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Tighter spending helps curb inflation

Viet Nam’s economic growth rate would be 5.8 per cent this year, lower than the 6.1 per cent forecast, but would quickly increase to 6.5 per cent next year, the Asian Development Outlook Update 2011 said.

The report was launched by the Asian Development Bank (ADB) in Ha Noi yesterday.

Bank country director for Viet Nam Tomoyuki Kimura said being faced with double-digit inflation, dwindling foreign reserves and a weakening currency, the Government’s Resolution 11, adopted in February this year, was a comprehensive policy package of fiscal and monetary tightening measures to curb inflation.

Progress has been made but year-on-year inflation remained at more than 20 per cent, Kimura.

“Sustained and consistent implementation of the resolution would lower inflation and allow interest rates to come down,” he said, adding that this would restore investor confidence and stimulate economic activities.

He said the ADB had forecast inflation to be 18.7 per cent this year before moderating to 11 per cent next year.

“The main risk to our near-term forecasts is a premature easing of macro policies,” he said.

The forecast assumed the Government would maintain fiscal and monetary tightening until inflation was brought down, confidence in the dong was solidified and foreign reserves were rebuilt.

“The adoption of the resolution indicated that authorities were prepared to put macroeconomic stability before rapid growth, at least in the short term,” he said.

For the second half of the year, gross domestic product (GDP) growth was expected to be modestly ahead of that in the first. The Government had decided to bring forward an increase in the minimum wage from the beginning of next month which would support growth in private consumption.

The Government planned a modest pullback in next year’s fiscal deficit to 4.5 per cent of GDP. The report said it might ease monetary policies if core inflation trended down.

Narrowing trade and current accounts deficits in the first half of the year had prompted a slightly revised forecast for the full-year current account gap to 3.7 per cent of GDP. Imports would rise next year as domestic demand strengthened. Modest growth in exports was expected next year based on the report’s assumption of slightly faster expansion of world trade.

The current deficit next year was forecast to be similar to this year’s as a ratio to GDP.

Country economist to Viet Nam Dominic Mellor shared the ideas, saying the resolution had helped curb credit growth and consolidate fiscal position.

Mellor said this had bolstered the balance of payments while foreign exchange rate reserves were partially replenished and the exchange rate stabilised.

He said the Government’s resolution and monetary tightening policy would eventually curb inflation and spur economic activity.

“Key risks would be mixed monetary policy signals, a non-transparent fiscal position, banking sector vulnerabilities, dong risk perception, food market rigidities and weak external environment,” he said.

He said the country has been vulnerable to food price shock as its inflation in term of food prices was higher than that of other countries in the region. Food items accounted for 40 per cent of the inflation.

On the other hand, he said, Viet Nam would be vulnerable to a weak global economy including renewed debt concerns in Europe and weaker growth in the US. These factors could reduce global growth and increase investors’ risk aversion.

“Restoring investor confidence requires greater clarity, consistency and transparency. In addition, it needs to balance efforts to support banks and corporations against the need to protect the real savings of depositors.”

Kimura said a more stable domestic macroeconomic environment next year should stimulate foreign investment and encourage residents to bring into the banking system some of the large volume of foreign currency and gold they held abroad or outside the system.

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