Experts Predict Inflation Higher Than Vietnamese Government's Target

Many experts believe that external factors and the fiscal policy will have a significant affect on the ability to successfully implement the objectives of a stable macro economy for Vietnam this year.

to the government's Resolution number 23 that was published a few days ago, it was affirmed that the target growth rate will be 6.5 percent while inflation is to be maintained at 8 percent in 2010. This indication is 1 percent higher compared the previous target adopted by Congress at the 6th meeting held in late 2009.

Increase in Consumer Price Index
Analysts think that the Consumer Price Index (CPI) increased up to 4.27 percent within the first 4 months of the year is one of the main reasons that led to the government's recent rate adjustment.

Dr Nguyen Duc Kien, member of the Economic Committee in Congress, evaluated the adjustment as a timely and necessary decision. He said that if the government was determined to maintain inflation rate at 7 percent and would do so at all costs, then Vietnam's economy will find it difficult to achieve the set out growth target. Dr Kien explained: 'This event should be seen as part of the big picture, along with many other macro variables. To maintain the inflation rate at 7 percent would mean to tighten the monetary policy, it will make it harder for businesses to approach capitals and consequently economic growth will be very difficult to achieve.'

Even though Dr Kien supports the rate adjustment, however according to this economic expert, to set targets is one thing, but whether or not the targets can be implemented is an entirely different matter. This view is also shared by Dr Vu Thanh Tu Anh, deputy director of the Fullbright Research Program and Economic Teaching in Vietnam, who shared that: 'A set target does not mean that it will definitely be implemented. The CPI itself, just like any other macro variables, is being affected by many factors, both internally and externally.'

Maintaining Fiscal Policy
Dr Tu Anh believes that an imports dependent country like Vietnam will find it difficult to monitor and control impacts due to increased raw materials input prices during the recovery of the world market. Meanwhile, if the government continues to maintain the fiscal policy and the monetary with high investment rates, while continuously increase credit to meet investment needs, then it will be very difficult to control inflation.

Dr Vu Thanh Tu Anh said: 'What concerns me most is the compatibility among these macro economic objectives, in particular growth target and inflation. Between these two goals there are always tradeoffs. It is very difficult to implement both in parallel, maintaining high growth as well as controlling inflation in an economy that is yet effective. In my opinion, we should not set out too many goals and then try to chase after them. Such policies are voluntarism and very difficult to implement.'

Pham Lan Huong, head of the macro economic policy committee at the Central Institute for Economic Management (CIEM), also suggests that setting a fixed target is not appropriate in the current economic conditions. She said: 'I think that the government's inflation adjustment is reasonable, but this decision is one with a directional characteristic rather than a fixed target. Inflation in 2010 may not be at exactly 8 percent.'

Rate of Inflation
On 12 May 2010, the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) published the economic and social survey results for 2010 in the region. In this report, UNESCAP forecasted that Vietnam's inflation rate would reach 10.3 percent in 2010, while GDP is only at 5.8 percent (compared to the government target rate of 6.5 percent).

UNESCAP representative and economic expert Eugene Gherman affirmed that: 'Forecasted figures and target rates can be different, but what is important is that we recognize that inflation is the main problem that needs to be addressed in 2010 for economies in Asia, including Vietnam.'

Vietnam Faces Difficulties in Addressing Inflation Problem

The Consumer Price Index (CPI) reached 4.12 percent in the first quarter of 2010, much higher than previously forecasted. This has made the government's plan to maintain inflation rate at 7 percent in 2010 even more difficult to achieve. The 'ghost' of inflation that has constantly haunted the Vietnamese economic development has once again taken shape. This is mainly due to the lack of empirical models to help management agencies to solve the problem at its roots.

Causes of Inflation

First, the costs of inputs such as wage increases, electricity, water, coals, steel have risen.

Second, there is imported inflation. This is shown very clearly in the Vietnamese mentality of preferring imported goods. The excess of imports over exports over many years has accumulated a relatively high imported inflation.Even though the relevant data are not available to carry out an economic regression analysis, one can still visualize the fixed relationship between the trade deficit and inflation. In the years when the trade gap is large, it is usually accompanied by the high inflation rate.

The third factor is the exchange rate policy. The devaluation of local currency on the one hand has forced an increase in import goods pricing. This should lift the competitiveness of domestic goods but instead they had sought to expand their profit margin. On the other hand, the increase in exchange rate has caused an increase in the costs of raw material inputs, there by exerting pressure on selling prices.

