Tightening monetary policies have helped contain demand for credit and inflation, but limited credit is likely to slow down economic growth in 2012.
According to HSBC experts, Vietnam has been successful in reducing demand to control inflation, but this has also decreased economic growth more than expected.
No consumer demand
In the first quarter of this year, economic growth declined to only 4.1 percent against the same period last year, marking the lowest rise since March, 2009. The service sector experienced the sharpest decrease.
The slow growth of the economy reflects the tight credit supply. Businesses are facing various challenges and this was shown in the declining outstanding loan balance in 2011 and 2012. Difficult access to capital resources has forced thousands of businesses to dissolve or halt their operations, especially real estate and construction companies.
The growing gap between exports and imports is another sign of the decrease of domestic demand. Exports have been up 22.1 percent since the beginning of the year, while imports have risen only 4.4 percent.
As most of Vietnam’s imports are materials for production, the gap shows businesses’ careful consideration. In fact, imports of fertiliser, cotton, fiber, footwear material, steel, automobiles, petrol and gas have seen sharp declines compared to the same period last year.
With economic growth slowing down more than expected and inflation following a downward trend for months, HSBC predicts that the State Bank of Vietnam (SBV) is likely to loosen monetary policies in the third quarter of this year.
The government will also facilitate the economy’s credit growth through administrative tools and the implementation of preferential credit policies for the economy’s key sectors.
However, HSBC forecast that Vietnam’s economic growth in 2012 will reach only 5.1 percent, much lower than the 5.9 percent of 2011, despite loose monetary policy and faster growth in the remaining months of 2012.
Scenario for the Vietnamese currency
Although there have been more positive signs for the stabilisation of the dong, such as the decreasing trade deficit and the surging FDI inflow in the past six months, HSBC experts maintain their cautious view on the stabilisation the currency, as they are concerned that the monetary policy may become too loose if inflation bounced back at the end of 2012.
If inflation keeps decreasing, the dong will be stable, they predict.
They also said the SBV’s decision to cut deposit interest rates in March and April and the downward trend of inflation are positive signs for the currency, which has long been in a vicious circle of devaluation and inflation.
Although Vietnam managed to curb inflation, experts warned of the price pressure which is likely to return to Asian countries in the second half of the year.
If the SBV’s monetary policies fail to keep pace with the market, there will be a negative impact on the dong by the end of 2012, they said.