Complicated financial juggling act

Foreign currency shortage concerns have been scotched by authorities

The country’s deficit increased from $870 million in September to $1.1 billion in October. Exports totaled $6.3 billion (versus $6.1 billion in September), while imports rose to $7.4 billion (from $7 billion in the previous month).

Nguyen Thi Kim Thanh, head of the Banking Development Institute, said that though the deficit target for 2010 was within reach, the $9.5 billion shortfall in the first 10 months suggested authorities needed to exert stricter control in the rest of the year.

“However, I can say the foreign currency shortage concerns are ungrounded as inflows are still strong,” said Thanh.

In 2010, the government set a trade deficit target of $13.5 billion.

Foreign direct investment (FDI) disbursement from January to October rose 7.1 per cent year-on-year to $9 billion. During the same period, however, FDI pledges totaled just $12.8 billion, down 42 per cent year-on-year, well below the government’s target of $22-25 billion.

Sherman Chan, HSBC’s economist for the ASEAN region, said the long-existing twin problems of high inflation and a large trade imbalance showed no signs of improving.

“Moreover, the currency [Vietnamese dong] is still under downward pressures and further devaluation appears increasingly likely,” Chan said.

Policy-makers have chosen to devalue the dong in an attempt to stimulate exports and hence narrow the trade deficit. Over the first 10 months of the year, the State Bank did devalue the dong by 5 per cent on aggregate. Chan said that in order to prevent a current account blowout and maintain investor confidence, policymakers needed to slow imports and boost exports, via productivity improvements, not currency devaluations.

 Vietnam’s industrial production in the last 10 months rose by 13.5 per cent year-on-year, marking a noticeable slowdown from the  January-September period’s 15.1 per cent year-on-year. The 10-month retail sales growth slowed to 25.1 per cent year-on-year from 25.4 per cent recorded during January-September.

Chan added that economic growth was slowing. “With retail sales continuing to cool and industrial production growth falling sharply in October, expectations of a further acceleration in gross domestic product  growth during the fourth quarter of 2010 appear misplaced.”

“Although investors may remain keen on taking advantage of Vietnam’s growth potential, they may adopt a wait-and-see stance for now as the outlook is a little murky. To meet their ambitious growth targets for the next few years, the authorities need to rebuild investor confidence by pushing ahead with economic reforms and policy tightening,” Chan added.