Fourth, the inflation in Vietnam relies heavily upon people's mentality. Expectations of high inflation also lead to a tendency to increase prices of goods, especially during the holidays and New Year periods. Generally, when prices are increased to a new level, particularly in services and consumer goods, it is difficult to readjust the prices downward again.

In addition, the problems of credit growth, increase in the amount of money in circulation, and the dollarization of the economy are also factors in the inflation boost. Some studies have suggested that credit growth and inflation in Vietnam have the latency between 6 to 8 months. However, this conclusion is only based upon statistics illustrated by graphs and is not yet proven by any quantitative models.

Why is Country's Inflation Difficult To Control?

First, it is because the origin of Vietnam's inflation has started from both internal and external factors. Vietnam is an emerging economy and is export oriented. Therefore, Vietnam imports many basic raw materials, machinery and consumer goods, etc.

Consequently, the one factor that has an enormous impact on Vietnam's inflation is the prices of foreign goods. At the same time, the exchange rate policy between VND and USD plays a decisive role in determining the prices of import goods purchased using other currencies because these prices are set using the basic cross-rate between VND and USD.

Meanwhile, Vietnam cannot decide on the prices of goods in the world. It can only accept them. Hence, it cannot have a policy to control this source of inflation. Nevertheless Vietnam can utilize a policy on import restrictions as well as exchange rate policy.

The use of exchange rate policy, however, still depends on the strength of Vietnam's domestic currency and the foreign exchange reserves. Also, import restrictions cannot be unilaterally imposed when Vietnam is a member of WTO because it cannot go against the principle of an 'open market' and will have to bear the pressure of 'reciprocity' in international trade.

Second, Vietnam's price management policies are not synchronous and difficult to predict, especially price regulatory policies on essential commodities which are important inputs for production processes such as coals, electricity and water, etc. These key input factors which make up a large proportion of the production cost will exert pressure on future increase in selling prices.

Third, Vietnam lacks empirical research on the causes of inflation, as well as their impact on quantity. New research on inflation is virtually analysis that is based on estimates rather than inferred figures and data.

When it comes to inflation, anyone can point out that it is caused by "material prices increase, wage rise, hot credit growth increase, exchange rate policy and imports." However, there is no quantitative data available on how much impact does each of these factors have on inflation, or how inflation would be affected if one of these factors is increased. Even if there is, it is not publicized and not yet proven.

It is because of these limitations in inflation empirical models that the State management agencies have found it difficult to impose appropriate regulatory policies. Sometimes it is the right policy, but the timing is not right, or if it is not applied at the right level, then not only it is not effective, it also worsen the problem.

An important point to note is that it is not because Vietnam lacks of organizations which can build empirical models for inflation, but the problem lies in the fact that Vietnam does not have enough input information and necessary data to build and verify. A number of the State management agencies have reported the impacts of some elements on inflation, but they are not convincing enough because the analysis were mainly based on subjective reasoning and judgment.

The year 2010 will witness the difficulties faced by policy management agencies when there are many negatively impacting factors. Meanwhile, government agencies and the State Bank will need to be flexible in their policies so that they can decode the "classic" equation of macro economics: 'the difficult choice between maintaining growth and the risk of high inflation'.

Vietnam's Choices for Post-Financial Crisis, Monetary Policies

The Vietnamese economic development in 2010 depends largely on the targets we have set on and the selection of macroeconomic policies to attain these targets. These targets on their part will require the choice of appropriate macroeconomic policies. This is why we should be careful in choosing macroeconomic policies and socioeconomic development targets in the short, medium and long term, based on scientific and realistic reasoning.

Strategy for Socioeconomic Development
The year of 2010 is the last one in the implementation of the 2001-2010 Strategy for socioeconomic development period so this is the last opportunity to achieve the targets of the strategy. With the most important target to double the Gross Domestic Product (GDP) after 10 years, it is necessary that the economic growth rate in 2010 must attain at least 6.5percent as set by the National Assembly's Resolution. On this bumpy road, the Vietnam's economy "vehicle" still relies on the traditional driving forces that are:

First, economic growth still relies mainly on the increase of investment with the total social investment capital ratio growing continuously from one third of GDP in the last part of the 20th century to nearly 40 percent in the last few years, ensuing the overall investment effectiveness has decreased drastically as demonstrated by the high ICOR index.

Second, the slow restructuring of the economy created no change in quality of growth, even though the speed of economic growth might attain the strategic target and more critically, no premises can be created to get a breakthrough for higher growth rate.

