Success & shortcomings

2011 and its many challenges is now behind us. The global economy has suffered from serious economic crisis with imperfect global institutions. Negotiations among the major powers, with the participation of global financial institutions, to stabilise economies have achieved modest but temporary success.

Global climate change has also created a number of obstacles to development in many countries and in the world as a whole. In this context Vietnam’s economic successes need to be noted.

Inflationary storm

Inflation in 2011 remained high, because economic development has primarily depended upon investment and there has been an inefficient use of capital over the last decade. Easy credit led to a continued increase in money supply in the economy.

According to the Asia Development Bank (ADB), money supply (M2) in 2010 rose by as much as three-fold over 2006 and nearly ten-fold over 2001. High inflation caused difficulties for much of the population, especially for medium- and low-income earners. That was the biggest problem for the economy in 2011.

Vietnam’s banking system is also too weak. Credit over GDP was much higher than in other countries in the region, estimated to be as high as 131.5 per cent in 2010. Small banks with liquidity shortages had to become involved in a race to attract deposits. Before the State Bank of Vietnam (SBV) applied a deposit interest rate ceiling of 14 per cent there were some periods when rates reached as high as 20 per cent.

The race to attract deposits at high interest rates had a negative impact on businesses, which in turn were incapable of repaying their debts, leading to an even more serious situation as regards bank liquidity. That was the second biggest problem for the economy in 2011.

Policy impacts

The government’s Resolution No 11, issued in February, has been realised with the aim of curbing inflation and ensuring macro-economic stability and social welfare along with a series of policies such as monetary tightening via cutting public investment and limiting credit growth, especially credit for non-production areas.

The results are clear. The CPI, after peaking in April, slowed down rapidly and was less than 1 per cent in August. Hopefully, with the persistent implementation of Resolution No 11, inflation will come down to single digits in 2012.

Another important success that should be referred to is the waking up of the banking system. The process has been carried out through a series of solutions, especially when the SBV decided to impose a deposit interest rate ceiling of 14 per cent.

A number of weak commercial banks saw their poor liquidity exposed and so were placed under special control. The restructure of banks has been boosted, with the merger of three commercial banks: the De Nhat, Tin Nghia and the Saigon Commercial joint stock banks.

The government’s three-pronged economic restructure, along with restructure of the banking system, includes restructuring State-owned enterprises (SOEs) and public investment. The restructure of public investment is part of the continuity of implementing Resolution No 11 but with an appropriate mechanism to raise the efficiency of projects allocated public investment from the government.

The restructure of SOEs has also begun, with publication of the management and financial status of State-owned economic groups and corporations. The remaining 1,309 SOEs are either being re-arranged or will be equitised.

In the social sphere many jobs have been created and the living conditions of low-income earners have improved. The agriculture sector has taken off, with a good harvest and better prices, therefore allowing it to play a role in stabilising the economy and growth.

Trade recorded encouraging results, with total revenues of $96 billion and the bridging of the trade deficit down to $10 billion. Thanks to the tightening of fiscal and currency policy an economic slowdown has been avoided, though many enterprises still face difficulties from high lending interest rates.

More alarming was the policy of decentralisation, which led to scattered investment and low efficiency. Moreover, due to the domination of certain interest groups, some policies in 2011 were not realised to the extent expected.

Solutions for 2012

At the beginning of 2012 the government worked out a number of solutions. Firstly, focusing on curbing inflation and ensuring macro-economic stability, realising the cautious, flexible and efficient tightening of fiscal and currency policy, strengthening the control and supervision of prices, organising the domestic market and boosting exports and curbing imports to reduce the trade deficit, pulling credit growth down to between 15 and 17 per cent in 2012, raising total payment tools to around 14 to 16 per cent, and reducing interest rates to a reasonable level to conform with macro-economic development. Appropriate measures need to be taken to lower spending and raise revenue collection, so as to reduce the State budget deficit to below 4.8 per cent of GDP.

Secondly, focusing on economic restructuring and renovating the growth model in order to raise the efficiency and competitive edge of the economy, especially on restructuring public investment and the financial and banking system, mainly targeting the commercial bank system, and restructuring SOEs.

Thirdly, raising the quality of human resources and applying science and technology. Fourthly, ensuring social welfare and providing healthcare and better cultural and material lives for the people and realising the poverty elimination scheme.

Three other measures include (i) dealing with natural disasters and climate change, and protecting the environment; (ii) perfecting the legal system, boosting administrative reform, raising the efficiency of State management, exercising thrift, and fighting waste and corruption; and (iii) strengthening national defence and security, ensuring law and social order and enhancing the efficiency of diplomatic activities.

In a brief report recently released on the economic situation in a number of countries in Asia, including Vietnam, analysts from JPMorgan remarked that Vietnam’s tightening of fiscal and currency policy has brought about initial results, helping to slow down inflation and the trade deficit.

On this basis the report says that Vietnam’s macro-economic situation will improve in 2012, inflation will continue to come down, the balance of payments will have more backing and foreign reserves will increase.

According to JPMorgan, another positive factor is that existing interest rates of 14 per cent will attract depositors. As a result, the report says, risks to Vietnam’s foreign reserves will only be seen if the government liberalises policy before conditions allow.

The report also remarked that the quality of bank assets in Vietnam is one of the issues requiring closer attention. However, the danger of a crisis in Vietnam’s banking system at this point is relatively low.