Seeking a panorama for Vietnam’s economy

Monday, June 23, 2008
Normal people don’t trade stocks, don’t invest in real estate, don’t import luxury cars – so why do they have to suffer the current difficulties?

When international financial institutions make economic analyses, they make comments based on the viewpoint of protecting investors, their customers, so is there anybody to analyse economic prospects for the common interests or the interests of normal people who don’t hold any US dollars or shares?

While foreign reports focus on financial matters, Viet Nam needs a panorama of the economy, based on more basic factors.

Trade deficit: After reaching the record high level of US$14.4 billion after the first five months of 2008, the trade deficit is slowing down due to different factors. Last year share prices surged and many people spent freely, which was proven through statistics of imported cars and luxury commodities.

As money is scarce at present, Viet nam can’t import a great deal of commodities. The quiet real estate market will also result in a lower demand for construction materials. There is some evidence for these propositions: imported cars are selling slowly; imported steel is being re-exported; the sales of locally-assembled cars in May fell by nearly 1,800 units compared to April, which will result in fewer car components being imported.

While the exchange rate is fluctuating towards the trend that the US dollar is revaluating over the VND, importers are having difficulties buying USD so imported goods are more expensive. But how do we encourage exports to reduce the trade deficit when many export items rely on imported materials?

Flexibility in the exchange rate is a way to enhance the competitiveness of Vietnamese goods in the international market – a flexibility in the value of the VND based on a basket of foreign currencies of Vietnam’s fellow traders, not only on the USD. The monetary and public finance tightening policy, if it is performed seriously and resolutely, will also help lessen the pressure of the trade deficit in the remaining months of 2008.

Actually, the trade deficit is going down: from $3.3 billion in March to $2.8 in April and $2.6 billion in May (source: Barclays Capital). This reduction needs to be boosted to create positive influences on other norms, especially the balance of payment.

Inflation: it is difficult for Vietnam to take measures to curb inflation while gas and food prices are increasing highly in the world, which also cause worries of inflation for other countries in the region. Nevertheless, as many experts have said, inflation in Vietnam is much higher because of its loose monetary policy in previous years. Now as credit is being tightened, the supply of money isn’t increasing remarkably; inflation will likely decrease in the upcoming time when this policy begins taking effect.

The World Bank’s data shows that the money supply has fallen by 10% year on year, consistent with a decrease of imports. According to the WB’s Taking Stock report, which was released at the recent mid-term Consultative Group Meeting in Sapa, Lao Cai, if the food factor is excluded, the price index has been falling since March.

It is necessary to note that the people’s expectations for inflation play a significant role in deciding the price tendency. Therefore, the interest rate policy must be linked with inflation control. Interest rates must be raised to ensure profit for depositors, and thus, the monetary policy would be able to take effect quickly.

Other norms: agricultural, forestry and aquatic production are still growing 2.9% year on year. However, Vietnam seems to be not taking advantage of the increase of food prices in the world so farmers don’t benefit much. In fact, they are suffering difficulties because businesses don’t have money to buy their products to export.

Industrial production value in the past five months maintained a growth rate of 16.4%, except for the construction industry. The WB’s report Taking Stock says though Vietnam has reduced its GDP growth rate target this year to 7%, GDP in 2008 will be still higher than the country’s expected number, based on the growth impetus of 2007.

“Though the development pace of the construction sector will decrease to zero percent in the remaining months of the year while other industries will maintain the growth rates of quarter 1, GDP growth rate will be around 7.5% in 2008,” the report says. Though Vietnam will have to pay to struggle against inflation, in the short term, the cost of the growth rate will be not too high. But the government must definitely say ‘no’ to the pressure of maintaining a high growth rate from industries and provinces.

As psychological factors play an important role in stabilising the market, we should review some financial and monetary factors to have an objective view.

Balance of payment: According to Prime Minister Nguyen Tan Dung in his talks with David Fernandez, JP Morgan Chase’s chief economist, Vietnam’s balance of payment in the first five months of 2008 was in surplus, around $1 billion, and it will be $2-3 billion for 2008. Disbursement of FDI projects is over $1 billion a month.

The WB’s report also shows similar figures: deficit of current accounts in 2008 is estimated at $11.3 billion and it will be compensated for by surplus of capital account of around $14.8 billion. Therefore, the balance of payment will be in surplus of around $3.4 billion. These are the figures that the market needs to reject rumours of Vietnam’s crisis of payment balance (see the below table).

However, from this angle, the market needs flexible forex policies to contribute to reducing the trade deficit and enhance the competitiveness of Vietnamese commodities, raising incomes of workers in the foreign-invested sector, whose minimum salary is calculated based on the USD, and revoking speculation tools of the foreign financial circle. The inflation rate must be remembered when the government conducts the exchange rate, not only for the USD but also other foreign currencies.

Impacts on people: financially-powerful interest groups have a strong voice while interest groups representing the poor, especially farmers, nearly don’t exist.

Policy conduct must be kept out of foreign investors’ influences. Vietnam’s statement that it will not devaluate the VND suddenly goes to that direction because if the VND devaluates, there will be strong impacts on inflation, cause difficulties for the monetary tightening policy and the poor will be the major suffers.

Up to 73% of the population lives in the countryside. If policies enhance farmers’ purchasing power, the local market will be the support pillar for small-and medium-sized enterprises.

Portfolio investment flow: foreign investors are holding around 25% of listed firms’ stocks, both on the official and the over-the-counter markets. So the total portfolio investment capital is around $7-8 billion and most of it belongs to closed funds. There is around $2.5 billion of hot capital, plus around $5 billion of bonds owned by foreigners.

“Vietnam’s foreign currency reserve is equivalent to 360% of foreign debts,” comments Dragon Capital. Information about the high increase of NFD (non-deliverable forward) USD/VND exchange rate is not related to the real exchange rate and the people must be informed about this because the fluctuations in the stock market and the forex market are mainly caused by the psychologies of local investors.

The most important thing is once we define the reasons for the current situation are the monetary, fiscal policies and state-owned corporations’ investment, we have to persistently and resolutely perform set solutions.

It is necessary to control the impact of financial activities on production and business. The two have close relations, but in Viet Nam financial activities have just emerged in recent years.