Time to phase out stimulus program: World Bank

With the global economy substantially better now than in 2009, it is almost time to begin gradually phasing out Vietnam’s stimulus package, advised the World Bank (WB) in its latest economic report for East Asia and the Pacific region. In the East Asia and Pacific Economic Update 2010 titled “Emerging stronger from the crisis”, the global lender said that Vietnam navigated the global financial crisis better than anticipated, given its high export ratio, growing GDP and the economy’s overall openness.  Real GDP grew 5.3% last year, led by a surge in construction due largely to the government’s sizeable stimulus program set between late 2008 and mid-2009. In addition, a large budget deficit, rapid credit growth and moral suasion on state owned enterprises resulted in a doubling of total investment in 2009, increasing the investment rate to 42.8% of GDP. The state sector accounted for about a third of the total figure. Regarding the country’s recovery post-crisis, WB economists noted that it has consolidated in recent months, with real GDP growing 6.9% in the last quarter of 2009 year-on-year. Growth of 6% is plausible for the first quarter of 2010. Meanwhile, inflation shows sign of accelerating. Prices rose 6.5% in 2009 as a whole, down from 19.9% in 2008. However, on a monthly basis inflation started accelerating in the last quarter of 2009, the WB warned. The economic report states: “The inflationary pressure is even more visible in asset markets, with the stock market index being on an upward trend for months in a row, and land prices escalating. These developments suggest that the limits of the expansionary policy stance adopted by government since 2008 are being reached”. In the last quarter of 2009, there was a gradual rebalancing of macroeconomic policy to ensure stability. The acceleration of inflation, a spike in the domestic price of gold, and a widening gap between the parallel and official exchange rates, made it obvious that the expansionary stance was not sustainable for much longer. The new policy stance was reflected in a lower target for credit growth in 2010 (25%, as opposed to an actual increase of 37.7% in 2009) and the discontinuation of the short-term interest rate subsidy program. Fiscal adjustment in the order of 2-3 percentage points of GDP, and two smaller devaluations of the Vietnamese dong, in November 2008 and February 2009 also reflected the new policy. According to the WB, the target for Vietnam’s real GDP growth in 2010 is an easily attainable 6.5%. However, keeping the inflation rate below 7%, as requested by the National Assembly, will be more challenging, according to the report.  The WB said that for the region’s middle income countries - such as Vietnam, the Philippines, Indonesia, Malaysia and Thailand – the priority is investment in physical and human capital to encourage the development of production and exports.

High interest rate cripples business

Preventively high interest rates asked by commercial banks are driving corporate borrowers away as enterprises say they cannot afford the borrowing cost as high as 19% a year. Despite the lending rate is capped at 12% a year by the central bank, lenders are still allowed to apply negotiable rates for medium- and long-term loans and therefore have pushed lending rates to as high as 18% to 19% a year. Ho Huu Hanh, director of the HCMC branch of the State Bank of Vietnam, said many enterprises have bemoaned the high rate. Huynh Quanh Thanh, general director of Hiep Long Co. Ltd., said his company now could not borrow funds due to the high cost. “At the current interest rate, only trading firms that have shorter business cycles can borrow. We have decided to relinquish taking out loans when banks raised the rate to 15% a year,” he said. Thanh remarked that given current business conditions, a more agreeable lending rate should be in the range of 10% to 12% a year. “The global economic recovery is still in the initial phase with many uncertainties ahead, so enterprises dare not invest much money into business expansion,” he explained. Tran Quoc Manh, board chairman of Saigon Production-Trading Joint-stock Company, said that the current lending rate at banks is beyond reach of many manufacturing enterprises. “The current rate of 17%-18% a year on medium and long-term loans is unbearable for enterprises, while short-term funds are being choked off,” he said. Under the central bank’s regulation, the cap of 12% is strictly applied to short-term loans. “Such a mechanism on interest rates has created a hindrance to enterprises wanting to access bank loans,” he said. Manh commented that high rates have forced many manufacturing enterprises to put their production projects on hold, while many others cannot boost their acquisition of machinery and equipment to modernize technology. That will result in blunt competitiveness on the global market, he said. Figures from the central bank’s HCMC branch also prove that enterprises are shunning banks. In the first quarter of the year, credits disbursed by banks in the city grew a mere 0.37%, showing reluctance on the part of enterprises to take out loans. Credits in HCMC usually account for one-third of the country’s total amount. Huynh Song Hao, deputy director of Vietcombank HCMC, explained that corporate borrowers dared not take out loans as high interest rates would affect their business efficiency. Several banks have advised their clients to take out loans in the US dollar to enjoy a lower interest rate despite the risk relating to the foreign exchange rate. Dollar loans carry an annual lending rate of 6% to 7%. In fact, as a breakdown in the first-quarter credit growth in the city, loans in the greenback rose 7.2% against the previous quarter, while loans in Vietnam dong fell by 1.81%.

