Monetary and Credit Policy: Repo and Reverse Repo Rates Unchanged

The Reserve Bank of India (RBI) has recently released its mid-quarterly review. It has clearly spelt out that monetary policy actions will be in terms of rate cuts going forward, given the moderating growth momentum and higher downside risks to growth.
The RBI kept repo and reverse repo rates unchanged at 8.5 per cent and 7.5 per cent, respectively, to fight rising inflation in Asia's third largest economy. The central bank left Cash Reserve Ratio (CRR–(money that banks must keep with the RBI) unchanged at 4.75 per cent. Recently, the RBI slashed CRR, the portion of deposits banks are required to keep with the central bank, by 0.75 percentage points, a step that was meant to infuse Rs 48,000 crore into the economy.
Earlier on March 9, the central bank cut CRR by a hefty 75 basis points, or three-fourths of one per cent, from 5.5 per cent to 4.75 per cent effective the fortnight beginning March 10.
The markets and the corporate sector were expecting the CRR cut on March 15 when the RBI is scheduled to announce its mid-quarter review. But the central bank said on Friday it feared a liquidity crunch due to the advance tax (to be paid before March 15) outflows; and this would have increased the already tight position of banks due to the usual frontloading of cash balances with the RBI.This CRR cut will inject around Rs. 48,000 crores of primary liquidity into the banking system. Earlier in January, the cut in CRR of half a per cent injected Rs. 31,500 crores into the banking system. The CRR cut was welcomed by banks and the corporate sector.
On January 24, RBI had cut CRR by 0.5 percentage points to 5.5 per cent, releasing Rs 32,000 crore into the system. Since then, the fund crunch has only worsened.
The strain on the system rose to high of Rs 1.02 lakh crore. And going forward it will only increase as by March 15 companies will have to make advance tax payments which will drive out Rs 60,000 crore from the system.
Another Rs 12,000 crore is likely to go out of banks due to the Oil and Natural Gas Corporation (ONGC) auction last week, and a similar amount will be drained out on account of excise duty payment by companies.
Rate of Inflation
Inflation rose to 6.95 per cent in February which is much above the Reserve Bank’s comfort level of 5-6 per cent. RBIs own forecasts of inflation is that it will go down to 7 per cent levels in March 2012 from November 2010 levels of 9.11 per cent. RBI has indicated that non food manufacturing inflation is still a worry as it has gone up from 7.6 per cent in October 2011 to 7.9 per cent in November 2011. However, it has reiterated that despite the rise in non food manufacturing index, headline inflation momentum is slowing down.
The market will now have to work out its own math on inflation. Inflation can surprise on the downside as much as it has surprised on the upside. It is going to be a difficult call on where inflation is headed in 2012, but considering the fact that prices are already at elevated levels with inflation as measured by the Wholesale Price Index (WPI) averaging over 9 per cent for the past two calendar years, inflation has the ability to come off sharply especially if global growth slows down dramatically.
GDP Growth
There are now serious concerns on the slowdown in the Indian economy as the Gross Domestic Product (GDP) growth figures for the September-December 2011 quarter came in a paltry 6.1 per cent, the lowest since the Lehman crisis that shook the global economy in 2009.
The economy has given mixed signals in the past few months with some green shoots being seen on inflation, foreign institutional investor inflows, stock markets, the rupee and policy action picking up.
However, the figures come as a dampener as they are well below estimates. It is clear the lag effect of problems seen last year of low investor confidence resulting in low investment, high inflation and high interest rates and policy inaction are playing out. The surprise is that GDP growth is now at the level seen during the Lehman crisis when the world economy was in a reset mode though the situation has improved since.
GDP growth decelerated to a low of 6.1 per cent in the third quarter of fiscal 2012, raising fresh concerns about the growth slowdown. Industrial sector continues to be the main laggard and grew at an anemic rate of 2.6 per cent due to falling domestic demand and faltering global recovery.
The magnitude of moderation has been a bit of surprise because advance estimates released earlier had pegged financial year 2012-13 growth at 6.9 per cent.
According to FICCI, it would be ironical if GDP growth in 2011-2012 goes below 6.8 per cent, would be lower than in the crisis that was achieved in 2008-09 — the year of the post Lehman crisis.
Foreign Trade
Indian imports continued to outpace exports in February as demand remained weak in major exports markets like the United States and Europe, nudging the government to revise up the full-year trade deficit projections.
A widening trade deficit will likely worsen India's current account deficit and further weaken the rupee. Merchandise exports grew an annual 4.3% to $24.6 billion in February, while imports grew 20.6 percent to $39.8 billion.
The trade deficit widened to $15.2 billion during the month, from $14.8 billion in January.

