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Asia Pacific Economic Outlook, November 2012

The Vietnamese economy could experience its slowest growth rate in 13 years. Inflation rose for the second consecutive month. The central bank could lower interest rates to boost economic activity.

Vietnam’s economy is likely to experience its slowest growth rate in 13 years. While GDP grew at nearly 4.8 percent during the first nine months of 2012, a marginal uptick in the last quarter will likely result in growth rate of 5.2 percent for the whole year. This is much lower than the country’s earlier target of 6.0–6.5 percent. The prime minister offered a rare apology for the government’s weakness in managing the economy. However, he indicated that slower growth was acceptable, given the difficult economic conditions at home and abroad. Furthermore, decelerating credit growth and a weakening banking system are taking a toll on growth. Navigating the Vietnamese economy is likely to pose a stiff challenge for its policymakers, and the country will continue to experience strong headwinds.

Meanwhile, headline consumer price inflation edged up for the second consecutive month. As a result, the disinflationary trend seems to have ended in August. Inflation came in at 7.0 percent in October, up from 6.5 percent in September, reflecting higher food prices and a sharp increase in health care costs. Food inflation, which tends to drive overall inflation, rose to 2.1 percent. On the other hand, health care costs rose a staggering 38.5 percent in October, surpassing a 31.3 percent increase in the previous month. While the spillover effect of higher health care costs is not as significant as food inflation, the country’s average inflation may exceed 9 percent in 2012 if the current trends persist. The government’s effort to contain inflation to single digits, compared to over 23 percent in 2011, appears to be paying dividends. However, policy measures to tame inflation have led to lower investment and slower economic growth. If inflation continues to decline , the central bank may resort to a looser monetary policy.

However, the country’s banking system is facing a host of other challenges. The central bank imposed restrictions on bank lending in order to limit inflation, but the drying up of credit lines led to lower activity in the real estate sector. Land prices fell after experiencing healthy growth. Prices of land and condominiums in Hanoi dropped 20–40 percent from their levels in the first half of 2011. This decline in housing and land prices has exacerbated the loan problem in Vietnamese banks, which account for 8.6–10.0 percent of the loans in the banking system. As a result, bank lending remains constrained, despite sufficient liquidity. The Vietnamese National Assembly’s economic committee estimates that $12.0–14.4 billion will be needed to dispose of nonperforming loans. Decisions from the banks to focus on cleaning up their balance sheets could hinder lending and compromise economic growth.

Navigating the Vietnamese economy is likely to pose a stiff challenge for its policymakers, and the country will continue to experience strong headwinds.

In October, the Index of Industrial Production (IIP) rose 5.7 percent over the previous year, and inventory levels declined. This is the third month-over-month increase in the IIP, and it shows that industrial production is making a recovery. However, the IIP has risen by 4.5 percent in the first ten months of this year, which is only half of the growth rate achieved in 2011. In addition, between January and October 2012, over 41,000 firms have dissolved or suspended operations because of difficult economic conditions. Furthermore, borrowing rates for industries operating in Vietnam are two or three times higher than other countries in the region. Barring the four priority industries that can borrow at 13 percent, lending rates for others range between 15 and 18 percent.

Given the weak economic environment, Vietnam’s recovery could be delayed. A sharper-than-expected slowdown in China, the United States, and Europe could hold back the country’s export-oriented industries. If inflation accelerates, investor confidence could decline. Overall, the country is likely to experience below-average growth, and surprises on the upside are unlikely.

Asia Pacific Economic Outlook, November 2012
Cover Image by Stephanie Dalton
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