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Economics – Markets – Strategy
Economics: Vietnam
steady inflow of FDI plus an improving services trade account will provide the
counter-balance to the deficit position in the merchandise trade account.
In addition, there is substantial ground to believe that a weaker VND could help
to alleviate the trade account problem. Yet, we do not expect the SBV to deviate
substantially from the current downward crawling peg against the USD. The
pace of depreciation may accelerate in an attempt to close the gap in the current
account but a collapse in the currency is unlikely given Vietnam’s positive long
term growth outlook. However, a weaker currency may invite higher imported
inflation and, therefore, it is probably not the most preferred policy instrument
for the problem in Vietnam right now. We believe the government will instead
place its bet on domestic monetary tightening, administrative and other controls
on credit as well as fiscal contraction to engineer a soft landing for the economy.
Tough action needed to rectify previous policy flaws
The inflation problem in Vietnam has revealed the underlying policy inconsistency
in the system. The government’s loose monetary and fiscal policy framework
complicated by the sharp rise in foreign capital inflows last year are probably
the main reasons for the recent spate of inflation. The inflationary impact of
these capital inflows has been exacerbated by the inability to fully sterilize the
inflows due to its undeveloped capital markets. Couple that with the deteriorating
current account, partly the result of “excessive” domestic demand, Vietnam is
at the crossroads as far as policy is concerned. The government needs to act
swiftly and decisively in its tightening measures to prevent runaway inflation
and a fallout in the balance of payment account. The recent tightening move
by the central bank is certainly the right way forward but more needs to be
done to rectify the problem. Hence, we expect further monetary as well as fiscal
tightening by the government going forward.
Growth is likely to under-perform
With the concurrent fiscal and Chart 7: GDP growth will moderate
monetary tightening, negative
% YoY
impact of high inflation on
domestic consumption, weak 9.0
Real GDP growth
investment and consumer 8.5
DBSf
sentiment on the back of spikes
in interest rates, growth will surely 8.0
undershoot. Growth in the first 7.5
quarter registered 7.5% which
led to the downgrade in the official 7.0
growth target to 7.0%, down 6.5
from 8% earlier on. We reckon
that against the backdrop of rapidly 6.0
Latest: 1Q08
deteriorating fundamentals,
5.5
growth for the full year could
end up worse than expected at 5.0
6.4% before improving to 6.9% Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09
in 2009 when confidence in the
economy returns (Chart 8). Indeed, near term downside risks to growth remain
extremely high and there could be many pitfalls along the way. Bitter and painful
restructuring will be necessary to prevent similar economic crisis from happening
in future.
A weaker VND
could help to
alleviate the trade
deficit
The government
must act decisively
in its tightening
measures
Growth for the full
year should
register 6.4%
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