(CPV) - “Inflation in Vietnam fell to 14.1 percent by March 2012 and is likely to fall back into the single digits by the second half of the year,” UN ESCAP predicted regarding the Vietnamese situation in its report, Economic and Social Survey of Asia and the Pacific 2012.
Double-digit inflation was the primary concern in 2011:
Rapid expansion of credit and money supply in recent years, coupled with a series of currency devaluations, resulted in double-digit inflation in 2011. Rising from 12.2 percent in January, inflation peaked at 23 percent in August, six months after the government announced wide-ranging stabilization measures. Inflation was 18.7 percent for the year, much higher than the historical average, but below the 2008 peak.
Economic growth moderates amid stabilization measures:
Expansionary policies adopted during the crisis helped the economy grow robustly by 5.3 percent and 6.8 percent in 2009 and 2010, respectively, but they also led to macroeconomic risks. In early 2011, strong stabilization measures were introduced to curb double-digit inflation and as a result, economic growth moderated to 5.9 percent in 2011.
Private consumption increased by 4.4 percent, but investment decreased by 9.2 percent, as firms struggled to cope with higher commercial lending rates. Government expenditure grew at a slower pace.
On the supply side, services grew 7 percent and contributed slightly more to GDP growth than did industry and construction, which grew by 5.5 percent. Manufacturing posted strong 9.5 percent growth, but construction activities experienced a marked slowdown. Agriculture grew by 4 percent, with rice yield reaching 42.3 million tons, the highest in the past decade.
In addition to immediate price stabilization measures, restructuring of public investment, state-owned enterprises and the banking sector are expected to follow and help enhance the long term stability and balanced growth of the economy.
Fiscal balances improve, but streamlining and restructuring tasks ahead:
Fiscal deficit narrowed to 4 percent of GDP in 2011, down from 6.6 percent and 9.3 percent in 2010 and 2009, respectively, owing to strong revenues, particularly from oil exports.
However, government expenditure growth was not in line with Resolution 11 commitments to cut investment expenditure by 80 trillion VND (about 3.2 percent of GDP) by cancelling inefficient projects and postponing non-urgent ones.
In addition to streamlining expenditures, the restructuring of large state owned enterprises will be an important task ahead. Such measures will help improve the quality of investment in the future.
Monetary policy focused on curbing inflation and helping weak banks
Vietnam introduced strong stabilization measures to curb inflation under Resolution 11 in February 2011. The central bank’s refinancing rate and discount rate were hiked from 9 percent and 7 percent at the beginning of the year to 15 percent and 13 percent, respectively, by December.
Total credit and money supply growth fell to 10.9 percent and 9.3 percent respectively, from 32.4 percent and 33.3 percent in 2010.
At the same time, the central bank and state-owned commercial banks stepped in with liquidity support to protect small and weak banks, as vulnerabilities including high non-performing loans emerged in the financial sector.
Partly in response to the weak GDP growth in the first quarter of 2012, the central bank reduced the refinancing rate by 200 basis points to 13 percent from January to April. Any further cuts would have to be carefully considered, however, given the still high inflation and the possible negative effects rate cuts could have on the currency.
Trade deficit was the lowest in ten years:
Vietnam saw a sharp increase in its current account deficit in 2007 upon joining the World Trade Organization. The deficit peaked at 11.9 percent of GDP in 2008, and has since fallen to 3.8 percent in 2011. Led by strong garments and crude oil exports, the country’s trade deficit in 2011 was the lowest in ten years.
Remittances grew by around 10 percent to reach $8.7 billion in 2011. Foreign direct investment inflow declined to $11.6 billion in 2011 from $17.2 billion in 2010, according to the General Statistical Office.
Portfolio investment inflows were also lower compared to 2010, at around $1.4 billion. The Vietnamese Dong continued to fall against the US Dollar, by 5.7 percent in 2010 and another 7.3 percent in 2011.
Although still at relatively low levels, the country’s foreign currency reserve increased to cover two months of imports by early 2012.
Poverty and food insecurity impacts of high inflation should be addressed:
There is some evidence that poverty increased after the country’s last bout of high inflation in 2008. With the return of double-digit inflation in 2011, the poorest are again being impacted by high food prices. According to the Central Institute for Economic Management of Vietnam, the rural poor spend 70 percent to 80 percent of their income on food./.