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An International Monetary Fund (IMF) team led by Era Dabla-Norris visited Vietnam during April 4-20 and worked with authorised agencies about how the Vietnamese economy has performed and its outlook.
Norris said policy support and an impressive vaccination rollout will help Vietnam achieve growth of 6 per cent in 2022 and 7.2 per cent next year.
“Inflation is expected to edge up to 3.9 per cent by end-2022. Growth risks are tilted to the downside while inflation risks are tilted to the upside,” she said. “The most immediate risks include the intensification of geopolitical tensions and a slowdown in China. Other risks include a tightening of global financial conditions and developments in the domestic real estate and corporate bond markets.”
Vietnam is expecting it can rein in inflation at about 4 per cent for the whole year, with an economic growth rate of 6-6 per cent.
The General Statistics Office (GSO) last week reported that in the first four months of this year, Vietnam’s consumer price index (CPI) increased 2.1 per cent on-year. The key drivers of the CPI climb included transport-related prices (up 16.21 per cent on-year), catering (3.17 per cent), and drink and tobacco (2.59 per cent).
According to the GSO, the manufacturing producer price index (PPI), which measures the gross monthly change in the trading price of industrial products, has significantly increased mainly due to rising input costs since early this year, affecting domestic consumption and economic growth which sat at 5.03 per cent on-year. In Q1, the PPI ascended 4.39 per cent on-year, reflecting rising costs of inputs which increased 5.5 per cent on-year.
“The PPI of manufacturing and processing products rose 3.84 per cent as compared to that in the same period last year due to a 48.63 per cent rise in prices of coke and refined oil. Besides, the prices of metal products also escalated 18.35 per cent due to price hikes in the global markets,” said a GSO report on Vietnam’s CPI situation. “Additionally, the PPI of electricity production and distribution and of gas, hot water, and air conditioning also augmented 9.2 per cent on-year in Q1.”
Meanwhile, the economy’s import price index in Q1 also increased strongly at 11 per cent on-year – including 11 per cent for agricultural and foodstuff products, 37.43 per cent for fuel, and 9.84 per cent for manufacturing and processing items.
Such price hikes, expected to continue in the coming quarters, are ascribed to uncertainties in the global market where material scarcities are happening due to various reasons such as harsh weather conditions, geopolitical conflicts, and the pandemic.
“Rising consumer and producer prices warrant close monitoring of domestic price developments as rising inflation would affect the recovery of domestic consumption and economic growth,” said the World Bank in its bulletin for April.
The bank predicted Vietnamese economic growth of 5.3 per cent and inflation of 3.6 per cent this year.
It suggested that in the short run, targeted policy intervention to alleviate the impact of the price hikes on the general population, and especially on the most vulnerable is recommended. The temporary petroleum tax reduction recently introduced by the authorities is one such short term measure, although perhaps the choice of reducing a specific environmental tax on petroleum may not reflect well on the environmental intentions of the authorities.
“If price increases persist, the economy should be allowed to adjust to the price changes,” the World Bank said.
Norris from the IMF also suggested that in Vietnam, policymaking should be agile, and the size and composition of policy support proactively adjusted to the pace of recovery. Fiscal policy should take the lead in policy support, especially if downside risks materialise as the scope for further monetary easing is limited in light of rising inflation risks.
“The programme appropriately prioritises health, economic recovery, and medium-term growth prospects. Going forward, fiscal policy will need to strike a balance between providing temporary, targeted support and facilitating economic transformation,” Norris said.
Monetary policy should remain vigilant of rising inflation pressures and, if sustained inflation pressures emerge, the State Bank of Vietnam should tighten its monetary policy stance and clearly communicate the underlying drivers to help contain inflation, Norris added. “Credit growth policy must strike a reasonable balance between promoting the recovery and safeguarding financial stability. The team welcomes recent steps towards greater exchange rate flexibility and modernisation of the monetary policy framework.”
Vietnam’s recovery is clouded by major near-term downside risks. High pandemic infections since mid-March could obstruct the economy’s return to normalcy this year. A slowing global recovery and a surge in global oil prices from the Russia-Ukraine conflict would directly affect Vietnam’s external trade and domestic oil prices, which would affect inflation.
Moreover, uncertainties in the global financial markets and the withdrawal of monetary and fiscal accommodation by advanced economies would weaken the dong, the local currency, rendering imports more costly and putting additional upward pressure on inflation.
By the end of Q1 2022, average inflation increased to 1.9 from 0.3 per cent in the same quarter of 2021. Inflation is forecast to accelerate to 3.8 per cent in 2022 and 4 per cent in 2023. Slower growth in China would slow Vietnam’s exports and recovery. Rising non-performing loans (NPLs) are another medium-term risk.
Adding in the restructured loans that have retained the classification category, Vietnam’s potential gross NPL ratio is estimated at 8.2 per cent of total outstanding loans. In addition to rapidly rising costs of construction materials, complex procedures for disbursing public investment could delay the implementation of Vietnam’s economic recovery and development programme, diminishing its desired impact on growth. Source: Asian Development Bank