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Managing inflationary and balance of payments pressure ‐ case of Vietnam Nguyen Do Quoc Tho Director General Monetary Forecasting and Statistics Department State Bank of Vietnam Outline 1. BOP and Inflation background 2. Policy responses Key BOP developments • Highly volatile trade balance. Long lasting trade deficit • Imports are mainly capital goods and materials for domestic production (consumption goods are less than 10%) • Important role of private transfer in financing the CAB (‐) • Huge surplus of capital and financial account • Overall balance volatility. 3 Key BOP developments % 2005 2006 2007 2008 2009 2010 2011 2012 10 10,000 5 5,000 0 0 ‐5,000 ‐5 Current ‐10 Account/ GDP ‐15 ‐10,000 Current Accoun t ‐15,000 Capital inflows • Since 2007, huge capital flows led to high ratio of investment to GDP (over 40%); • Huge capital flows, BOP in large surplus at times but more 5 volatile since 2008 FDI and FII Unit: $ millions Pre-QE period QE period 2007 2011 2012 Foreign Direct Investment (FDI) 6,797 6,569 7,168 Foreign indirect Investment (FII) 6,243 1,460 1,990 TOTAL 13,040 8,029 9,158 Roots of high inflation in Vietnam High openness of the economy Trade/GDP (%) in 2012 180 160 140 120 100 80 60 40 20 0 Vietnam Thailand S. Korea China India US High weight of food in CPI basket Source: Vietnam General Statistic Office QE impacts on inflation through food prices • Food and essential commodity prices are in upward trend in international markets due to QEs ‐> high pressure on Vietnam’s inflation. High budget deficit Source: Vietnam MOF Extended monetary policy expansion Source: Monetary Statistics and Forecast Department ‐ SBV Economic structure and investment effectiveness Investments on GDP (%) Vietnam ICOR 45 40 8 7 6 5 4 3 2 1 0 35 30 25 20 15 10 5 0 Vietnam Vietnam Region's 2006-2012 2001-2005 avg 2008 2009 2010 2011 2012 Vietnam’s inflation results from an amalgamation of demand and supply elements => To curb inflation in Vietnam: ‐ Demand side: Resolution No 11/2011/NQ‐CP ‐ Supply side: Resolution No 01/2012/NQ‐CP Resolution No 13/2012/NQ‐CP Demand side measures (Resolution 11) Monetary policy 12/07 12/08 12/09 6.5 9.5 4.5 2010 2011 2012 2013 1st 2nd 1st 2nd 8 9 9 14 (4) 15 (1) 9(6) 7 (2) 7.5 6 7 7 13 (2 ) 13 7 (6) 5 (2) 10 10 6 7 3 7 3 4 3 7 (2) 3 8 (1) 3 8 3 8 4 4 1 3 1 3 3 4 1 2 1 2 1 5(2) 1 6 (1) 1 6 1 6 1 1 1 1 1 1 I. Policy interest rates (%/year) 1. Refinancing rate 2. Rediscount rate II. Reserve requirements (%) 1. < 12 months + VND + Foreign currencies 2. >= 12 months + VND + Foreign currencies Not applicable 3. Abroad deposit of domestic banks III. Exchange rate band (%) Adjust inter-bank exchange rate 0.75 3 +5 +3 3 3 1 +3.43% (11/09) +3.36% (2/10) +2.1% (8/10) +9,3% (11/2) Demand side Measures (Resolution 11) Monetary policy • Credit growth ≤ 20%; M2 growth ≤ 15‐16%; controlled credit to risky sectors (including FX loans); deposits rate ceiling; agreements of Banking Association on deposit and lending interest rates; credit growth caps; credits/deposits caps; policy communication, etc. Fiscal policy • Tighten public investment and state budget deficit Supply side measures (Resolution 01 and 13) Extending VAT deadline for labor‐intensive firms in agricultural, forestry and fishing sectors Granting license tax exemption in 2012 for fishing households and salt producers Mobilizing 2,000 billion VND to fund for development projects on agriculture and rural infrastructure Controlling essential commodity prices Reducing interest rate on agricultural loans Result – inflation eases Source: Vietnam General Statistic Office