Indonesia-China Trade Deficit

Bilateral trade between Indonesia and China has become more and more balance. From January to July this year, Indonesia's non-oil trade deficit with China has now been reduced to $3.39 billion.
Import and Export
Figures provided by China's Commerce Department shows that from January to July this year, the total import and export volume of China has exceeded $2022.5 billion. It was an increase of 25.1 as compared with same period last year. This resulted in $ 76.21 billion foreign trade deficit for China. For the month of August China's trade deficit reached $ 17.8 billion.
Not too long ago, Indonesia's Central Bureau of Statistics Director Rusman Heriawan said that during the first seven months of this year, Indonesia's biggest non-oil export market is China; and that Indonesia's non-oil export to China stood as $10.92billion. It took up 11.69 percent of Indonesia's total export volume. Meanwhile, China is also Indonesia's largest source of imports, with import value worth about $ 14.31 billion.
According to data obtained from Indonesia's Ministry of Trade, in Indonesia's non-oil trade with China for the year 2007, Indonesia's non-oil trade has suffered a deficit of $1.293 billion; and for the year of 2010, Indonesia's non-oil trade deficit with China has increased to $5.607billion. But by the end of May in 2011, Indonesia's trade deficit with China has turned $ 2.731billion.
12th Five-Year Plan
The main reason that triggered the rapid growth of Chinese imports is due to the fact that not too long ago, China's 12th Five-Year Plan has outlined its national economic and social development. Subsequently, China has made number major changes in its economic market. One of changes is for China to improve its people's quality of life and so China has stressed on providing supplies to the domestic market. Another reason is that it is China's wish to see the Indonesia-China trade can attain mutual win and mutual beneficial trade balance situation. In this regard, China has upgraded the opening up level of its overseas trade limit, including the optimization of engaging in foreign trade and other measures.
Consumer Price Index
Song Yu, Goldman Sachs Group's economic analyst based in Hong Kong recently said that according to Goldman Sachs Group's research report prepared by Goldman Saches Group's Asia macro economist Song Yu, currently, China's economy is full of confidence in the implementation of its "soft landing" economic policy.
It is expected that for the month of August, China's Consumer Price Index will decrease to 5.9 percent from July's 6.5 percent. The main reason is due to the decrease in the prices of food items. Nevertheless, from August China's real economy growth rate has begun to fall. It is expected that China's real economic growth in August will be decreased to 13.8 percent from July's 14 percent.

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.

ASEAN 10 Plus 4 Framework

Ever since China began to open up to the outside world and carried out its reform, China has followed the path of an open-end regionalism. Such open-end regionalism can allow China to take the lead to establish the ideological basis of regional platforms. What open-end regionalism stresses is the inclusive of regional organizations. Such regionalism can be reflected on China's relationship with ASEAN (Association of Southeast Asian Nations) countries.

After the end of the Cold War, the relationship between China and ASEAN is a most successful case in all regional organizations. The relationship between China and ASEAN has also led to two other countries in Northeast Asia, namely Japan and South Korea to establish closer relationship with the ASEAN countries.

