Analysts urge caution in difficult months to come

Market analysts are warning against any dramatic shifts in fiscal policy and say that inflation remains problematic

According to HSBC economist Frederic Neumann, continuous fiscal and monetary tightening was expected in 2011’s third quarter.

Vietnam’s gross domestic product (GDP) growth decelerated sharply in the first quarter to 5.4 per cent year-on-year from 7.3 per cent in the fourth quarter of 2010. The International Monetary Fund (IMF) forecasted 2011 GDP growth at 6.25 per cent and 2011 inflation rate at 13.75 per cent.

“The slowdown was attributed to recent policy tightening and a seasonal pattern observed in recent years that had growth sliding in the first quarter,” said Neumann.

However, high inflation remains a key policy challenge, with the June consumer price index (CPI) figure hitting 20.8 per cent year-on-year.

“The numerous hikes in electricity and fuel prices in recent months have also played a significant part in fuelling inflation. Core inflation has also picked up noticeably to multi-year high levels, reflecting second-round effects and also still-strong underlying pressures,” added Neumann.

Since November 2010, the State Bank has tightened monetary conditions resulting in higher dong interest rates, with negotiable dong deposit rates up to 19-20 per cent, per year and lending rates climbing to 23-24 per cent, per year in June. As a result, total credit growth slowed to 7.13 per cent by June 20. On the fiscal side, according to the National Assembly economic committee chairman Ha Van Hien, in the first five months, about $2.28 billion (VND47,167 billion) was trimmed from public investments.

Marc Djandji, head of research at Viet Capital Securities Company, agreed that the government should continue to tighten policies, especially fiscal policies, to reduce the trade deficit.

“During the last decade, Vietnam has experienced a chronic trade deficit due to an economic growth model based largely on investments, particularly on public investments. As a result, total credit as a percentage of GDP hit 130 per cent in 2010, the second highest level among developing countries in Asia-Pacific,” said Djandji.

Neumann added that although the Vietnam dong had stabilised in recent months because of an improvement in market confidence following the government’s shift in policy stance earlier in the year, solid results were needed in coming months to help sustain sentiment.

“We expect fiscal and monetary tightening to continue in the third quarter with the refinance rate likely to be raised by another 3 per cent to 17 per cent. Policymakers are also likely to step-up efforts to curb credit growth, as the current annual target of 20 per cent compared with the actual increase of 28 per cent in 2010 still appears too high if the top policy priority now is to cool inflation to improve economic stability,” said Neumann.