Third, the growth model is based on exports while the change of export commodities and markets structure is limited. Within the structure of export commodities, the ratio of raw materials and resources still occupy a large share while the light industrial group of products is mainly composed of cheap labor-intensive processing products with low value added.

Fourth, the stability of macro economy is not solid yet. The inflation rate (as reflected by CPI [Consumer Price Index]) in the period of 2001-2010 is lower that the preceding one. However, if inflation in the period of 1991-2000 followed a downward trend, it started to go up since 2001.

Affecting Economic Growth
Control of inflation has become a focal concern in the stabilization of the Vietnam's macro economy during the last few years, but recently, the efforts to maintain the main equilibriums of the economy have created many problems affecting directly the stability of the macro economy and limit the space for the management of policies. The most striking example is the deficit in the trade balance. Although export trade has made outstanding gains in turnover, because of the limitations in structure, in export development model and in imports control, excess imports have persisted for a long period of time and affected negatively on the economic growth and the socioeconomic stability.

The target to control imports to reduce the trade deficit to under 10 percent of the GDP and under 20 percent of total exports turnover is very necessary to stabilize the macro economy and at the same time to create a premise and motive force to restructure the economy and speed up the time to regain the trade balance equilibrium.

Trade deficit is the decisive factor causing the heavy deficit in the current balance of payments in recent years and dragging along deficit in comprehensive balance of payments. In addition to trade deficit, State budgetary deficit lingering for many consecutive years has also increased the risks for the economy, including growth risks and destabilization of the macro economy.

Fiscal Policy Options
The short-term focus of the fiscal policy is to ensure that the level earmarked to the state budget at one fourth of the GDP no less but also no more so as not to increase the burden to mobilize for the state budget of the economy. However, all discriminations about economic sectors should be reduced to the lowest level albeit to abolish completely both in obligations to contribute to the state budget as well as to benefit from the state budget spending or disbursement of such nature.

The second priority is to reduce the budgetary deficit in the roadmap to restore the state budgetary balance in the long-term.

Choice of Monetary Policy
If the fiscal policy should be "neutral" in short term basis and active in promoting the restructuring of the economy in the medium and long term range, the monetary policy will become the policy tool to promote economic growth and ensure macro stability. The flexible and marketable character of the monetary policy should be promoted to realize at the same time these two core targets.

On one hand, increasing aggregate credits has been and will be the key factor to promote economic growth while other financial channels for businesses are still scarce. Reality has shown that the economic growth rate of Vietnam has an organic link with opening up credits. On the other, the degree of stability of the macro economy, particularly inflation in Vietnam also has a dialectic relationship with the growth rate of credits though it has a certain latent period. Interest rates should be implemented flexibly and following market mechanisms.

Assessment
To achieve the important macro economic targets, particularly the control of excess imports, to attract foreign investments, to ensure the equilibrium of the balance of trade, current accounts and payments, to balance investment saving and consumer accumulative spending and to manage foreign debts, the foreign exchange policy will play a very important role.

It is foreseen that, under the pressure of the economic disequilibrium between domestic and foreign scenes, in 2010, the devaluation of the Vietnamese Dong is inevitable but the scope and timing should be synchronized with the foreign exchange control and trade policy in order not to create a shock to the macro economic stability while refraining from too much expectation in solving immediately all the macro disequilibrium that have been accumulated through the recent years, especially with only a separate tool such as the exchange rate adjustment.

Vietnam's Economy Shows Positive Economic Growth Trend

While most economies worldwide suffered a negative growth rate in 2009, Vietnam managed to place itself among the few countries that attained a relatively high growth rate of 5.32 percent. This basic figure indicates the strong recovery of the economy.
Minister of Planning and Investment Vo Hong Phuc said this at the regular meeting of the government in December 2009. According to the minister, the trend in other fields is positive as well.

Industrial Output Grows at 7.6 Percent
Industry was seriously affected by the shrinkage of export markets, but factories, businesses, and corporations made a great effort. The government and authorities at various levels proposed timely and effective solutions, for example supporting interest rates, expanding domestic consumption, and encouraging people to respond to the campaign "the Vietnamese people use Vietnamese products." Industry recovered quickly as a result. Negative growth of 4.4 percent in January 2009 was followed by continuous increases through the last months of the year, when industry was growing 12-13 percent. Overall industrial growth in 2009 was 7.6 percent.
High growth rates were seen in some product areas such as air conditioners 41.8 percent, Liquefied Petroleum Gas (LPG) 39.3 percent, freezers and refrigerators 29.5 percent, cement 19.2 percent, and round steel 19.1 percent.
A number of provinces experienced high growth rates, including 15.8 percent in Quang Ninh, 13.9 percent in Thanh Hoa, 10.6 percent in Dong Nai, 10.3 percent in Binh Duong, 9.4 percent in Hanoi, and 7.9 percent in Ho Chi Minh City.

