Testing economic juggling act

Trade deficit is widening despite growing exports

Prices continue to hike. The stock market is falling and trade deficit is widening. Vietnam’s economy is still struggling despite a series of measures applied over the past five months.

In May, the consumer price index (CPI) increased 3.91 per cent against April or 15.96 per cent in comparison with last December. The inflation is higher than in April when the CPI increased 2.2 per cent against the previous month. Concurrently, the trade deficit has reached an estimated $14.4 billion, accounting for 61.6 per cent of export turnover.

“Inflation has not been reined in during the past five months and has put pressure on macroeconomic stability,” Nguyen Duc Hoa, Deputy Minister of Planning and Investment, said in a recent meeting.

Vietnam is not the only country feeling inflationary pressure. Global factors such as high energy and food prices have contributed to inflation, but the fact that prices have risen much faster in Vietnam than in neighbouring countries suggests that domestic factors are very important. Economists said the inflation surge had been largely the result of monetary expansion last year.

To curb inflation, the government has tightened monetary and fiscal policies, and enterprises have been encouraged to boost production to ensure the supply of goods and export turnover.

Early this year, the government ordered the central bank and ministries to impose tighter monetary control. These included imposing stricter lending rules, raising interest rates, increasing compulsory bank reserves and forcing banks to buy central bank bills to absorb local currency. Credit growth in the banking system has been set not to exceed 30 per cent in 2008, lower than the 53 per cent growth seen in 2007.

As a result, all local banks have raised mobilisation interest rates to lure cash, resulting in serious competition among banks. This has, in turn, led to higher lending interest rates. Prime Minister Nguyen Tan Dung has asked that prices of 10 key goods and services remain stable until the end of June to help bring the market under control. These included fuel, electricity, transport fees, cement, steel, water, coal, medicine, hospital and school fees.

The government’s recent pledge to prioritise inflation control over growth is a step in the right direction. It has proposed the National Assembly to cut 2008’s growth target from 9 to 7 per cent. Additionally, Dung ordered that unnecessary or inefficient investment projects be delayed or cancelled.

However, these measures have had little impact on CPI, which has risen. Banks and enterprises still need capital, suggesting that a large amount of money is still in circulation bearing in mind that Vietnamese are spending more on goods and services.

The Ministry of Planning and Investment (MPI) statistics show that the total retail and service turnover in the past five months increased by 29.5 per cent in comparison with the same period last year, reaching VND370 trillion ($23 billion).

“When CPI increases sharply, consumers spend more money buying goods and services because they feel their money is being devalued,” said Nguyen Van Nam, an economist and former director of the Trade Study Institution.

The high inflation has forced Vietnamese to increasingly purchase gold and foreign currencies, especially dollars, as a protecting measure to preserve their assets. In the past five months, Vietnam has imported more than 50 tonnes of gold and the dollar exchange rate exceeded the VND17,500 threshold on the black market last week.
The question arises: “Why is the inflation rate still increasing sharply in spite of such strong measures?”

In fact, the country experienced two price fevers over rice and cement last April and May due to a lack of market information, problems with speculation and weaknesses in managing supply chains. Le Dang Doanh, a senior MPI advisor, said governmental administrative measures like controlling price increases was not a good idea since global fuel and input material prices were also skyrocketing.

The ban on increasing sale prices has left enterprises in a difficult situation with global prices also rising. Large enterprises such as Vietnam Cement Corporation and Vietnam Steel Corporation reported that several factories slowed production and international exports, impacting on the local market. Late last month, the Ministry of Finance proposed that the government retain the ban on increasing essential goods’ prices after June.

“This is not a good idea. This could cause a great shock to the market when the ban is lifted,” said Nguyen Minh Phong, an economist at the Hanoi Institute for Social and Economic Research and Development. The bird flu, animal diseases and blue ear and natural disasters have also caused food price, which make up 43 per cent of the consumer price basket, to surge.

Another reason for ongoing high inflation is that the mobilising interest rates of local banks have not been attractive to Vietnamese although the State Bank late last month increased the basic interest rate by 3.25 per cent from 8.75 to 12 per cent and removed the 12 per cent cap on deposit rate. This was an attempt to mobilise more money from circulation. Local banks can therefore increase their mobilisation interest rates, but they are still lagging behind inflation.

The widening trade deficit is also a major challenge for the economy. Vietnam’s trade gap has grown to $14.42 billion in the past five months, over three times higher than the same period last year. Exports rose 27 per cent to $23.4 billion, while imports climbed 67 per cent to $37.82 billion, according to an MPI report.

The report said that most imported goods involved machinery, fertiliser, electronic components, automobiles and fuel. “The deficit is not as unhealthy as it would be if it was dominated by consumption goods,” said HSBC in a recent report.

Problems linger. CPI is still climbing, and the trade deficit is widening. It is clear that the government will need to implement stronger measures to resolve these issues in the coming months.