World Bank warns of rising inflation

World Bank warns of rising inflation

Viet Nam's Consumer Price Index (CPI) is expected to go up to 8.2 per cent by the year-end, the World Bank (WB) revealed yesterday in its economic outlook report.

The figure is much higher than the Vietnamese Government's target of 6.5-7 per cent and is also far above the forecasts of some economic institutions.

Viet Nam's inflation this year is set to be affected by the minimum wage increase from the beginning of this month. Price hikes of electricity, hospital fees, transport and education services would also make prices strongly rise, said Deepak Misha, WB's chief economist.

But the country's economic growth would increase more rapidly in the last quarters of this year and is expected to hit 5.3 per cent before rising to 5.4 per cent in 2014, he said.

He added that Viet Nam has now had the longest spell of slow growth since the start of doi moi (renewal).

The report revealed that Viet Nam is the only large developing country in the East Asia and Pacific region, other than China, whose post-crisis growth rate has been lower than its pre-crisis level.

The economies of Indonesia, Malaysia, Philippines and Thailand have all grown faster in the post-crisis period, Misha said.

He argued that the economy face three big issues; high fiscal deficit, slow progress in banking sector reform and a lack of progress on the restructuring of State-owned enterprises.

The financial sector remains fragile but a risk of a systemic crisis has receded.

The restoration of macroeconomic stability and the tight credit policy of the State Bank of Viet Nam (SBV) has prevented the problems from worsening.

The report also said the establishment of the Viet Nam Asset Management Company (VMAC) has so far been the most visible step taken by the Government to resolve the huge problem of non-performing loans (NPLs).

Resolution of this issue would require a proactive multi-pronged approach, it advised.

Slow economic growth would continue pressuring Viet Nam to rethink its monetary and fiscal policies putting pressure on inflation. In addition, late implementation of the structural reform programmes would affect the confidence of investors and continue to negatively impact growth prospects.

However, the WB also pointed out positive trends in the economy.

Viet Nam's foreign currency reserve has climbed to the equivalent 2.8 months of imports in the first quarter of this year in comparison with 2.2 months of the same period last year and 1.6 months two years earlier.

The WB said the country's foreign reserves improved in the first half of the year as it enjoyed balance of payments surplus of around 9.3 per cent of its GDP.

It added that Viet Nam posted its largest ever current account surplus, though future surpluses were likely to be considerably smaller. The country's export basket has quietly undergone a significant transformation in the last ten years. Crude oil and agriculture, including rice which accounted for 44 per cent of Viet Nam's total export value in 2002, saw their shares plummet to 19 per cent last year.

In the same period, the share of low-value manufacturing exports such as garments and footwear also fell from 27 per cent to 20 per cent. High value export items which had a negligible share in 2002 accounted for more than a fifth of Viet Nam's exports.

Foreign investors were worried but remained optimistic about the future.

According to the 2012-13 ASEAN Business Outlook Survey by AmCham Singapore and the US Chamber of Commerce, Viet Nam still took the lead in the region with 57 per cent of votes.

However, in the short-term, the WB warned that there were several risks in their projections.

First, slower growth would intensify demand for further loosening of monetary and fiscal policies with the risk of stoking inflationary pressures and reversing the recent gains in macroeconomic stability.

Second, if the implementation of structural reforms is delayed further, investors' confidence would be undermined, further worsening growth prospects. On the external side, Viet Nam's economy remains susceptible to a further slowdown in the global economy since its declining revenue performance and rising public debt leaves little room for significant counter-cyclical policies.

Sluggish growth

Viet Nam's economic growth will be sluggish over the next few quarters and become dependent on external demand, without concrete reforms being introduced to address key issues, according to a report released by HSBC on Thursday.

The bank believed that from a macro perspective, the economy has stabilised but economic activity has not returned to previous levels.

Major growth indicators, including HSBC's manufacturing PMI (Purchasing Managers Index), the CPI (Consumer Price Index) and trade prints, reflect sluggish domestic activity.

In the second quarter of this year, growth in GDP (Gross Domestic Product) was five per cent year on year, rising slightly from 4.8 per cent in the first quarter of 2013.

The bank believed that inflation is expected to remain manageable due to weak domestic demand and low global commodity prices.

However, HSBC said the government could potentially raise the costs of public services while revenue collection remains sluggish as a result of slower growth.

In the first quarter of this year, the total revenue collection fell by 3.9 per cent year on year and expenditure slowed to 15.4 per cent year on year. Most of the decline in revenue comes from low corporate income revenue, value added tax (VAT), especially VAT on imports.

The report also showed that core inflation rose by 0.6 per cent in June from 0.4 per cent in May and is expected to drop significantly next year thanks to a favourable base effect.

HSBC expected the economy to pick up only slightly to 5.1 per cent from five per cent in 2012. The bank also believed that Viet Nam was likely to under perform in the coming decade, unless reforms to resolve major bottlenecks in the economy are introduced, including an inefficient banking system and a state-owned sector.

According to the bank, the second half of this year could determine whether Viet Nam will muddle through or return to its former levels of growth over the next decade.

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