Food Production Hits Record Level
In 2009, our country, particularly Tay Nguyen [Central Highlands] and the South Central Coast suffered severe damage from floods and storms, but because of efforts to promote production in other regions, particularly in the Red River Delta and the Mekong Delta, total grain production reached an estimated 43.33 million tons, including 38.9 million tons of rice, surpassing the 2008 record high by 0.4 percent in 2008, rice production reached the highest level in 12 years. Average rice productivity was 52.3 quintals per hectare.
Over the previous years, many localities had begun to replace old and stunted perennials with new varieties of higher yield and quality. Income from perennials was higher than other that of crops, so businesses and farmers continued to expand cultivated areas. Notably, more than 42,800 hectares of rubber were planted in the northern mountain provinces, Tay Nguyen and Binh Phuoc in 2009, and these provinces increased tea plantation by 2,600 hectares, and 6,100 hectares for coffee.
Animal husbandry continued to expand, particularly large-scale concentrated husbandry, and the number of farms increased more than 18 percent in compared to 2008.
Fishery and aquaculture production increased 5.4 percent over the previous year. The main reason was that localities continued to convert and expand cultivation areas in the direction of combining multiple cropping and polyculture. In addition the models of cage and raft aquaculture continued to develop, especially cage and raft aquaculture in the sea near the provinces of Kien Giang, Quang Nam, Ninh Thuan, Phu Yen, and Haiphong. Offshore seafood production increased due to a policy that supports purchases by fishermen of longer-range boats. Fishery services also improved, allowing boats more days at sea.

Posts, Telecommunication Revenue Increased 39.7 Percent
The number of new subscribers in 2009 was 41.7 million, an increase of 40.8 percent compared to 2008, including four million fixed-line subscribers, an increase of 43.1 percent, and 37.7 million cell phone subscribers, an increase of 40.5 percent. By the end of December 2009, the number of telephone subscribers in the country was 123 million, an increase of 51.3 percent over the previous year, including 18.1 million fixed line subscribers, an increase of 28.4 percent and 104.9 million cell phone subscribers, an increase of 56.1 percent.
By late December 2009, the number of internet subscribers had reached 3 million, an increase of 45.5 percent compared to 2008. The Internet users were estimated to be 22.9 million by late December, an increase of 10.3 percent over 2008. Total net revenue from post and telecommunication services in 2009 was estimated at 94.9 trillion Vietnam dong, an increase of 39.7 percent compared to 2008.

Lowest Consumer Price Index Increase in 6 Years
Consumer prices were fairly stable in 2009, apart from an increase of over one percent in February and December. The consumer price index in other months decreased or increased slightly. The consumer price index in December 2009 increased 6.52 percent in comparison with December 2008, much lower than the National Assembly's approved target of 10 percent.
The consumer price index in 2009 increased 6.88 percent from 2008, the lowest in the recent six years. The consumer price index increased 7.71 percent in 2004, 8.29 percent in 2005, 7.48 percent in 2006, 8.3 percent in 2007, and 22.97 percent in 2008.
In the context of the global financial crisis, our economy achieved a fairly high growth rate, and the inflation rate was not high. This indicates a big success for macroeconomic management and administration.

Exports Grow at End of Year
Because of the shrinkage of consumption in international markets, many commodity prices dropped sharply, so export turnover reached only about $41.4 billion in the first three quarters of 2009, a decrease of 14.8 percent from the same period in 2008. Exports for the whole year were estimated at $56.6 billion, a decrease of 9.7 percent from 2008.
However, in the later months, the situation noticeably improved. Export turnover in November reached nearly $4.7 billion, an increase of 10.2 percent over the same period in 2008.
December achieved the highest level of the year with $5.25 billion, an increase of 12 percent over the previous month and 12.5 percent over December 2008, mainly because of an increase in major commodity exports. Textile exports increased $90 million, rice $80 million, footwear $77 million, coffee $67 million, and crude oil $33 million.
Vietnam's economic changes during 2009, particularly in the last months, are a positive sign for new developments in 2010, the last year of 10-year 2001-2010 socioeconomic development strategy, the year of party congresses at all levels, and the 11th National Party Congress.