Open Process Evolution
How can G2 expand the basis of its own system? It will be an open process evolution. During this evolution, G2 may come out with different organizational structure. However, for effectiveness and convenience, G2 may also wish to use the ASEAN platform to develop the G2 structure. In other words, ASEAN can indeed expand its open-end regionalism to China-US relationship.

There are many reasons why ASEAN can become an interactive platform for G2. First of all, ASEAN has already formed its ASEAN "10 +1" mechanism. Built on this base, ASEAN now has the ASEAN "10+3" (ASEAN plus China, Japan, South Korea) framework. Now, the United States has openly said that it wants to "come back" (return to Southeast Asia). This means that ASEAN can come out with another "10+1" mechanism (ASEAN plus US) framework to include the United States.

Developing Enough Momentum
It is not difficult for the ASEAN "10+3 mechanism to extend and become an ASEAN "10+4" framework. During the initial stage, the United States may be reluctant to buy this concept. However, with East Asia gradually becoming the center of the world economy, the United States will also gradually develop enough momentum to enter this ASEAN "10+4" mechanism. The ASEAN-China Free Trade Area has already entered into force.

After a period of trial run, the ties between ASEAN and China will further be strengthened. This will give the United States great competitive challenge in the East Asian region. If the United States does not want to be marginalized in this region, the United States must make effort to institutionalize its presence in the Southeast Asian region.

Both ASEAN and Northeast Asian countries are facing a reality that the United States was here in the past; the United States is here now and the United States will also be here in the future. The importance of the United States to Southeast Asia (regardless if it is from economic or strategic perspective) is obvious. It is with good and great reason that the ASEAN countries would want to earnestly "invite" the United States to come back to Southeast Asia. In Northeastern Asia, Japan has proposed to establish a more equal relationship with the United States. If ASEAN does not consider the US factor, then the concept of an East Asian Community will be difficult to achieve.

US Shift Toward East Asia
East Asian regionalism is inclusive, which means it can include the United States. In the same token, if East Asian countries have recognized the existence of the United States, or to use the words of realism, there is no ability for the region to exclude the United States, they would have to consider how to "digest" the United States. It is like the US engagement policy on China with the purpose to "digest" China.

In fact, as the US focus begins to shift toward East Asia, the United States has more and more like an East Asian country. In such a case, the United States must be integrated into the Asian economic and security mechanism. The more the United States is excluded from this region, the more insecurity East Asian countries can become. The reason is very simple. This is because the more the region wants to exclude the United States, the more the United States will have the psychological fear of not becoming part of the same. The United States might find whatever means they can use to get involved in this region then.

Providing Economic Platform
First and foremost the proposed ASEAN "10+4" mechanism is an economic platform. In this regard, interaction on economic issues within such a platform is easier to carry out. Compared with other aspects of interaction, economic interaction is often not a zero-sum game. Economic interaction platform can even result in having positive effect on political interaction. At this moment, between China and the United States, these two countries face many trade disputes.

On the surface, although the China-US bilateral trade disputes are trade matters between the two countries, to a great degree, such trade disputes involve the whole East Asia's trade relationship with the United States. This is especially manifested in the aspects of the US trade deficit with China. It is difficult for regional countries to explain China's trade relation with the United States if we do not consider China's trade relation with other East Asian countries. If the US economic mechanisms can be integrated into the East Asian region, when the United States considers its economic interest, its economic concern will not so easily be politicized as what has happened now.

Possible Positive Impact
Economic integration will also bring positive impact to the ultimate security issue. The security issue between China and the United States is not just the problem between the two countries; it is also the security issue of the entire Asia. If China and the United States can, based on the proposed ASEAN "10+4" mechanism, to also nurture military confidence and build up a security cooperation mechanism, such security cooperation mechanism will allow peace in Asia to prevail and be protected, it will also provide solid foundation for global security.

