Deepening economic woe
05-MAY-2008 Intellasia | The Saigon Times Daily page 4
May 5, 2008 - 7:06:03 AM
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Economic data in April confirmed our fears that the inflation and trade deficit in Vietnam continued to worsen. Policy efforts have so far failed to reign in prices and the investment-driven surge in imports. The market shows little faith in how the economy is being managed and has priced in about 5% depreciation in the Vietnam dong by yearend.
Inflation surged to 21.4% in April year on year, as food prices continued to drive the headline number. But non-food prices also rose 12.6% in the past twelve months. Although authorities highlighted the fact that construction materials contributed to the bulk of non-food inflation, all other categories (except communications) showed large degrees of acceleration. This situation appears especially dangerous, as food prices are unlikely to stabilize near term.
The rice crisis spreading across Asia and much of the world threatens to keep prices elevated. Grain inflation is increasingly spreading into pricing for other foods and feeds. The Vietnamese government has recently taken measures to curb domestic speculation in addition to tighter export controls on rice, as panic buying occurred over the weekend. But global supply is unlikely to catch up with heightened demand from both speculative and real sources in the short-term.
Vietnam's external accounts also continued to slide. The trade deficit widened to US$11.1 billion in April, more than four times year ago and nearly matched the deficit for the entire 2007. The 75% increase in imports far outweighed the 28% rise in exports. With oil prices well above US$100 per barrel, the value of crude export rose 46%, but a near doubling in imports of refined products turned a US$1 billion petroleum surplus in 2007 to a US$260 million deficit now. Huge increases were seen in many other import products, such as the quadrupling in autos, reflecting the still strong investment demand despite tightening measures.
Policymakers seem pressed for results, and announced a plethora of initiatives in the past week. The deposit rate cap was raised from 11% to 12%. The central bank promised guaranteed loans to commercial banks should they run short of funds. The SBV also intervened heavily in the Vietnam dong. The securities commission stopped giving new permits to asset management firms. The Government issued directives to cut fiscal expenses by 10% through belt tightening. Some of these measures aim to repair the side effects of credit controls, while others try to deliver on old promises, but generally appear insufficient in front of such large imbalances.
The deepening troubles all came without real slowdown in exports, which is particularly worrying as the external environment continues to weaken even though global financial conditions have stabilized. The lack of reliable updated data on foreign exchange reserves and fiscal balance clouds the Government's true capacity to manage the currency and price controls. This nasty brew may produce a longer than expected pause in Vietnam's development.
This information is given by Citigroup.
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