The Asian Development Bank on Wednesday warned the government that premature easing could undermine macroeconomic stabilisation efforts, erode business and consumer confidence in dong, and renew downward pressure on foreign reserves.
ADB Country director for Vietnam Tomoyuki Kimura said that it is still too early for Vietnam to ease macroeconomic policies as year-on-year headline inflation remains above 20 percent.
He added that Resolution 11 – a comprehensive policy package built to enforce austerity measures to achieve macro stability – has made good initial progress by helping the exchange rate to stabilise, allowing foreign reserves to be replenished, and lowering the monthly inflation during June – August.
Investors and residents likely have more confidence in economic management if policies and policy making were given greater clarity, consistency, and transparency, Kimura said at a press conference in Hanoi on Wednesday to launch The Asian Development Outlook 2011 Update (ADO Update).
According to the report, inflation is projected to ease gradually to 18.7 percent by this end of the year before moderating to 11.0 percent next year.
The report forecasted a slightly lower Vietnam growth outcome from 6.1 percent to 5.8 percent for 2011 to quicken to 6.5 percent in 2012.
ADO Update commended efforts taken by the government but observed that the market was receiving mixed signals on both monetary and fiscal policies that was undermining the effectiveness of the macroeconomic stabilisation package.
Although the Ministry of Finance cut public spending and its fiscal deficit target earlier in 2011 it simultaneously increased some social spending, and later proposed tax breaks for businesses.
Macroeconomic tightening, after a period of rapid credit growth, generally puts stresses on borrowers and banks.
A 23 percent increase in US dollar borrowing in the first six months of this year heightened that risk. dong could come under downward pressure as these mostly short-term loans mature.
Reflecting these concerns, sovereign spreads and credit default swaps drifted up to 400 basis points in August, the highest since May 2009. The central bank has raised the required reserve ratio for banks’ US dollar deposits by 4 percentage points to 8 percent on deposits of less than 12 months (6 percent on longer-term deposits) between May and August in moves aimed at damping US dollar lending.
However, on August 30 it suspended limits on the loan-to-deposit ratio to reduce interest rates and support financial institutions struggling to meet credit targets.
The regional lender said the near-term outlook depends very much on the government demonstrating a continued commitment towards restoring macroeconomic stability.
Sustained and consistent implementation of Resolution 11 will lower inflation and allow interest rates to come down, which would boost investor confidence and stimulate economic activities.
Kimura said that restoring macroeconomic stability was the immediate priority, but addressing root causes of high inflation required greater efforts on structural reforms. These reforms include reducing bottlenecks in production and transportation, safeguarding the finance sector, increasing the efficiency of public investment, and imposing market discipline on large state-owned enterprises.