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Economics – Markets – Strategy
Economics: Vietnam
in FDI inflows, remittances and portfolio investment betting on the property
and equity market boom in 2007 are probably the key reasons. The banking
sector is flooded with cash and the aggressive credit extension by commercial
banks to earn market share probably exacerbated the situation.
Indeed, the inflation problem in Vietnam has reached a crisis stage and drastic
counter-measures are needed to bring an overheated economy into order. After
some drastic tightening move on 19 May, the State Bank of Vietnam (SBV) again
raised all three policy rates by 200bps on 10 June in a desperate bid to tame
inflation. That’s two series of sharp rate hikes within a month. The prime/base
rate was raised to 14%. The discount rate and refinance rate were lifted to 13%
and 15% respectively. Yet, the drastic and painful monetary tightening was
needed to contain the excess liquidity in the system and to ensure banks have
the mechanism available to mobilize deposits if necessary.
Apart from monetary measures, the government has also adopted administrative
measures to tame inflation. For example, the government froze prices of 10
“essential” goods until June. They include petrol, electricity, coal, water, cement,
steel, school fees and hospital fees, bus, rail and air travel. The government also
promised to cut fiscal expenses by 10% through belt tightening. That is essentially
a contractionary yet necessary fiscal policy which will surely affect overall growth
outlook as many public infrastructure projects will be postponed as a result.
More tightening needed
Despite the desperate
measures by the government
to rein in inflation, it is unlikely
to abate in the near term.
In fact, our estimation based
on the current global trend
for crude oil and food prices
point to even higher inflation
ahead. Moreover, effects of
the monetary tightening will
take time to filter through
the system while the declining
VND is complicating matters.
Full year inflation in Vietnam
is estimated to average 26.3%
and will easily breach the
30% level once some of the
existing subsidies are lifted
Chart 3: More tightening needed to tame inflation
% YoY, % pa
DBSf
40
30
20
10
0
-10
-20
-30
Real prime rate
Inflation
Prime rate
Jan-07 Jul-07 Jan-08 Jul-08
(Chart 3). However, inflation in 2009 should taper off to 15% on average as
growth moderates and the tightening measures start to take effect.
Nonetheless, more tightening may be needed in the near term to keep the lid
on inflation. In fact, the real base rate (inflation adjusted) is expected to remain
in negative territory in the near term until mid 2009, which will gives more
room for rate hikes (Chart 3). The government has demonstrated its will to fight
inflation in its recent tightening moves. With that, we expect the base rate to
be lifted by another 200bps in the next 2 quarters to 16% to help clamp down
inflation.
Inflation has
reached the crisis
stage and strong
counter-measures
are needed
Despite tightening,
inflation will hit
26.3% for the year
Expect another
200bps hike in base
rate
Widening trade deficit is another big concern
Apart from inflation, Vietnam’s widening trade deficit is another big concern.
Trade deficit registered USD 14.4bn in May year-to-date, about four times higher
than a year ago and already surpassed the deficit for the entire 2007 (Chart 4).
Trade deficit exploded from about 18% of nominal GDP for the whole of 2007
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