International observers said they were appreciative of SBV efforts to curb inflation yet were cautionary about prospects of growth and raised concerns over bad debts.
Inflation has been slowing down thanks to the government’s efforts, which has bolstered interest rate relaxation and then economic growth, said three recent reports of JPMorgan Chase, HSBC and ANZ in late July and early August.
Also, these reports highlighted macroeconomic improvement such as a narrowed trade deficit, a stabilised USD/VND exchange rate and increased foreign reserves. “The trade deficit in the first seven months of this year was only a slight $58 million compared with $6 billion of the same period last year. The foreign exchange rate between the US dollar and dong has stabilised since earlier in the year and foreign reserves have been significantly bolstered thanks to a decreasing trade deficit and accelerated FDI disbursements,” said the HSBC report.
“The macroeconomic outlook has much been improved thanks to policy tightening since early 2011″, said Moody’s report on Vietnam sovereign credit rating on 8 August.
However, ANZ said it is concerned that the inflationary easing could signal weakening demand that may become a drag on growth prospects citing year-on-year first-seven-month export growth fell to 3pct from 16.9pct in June.
Likewise, HSBC said the July purchasing managers index (PMI) tumbled to its lowest level since its first release in April 2011 indicating reluctance to spend due to either higher debt loads or a gloomier economic outlook.
Meanwhile, JPMorgan Chase appeared more optimistic about the inflation slowdown that had been briefly attributed to falling food, foodstuff and fuel prices. Also, despite some indications of a stalling economy in the first half, credit growth and economic activity has become much steadier in recent months.
Credit growth and bad debts
Unlike JPMorgan Chase, the other two lenders assumed credit growth a worrying issue for the time being. “A credit growth slowdown of below 1pct since earlier in the year partly implies weakening domestic demand”, said the HSBC report.
Another hotly-debated issue is the ‘real’ rate of non-performing loans in the banking system. In all likelihood, the actual bad debt ratio of the total outstanding loans as of 2011 end is very likely to outstrip the officially published 3.1pct, said Moody’s citing the absence of transparent locally-released statistics. The banking industry has appeared considerably vulnerable following the boom in easy credit.
“Decreasing asset value has deteriorated banks’ capital and weakened risk-absorption capacity as well as impeded further lending. Consequently, credit growth has almost levelled off over the past seven months”, this credit rating firm added.
Moody’s also cautioned that handling bad debts would cost a great deal but specific plans have not been finalised as yet nor has a timeframe.
However, what these reports share in common is the need for prudence about the economic outlook in the near future.
“Inflation has significantly eased yet concerns over economic growth have sprung up”, said Moody’s anticipating GDP growth rate to average 5pct in the next two years.
Overall, macroeconomic policies are seemingly on the right track said these institutions expecting additional interest rate cuts on further inflationary cooling.
“Monetary policy loosening and fiscal assistance are likely to remain for the remaining months of this year in order to speed up growth. Inflation could drop in the third and fourth quarter to 6pct-7pct in the year end”, ANZ was quoted as saying without providing specific forecast.
Similarly, HSBC reckoned further monetary loosening yet failed to specify forecast for interest rate. Also, JPMorgan Chase forecast interest rates to fall by another 200 basis points in the second half of the year. Standard Chartered Bank earlier predicted the decline of 100 basis points in quarter 3.