The proposed ASEAN "10+4" mechanism itself can be an open end mechanism. Based on such principle, this mechanism can be expanded to include more relevant countries. It will be the ASEAN "10+4" formula.

State of Vietnamese Economy

The trade deficit which in the last three years reached $45 billion has had a negative impact not only on the international balance of payments, but also on the macro balances of our economy. The target to "rein in this wild horse" at 20 percent this year is absolutely necessary.

Managers have approached this target from two directions: promoting exports and restricting imports. The Ministry of Industry and Commerce forecast that the increase in exports this year will not be 6 percent as planned by the National Assembly but rather 7 percent, so the export goal should be $60.777 billion (the 2009 figure was adjusted to $56.801 billion). By keeping the trade deficit at the threshold of 20 percent, this year's import "quota" will be $72.932 billion, and the import turnover will be $12.155 billion, which means a decrease of $719 million compared to the import turnover in 2009.

Export-Import Growth
According to the January 2010 estimate announced by the General Department of Statistics, although the absolute level of trade deficit decreased sharply compared to the last four months of 2009, the scale of trade deficit was still above the goal because while exports increased vigorously, imports increased even more.

Specifically, while export turnover was estimated at $4.9 billion, an increase of 28.1 percent compared to the same period in 2009, imports reached $6.2 billion, an increase of 86.6 percent. Therefore the import surplus was $1.3 billion, and the trade deficit was 26.53 percent, higher than the target limit of 20 percent.

Obviously, in theory, this is just a "warm up," and perhaps there is time to adjust, but actually there are grounds to assume that there will be a strong increase in imports, while exports will grow at a much slower rate. Therefore it is possible to be unable to achieve the target of reining in the trade deficit.

An increase in both exports and imports will resonate because of two factors, the increase of quantity and the increase in prices, but the factors for the basket of imported products are much more significant than for the basket of exports.

In particular, the estimates of export and import of products for which statistical data on quantity and value are available - nine export products and 11 imported products - showed that in January, total imports increased 95.82 percent, and that 41.1 percent was due to increases in price and 54.5 percent was because of an increase in quantity. The price factor caused a 45.24 percent increase in exports, and although actual export value increased only 37.43 percent, quantity decreased 7.81 percent because a considerable amount of crude oil was reserved for the "first-born" of the petrochemical industry in our country.

IMF Forecast
Certainly in the future "made in Vietnam" petrochemical products will replace some products we have had to import for a long time, but it is obvious that the import segment of the economy in general will grow much more than exports.

This judgment is based on the price trends which are very different for various product groups on the world market, as well as their unequal correlation in the two baskets of export and imported products. In fact, whether world prices decrease or increase, prices of manufactured and processed products will change less than prices of raw materials. In the present period, according to an International Monetary Fund (IMF) forecast, instead of the decrease of 31 percent in 2009, world prices of raw materials will increase about 16 percent this year, while the estimates for manufactured and processed products are -9.1 percent and +3.1 percent respectively.

Affect of World Pricing
Given the conditions of world pricing, the structures of the two baskets of export and import products in our economy are sensitive. There are two reasons for this. First, on the average in the last three years, the basket of imported products was nearly 22.5 percent more than the basket of export products. Second, in such correlation, the group of raw and unprocessed materials and fuel accounted for 65 percent of the basket of imported products, while the group of raw and semi-processed products accounted for only about 46 percent of the basket of export products. Therefore, the affect of world pricing on the basket of imported products is 1.7 times greater than on the basket of export products.

Because of structural differences, the basket of imported products shrunk much more than the basket of export products (13.68 percent versus 9.39 percent) during global economic recession in 2009. This year the basket of imported products will expand much more than the basket of exports.

For this reason, instead of decreasing in the chilled conditions of 2009, the trade deficit will increase this year when world prices heat up again according to the familiar scenario of the past years. However, to restrict imports in order to restrain the trade deficit, we cannot avoid restructuring the economy, but that would take a long time.