Vietnam economic report: GDP weakness persists

Vietnam economic report: GDP weakness remains policy issue of serious concern. Fiscal policy is now implemented more actively. Inflation continues a rapid downtrend. The SBV maintains a strong effort to help 4 priority sectors (agriculture, exports, intermediate inputs, SME) by capping their loan rates to 3% above the deposit cap. Monetary policy is still not functioning effectively to help GDP recover.

GDP weakness remains policy issue of serious concern. Many thousands more of enterprises have ceased operations, in addition to the 50,000 in 2011. Under a year-long credit squeeze, aggregate demand has fallen such that invention levels are high and still rising. The support measures would take time to start exerting some helpful impact. For the near future, we expect the business sector to face some degree of non-negligible difficulty.

As we have recommended in a policy memo, fiscal policy is now implemented more actively. An un-utilized fund of 120 trillion in public investments is being disbursed to boost GDP. We also note that due to a policy lag, real effects of such measures can come by en of this year. We project a subpar growth rate of 5.5% for 2012.

Inflation continues a rapid downtrend, with 0.18% mom, 8.3% yoy, and 2.78% YTD, respectively. Foods and fuels, commonly considered strong inflation drivers, have behaved moderately, and contributed to a single digit CPI rate in May. Another factor helping to keep inflation in check is weak demand pressures. Inflation would likely maintain a downtrend to the end of 2012 and into next year as well.

The SBV maintains a strong effort to help 4 priority sectors (agriculture, exports, intermediate inputs, SME) by capping their loan rates to 3% above the deposit cap. It continues to reduce policy rates to keep up with a quickly declining inflation. By early June, the VND deposit cap (for maturities of < 12 months) is down to 9%, and is negotiable for term of > 12 months. The SBV is in effect allowing long-term deposit rates to reflect market forces: a clear signal that it may soon abolish any deposit cap altogether.

Monetary policy is still not functioning effectively to help GDP recover from a hard landing in Q1. As of end May, credit growth is slightly negative for the banking system as a whole. Some individual banks may report positive loan increases, but in a low range of 5-6%. The SBV’s original goal of expanding money supply by 15-17% is now judged to be not achievable. The PM office promises a 2% credit growth per month in H2 to help business access affordable funding. Even this modest goal of 13% monetary expansion for this year is open to doubt.