Good trade deficit news has a sting in the tail

The nation still has an uphill task to overcome a negatively weighted trade deficit

The General Statistics Office (GSO) said the country incurred a $900 million trade deficit in August, the second month this year the trade imbalance was below $1 billion. In August, its exports totalled $6.1 billion while imports were $7 billion, up 40.6 and 30 per cent on-year, respectively.

Economists said Vietnam’s August trade results were encouraging as import growth continued to slow, helping to narrow the eight months’ trade deficit. Authorities want to curb monthly trade shortfalls to under $1 billion in the second half of the year.

“This is an ambitious goal, but Vietnam appears to be on track to achieve it. Policy seems to be heading in the right direction, with monetary policy and state spending tightened,” said Sherman Chan, an economist with Moody’s Economy.com.

Vietnam reported a monthly trade deficit of $800 million for July, lower than the previous figure of $1.3 billion in June, $1.9 billion in May, $3.2 billion in April and $3.3 billion in March this year, according to GSO statistics.
Imports are gradually slowing while exports have unexpectedly reaccelerated. Tightening policies have cut import growth from 85 per cent in March to 30 per cent year on year in August. “The recent fuel price hike partly helped reduce import demand,” said Chan.

Chan said continued trade imbalance improvements would make investors slowly forget fears of a current account and currency crises that emerged a few months ago. “As data continued to demonstrate that economic development remains under control, investor confidence will be revived, helping to support the local stock market and currency,” Chan said.

Citi economist Ken Peng said a trade deficit improvement should strengthen confidence that tightening measures were helping to curb overheating problems in Vietnam. “The expected narrowing in the trade deficit would be the biggest driver of growth in 2009, while domestic demand remains weak,” said Peng.

Chan, however, warned that there were still downside risks to Vietnam’s economic outlook. Although the State Bank has aggressively tightened monetary policy in the past couple of months, local banks have lowered borrowing costs to ‘support clients’ that could cause headache to improving trade imbalance.

“Lower borrowing costs will stimulate domestic demand, potentially causing a reacceleration in imports, which has been a prime factor in the widespread concerns about a crisis earlier in the year,” Chan said. Peng, meanwhile, said tight foreign exchange controls, a shrinking trade deficit and continued capital inflows have strengthened the dong and high inflation was also eroding export competitiveness.

“A stronger dollar and weakening external demand could reverse some gains. Weaknesses in commodity prices and global demand could slow Vietnam’s export growth,” said Peng, forecasting Vietnam’s trade deficit to land at $19.5 billion in 2008.

Vietnam’s imports are forecast to be at $80.2 billion this year and exports at $61.2 billion, according to a Ministry of Industry and Trade source. The total trade imbalance was $15.9 billion in the first eight months of this year.