Vietnam's economy is seeing return of inflation and trade deficit, Standard Chartered Bank's latest report has said.
Reportedly, till January 2010, Vietnam's total trade gap in 12 months stood at $14 billion and was on increase. From Q2 of 2007 to Q2 of 2008, the trade deficit was recorded at $20 billion due to the high volume of stockpiled steel products and a sharp increase in net import of petroleum products. However, between late 2009 and January 2010, the goods prices were driven to fall a little. So giving explanation for the trade deficit of the last 12 months, Standard Chartered's experts analysed that Vietnam's domestic economic growth is higher than the growth of global economy.
Factually, during three months from last November to January 2010, Vietnam's exports surged 17.3 percent year-on-year but the imports jumped 52.2 percent surprisingly. Meanwhile, the demand from US, the biggest foreign market of Vietnam, had slowed down, particularly Vietnam's export ratio (of total export turnover) to US in December 2009 declined 9.2 percent in value year-on-year. But, Vietnam's export to China reached an average growth of 63 percent from November 2009 to January 2010. Thus, China is an important country boosting Vietnam's export growth when Vietnam lacks the supports from European markets.
Imports of Vietnam are also going up. Especially the trade deficit between November and December 2009 came from the increased imports of machines and accessories, showing a strong surge in investments. In details, Vietnam spent $1.38 billion on importing machines and accessories in last Nov-Dec, soaring 40 percent compared with the average import spending of previous 10 months.
According to Standard Chartered, the good news is that the export operations are being recovered and trade deficit is being narrowed. But Vietnam's foreign trade is still affected by increases in goods prices. The country's inflation from December 2009 to January 2010 returned to over the 7 percent threshold. More worryingly, this was the first time that CPI increased over 1 percent/month in two consecutive months due to the high costs for food, housing land and transportation.
First off, clearly the inflation is on upward trend. Particularly the government raised the electricity price by 6.8 percent (against the current prices) from March 1, 2010, thus inflation could rise by another 0.23-0.36 percentage points. The depreciation of the dong against greenback could push the pressure on imported goods prices. “We [Standard Chartered Bank] forecast that Vietnam's CPI would reach average 8.9 percent within this year”.
Both increasing interest rates and lowering liquidity are the best ways to combat with increasing trade deficit and inflation. State Bank of Vietnam (SBV) has maintained the forex rate stabilisation policy since the start of this year but decided to reduce the price of dong to 3.4 percent against US dollar on February 10, 2010. With the move of SBV, the dong will depreciate further against the greenback in following months and the forex rate could be over 20,000 dong/US dollar by late 2010 because of trade deficit and inflation.
But, Tai Hui, Regional Head of Research, South-East Asia of Standard Chartered Bank (Singapore) gave his point of view, Vietnam's Central Bank will be more cautious in hiking basic rates and devaluing the dong to boost exports and create jobs.
"We hope that SBV will raise the prime rates by total 200 basic percentage points in 2010 and bring the basic rate to 10 percent late 2010," according to Tai Hui.
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