Vietnam walks tightrope between inflation and downturn

HANOI – VIETNAM, like much of the world, is trying to stimulate its economy amid the global downturn, but it is in a quandary because it must also keep rampant inflation from flaring up again, say experts.

With a small and relatively insulated banking sector, Vietnam was not directly exposed to the subprime crisis that sparked the Wall Street meltdown and the subsequent worldwide credit crunch and turmoil on global financial markets.

But the wider economic repercussions of what has been called the worst global economic crisis since the Great Depression are already being felt in this developing economy, especially in the crucial export sector.

Amid slackening overseas demand, Vietnam’s monthly exports have steadily fallen from US$6.5 billion (S$9.87 billion) in July, to US$6 billion in August, to US$5.3 billionin September, to US$5.1 billion in October.

And, although it’s too early to say foreigners are pulling out of financial markets, in the past month they have been net sellers of bonds and stocks.

Inflation has been in double digits all year and stood at 26.7 per cent in October, a slight fall after a drop in global energy and commodity prices.

Aiming to reduce liquidity to fight inflation, the government had raised interest rates and bank reserve requirements several times this year.

But this has also starved businesses of credit for investment and working capital, forcing the central bank to reverse its monetary policy as both local and international factors have slowed economic growth in Vietnam.

Since late October, the State Bank of Vietnam has twice lowered its benchmark rate. It now stands at 12 per cent and Prime Minister Nguyen Tan Dung last week said more rate cuts could be expected to free up credit next year.

Mr Pham Do Chi, chief economist at investment fund VinaCapital Group, agreed that ‘the government can further reduce interest rates to help stimulate the economy through the domestic private sector and the foreign-invested sector.’

‘They may reduce the base interest rate further, by two percentage points in the next three months. The economy can absorb this because we have seen that inflation is coming down, and the economy is already cooling off.’

Consumer price increases started to level off in September and fell month-on-month by 0.2 per cent in October, government data said.

The communist government’s target is to bring annual inflation down to 23-24 per cent in 2008, and to less than 15 per cent in 2009, to defuse a major source of public anger and a wave of labour unrest.

Leaders have also cut the economic growth target from 8.5 per cent last year to around 6.5 per cent for this year and next – although some economists predict gross domestic product growth below six percent next year.

The government also predicts that export growth will slow to about 13 per cent in 2009 from a projected 33 per cent this year.

‘As the situation has completely changed in the space of three, four months, lowering the rates goes rather in the right direction,’ said Mr Sebastien Barbe, economist at Calyon of Credit Agricole French group, based in Hong Kong.

Vietnam’s inflation ‘is enormous but it will be less and less of a concern because disinflation forces that are at work everywhere are very, very strong.’

Still, Vietnam’s room for manoeuvre remains limited because the inflationary risk in the country has not disappeared. Some experts warn for example that public service wage increases next year could contribute to driving up prices again.

‘The main challenge is how you manage the macroeconomic situation in such a way that you can cope with the global economic slowdown… without rekindling inflationary pressures of the very recent past,’ said Mr Chi.

Mr Vo Tri Thanh, research director at the Central Institute for Economic Management under the Ministry of Planning and Investment, said it was ‘the time for us to ease, but cautiously, macroeconomic policy.’

A loosening is necessary as ‘social issues now emerge,’ he said, pointing at the rise in the number of labour strikes and increased unemployment. — AFP

http://www.straitstimes.com/Breaking%2BNews/SE%2BAsia/Story/STIStory_302997.html

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