Download Taking Stock An Update on Vietnam’s Recent economic

Taking Stock
An Update on Vietnam’s
Recent Economic Developments
The World Bank in Vietnam
June 5-6, 2008
A more uncertain global environment
World commodity price index
600
Index (Jan 2002 = 100)
500
Energy
Food
Metal and Minerals
Raw materials
400
300
200
100
0
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Source: World Bank
The biggest uncertainty concerns financial markets.
Pressure from higher world prices
Rice prices in domestic and world markets
Gasoline prices in domestic and world markets
220
Philippines fourth tender >$1,100/ton (April 17, 2008)
1000
Price index (Jan 2006 =100)
200
US$ per ton
800
Philippines panic buying > $700/ton
600
Vietnam tightens export restrictons
400
200
Singapore FOB price
Vietnam retail price
180
160
140
120
100
India imposes export restrictons
80
Sources: USDA, FAO
Jan-06
Source: Based on data from USDA, FAO and GSO
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
Jan-05
Oct-04
Jul-04
Apr-04
Jan-04
0
Source: Singapore FOB price is based on the US Department
of Energy
Domestic prices lag behind and will have to be adjusted
Inflation accelerates
Vietnam consumer price index
40
General
Food & Foodstuff
Non-food
percent
30
20
10
0
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Mainly driven by higher food prices. But non-food
inflation has risen too, and the causes are domestic
Social impact of higher prices
On average, Vietnamese households are net producers of food and
rice; so higher prices increase welfare on average. But higher prices of
rice mean that the majority loses.
Current account deficit widens
0
% GDP
-5
-10
-15
Trade deficit - BOP
Current Account
-20
2003
2004
2005
2006
2007e
2008f
The causes of the overheating
Credit growth and its components
Change (Percent, year on year)
100
80
60
40
20
0
To SOEs
To private
sector
2007
By SOCBs
By JSBs
Q1-08
Economic Groups and General Corporations contributed to asset price frenzy
in 2007, through investments in financial and real estate businesses.
However, the main cause was rapid credit growth, especially by JSBs.
The policy response and its
implementation
1.
2.
3.
4.
5.
6.
Priority to controlling inflation
Credit growth target for 2008: 30 percent
Tighten government expenditures
Revise public expenditure investment plan
More flexible exchange rate
Accept lower growth in 2008: 7 percent
2.0
45
1.5
40
1.0
35
30
Apr-07
0.5
0.0
Jul-07
Oct-07
Broad money
Jan-08
Apr-08
Non-food CPI
50
90
80
45
70
60
40
50
40
35
30
20
30
Apr-07
10
Jul-07
Oct-07
Broad money
Jan-08
Apr-08
Monthly Import (yoy)
Source: Based on data from SBV and GSO
The contraction in money supply seems to have an
effect on non-food inflation and on the growth rate of
imports, with a lag of about three months
Monthly import value (percent change
year on year)
2.5
Broad money (percent change year
on year)
50
Non-food CPI (monthly percent
change)
Broad money (percent change year
on year)
Is it working? (1)
Is it working? (2)
Index (June 07 = 100)
130
Vietnam stock exchange index
100
70
EMI
S&P 500
VN Index
40
Jun-07
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
But the contraction is also bringing down the
price of assets. This affects the banks who got
over-exposed to the real estate market.
Exchange rate policy
Index (December 2006 = 100.0)
115
Nominal and real exchange rates
110
105
100
95
Dec-06
Mar-07
Basket benchmark
Jun-07
Oct-07
Basket nominal
Jan-08
Apr-08
Dollar nominal
The acceleration of inflation in Vietnam has resulted in
real appreciation (a decline in competitiveness). The
trade deficit and weaker inflows call for depreciation
Main Recommendations (1)
• Stabilization policies are working, even if this is
hidden by time lags and high world prices of food
• The government should therefore continue the
implementation of its credit policy.
• However, more could be done on fiscal policy and
exchange rate policy.
• If all the burden of adjustment falls on credit policy
the weakest banks will be vulnerable.
• And it will take time for asset markets to recover,
affecting economic activity and equitization plans
Main Recommendations (2)
• More decisive action is needed in relation to public
investment projects and government spending
• It is also necessary to gradually raise the reference
exchange rate and widen the flotation band.
• This would help restore the trade balance and
dissuade fears about exchange rate corrections.
• Even with these measures in place, priority should
be given to financial sector stability.
• Having weak banks quickly absorbed by stronger
ones will preserve depositor confidence
2008: Targets and Forecasts
• Even with all these measures in place, inflation is
bound to remain high
• World prices of food and gasoline are higher than
in Vietnam, and they will need to catch up
• At present, a move towards greater exchange rate
flexibility will result in some devaluation of the dong
• In an open economy, devaluation raises the prices
of all goods that can be imported or exported.
• However, due to the “inertia” of the economy, the
growth rate of GDP may remain quite high
Is the World Bank too Optimistic?
GDP growth rate (percent)
9.0
8.5
8.0
7.5
7.0
6.5
2003
2004
2005
Forecast
2006
Actual
2007