks and Opportunities for 2011”, Standard Chartered Bank, October, 2010
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