ADB: policy tightening will lower inflation
In its Asian Development Outlook 2011 Update (ADO Update), the ADB said Resolution 11, a comprehensive policy package, has made good initial progress by helping the exchange rate to stabilise, allowing foreign reserves to be replenished, and lowering monthly inflation outcomes during June - August.
It was too early, however, for Vietnam to ease macroeconomic policies, as year-on-year headline inflation remained above 20 per cent, the report said, adding premature easing could undermine macroeconomic stabilisation efforts, erode business and consumer confidence in the dong, and renew downward pressure on foreign reserves.
The report forecast a slightly lower Vietnam growth outcome, from 6.1 per cent to 5.8 per cent for 2011, increasing to 6.5 per cent in 2012. Inflation was projected to ease gradually to 18.7 per cent, revised up primarily because of higher food prices, before moderating to 11.0 per cent next year.
ADO Update commended efforts taken by the government but observed that the market was receiving mixed signals on both monetary and fiscal policies that was undermining the effectiveness of the macroeconomic stabilisation package.
"Investors and residents are likely to have more confidence in economic management if policies and policymaking are given greater clarity, consistency, and transparency," said Tomoyuki Kimura, ADB country director for Vietnam.
The ADB report said deteriorating bank credit quality remained a risk. Macroeconomic tightening, after a period of rapid growth in credit, will have placed stresses on borrowers and banks. The government needed to take concrete actions to safeguard the financial sector.
"Restoring macroeconomic stability is the immediate priority, but addressing root causes of high inflation requires greater efforts on structural reforms. These reforms include reducing bottlenecks in production and transportation, safeguarding the finance sector, increasing the efficiency of public investment, and imposing market discipline on large state-owned enterprises," said Kimura.