Survey finds business optimism high in Vietnam

Enterprises in Vietnam are the fourth most optimistic as over two-thirds of the respondents expressed their high optimism about the country’s outlook, according to a survey just released by the researcher Grant Thornton Vietnam. Grant Thornton’s survey shows up to 72% of the respondents expressed their high optimism about Vietnam alongside with Chile, India and Brazil, well compared with emerging markets and global averages of 57% and 24% respectively. The optimism among businesses in Vietnam surges from 31% last year but still lags behind the 87% observed in the report of Grant Thornton International in 2008, the foreign-owned audit and business advisory services firm said on Wednesday. Regarding revenue prospects for the next 12 months, the survey finds businesses in Vietnam are most optimistic, with 95% expecting an increase in their earnings compared to an emerging markets average of 59% and a global average of 40% respectively. Optimism regarding profitability and employment are also the highest, registering 91% and 60% respectively in this year’s survey with more than 7,400 chief executive officers, managing directors and senior executives in medium to large private-held businesses in 36 economies. Grant Thornton said in the survey that Vietnam had a good supply of semi-skilled, low cost workers while literacy is high, approximately at 96% of the country’s population of some 86 million. In addition to higher political stability than in many of its neighboring countries, Grant Thornton said the Vietnamese Government had taken steps to make Vietnam attractive to the right investors, and by attempting to cut bureaucracy. “The Government is trying hard to streamline bureaucracy. An example of this is Project 30: reviewing registration procedures and approvals with the overall aim to reduce the amount of regulation and red tape,” Ken Atkinson, managing partner of Grant Thornton Vietnam, said in the report. But, Grant Thornton called for investors to make use of local advisers and take time to check the background of potential business partners and understand the business environment. Grant Thornton noted laws were changing rapidly in Vietnam. The country’s economy has become more open in recent years and increasingly diversified, although agriculture still accounts for more than one-fifth of total output. The survey ranks Vietnam 16th in the 2010 emerging markets opportunity index after mainland China, India, Russia, Mexico, Brazil, Turkey, Poland, Malaysia, Indonesia, Thailand, Argentina, Hungary, Iran, Chile and South Africa. The survey indicates financial constraints as the greatest concern to businesses in Vietnam regarding their ability to expand operation as Grant Thornton pointed out in another report released weeks ago. The latest survey shows the cost of finance and shortages of working capital are of more concern to businesses in Vietnam than anywhere else in the world. “By means of comparison, financial concerns are cited as major constraints by around 20% more businesses in Vietnam than the emerging markets average. Poignantly, businesses in Vietnam rate their lenders as the fifth least supportive in the world: just 49% class lenders as supportive of their business,” the report says.

Barclays Capital: Trade deficit not as bad as it looks

Vietnam’s January-March trade deficit is US$3.5 billion compared with a surplus of US$1.5 billion in Q1 of 2009, but it is not as bad as it looked, says Barclays Capital. The British banking institution Emerging Markets Research comments that at first glance the trade gap looks sizeable, but it should be seen in the context of US$2.5 billion of foreign direct investment (FDI) disbursements and US$1.5 billion of remittances during the quarter. “On the currency front, the Vietnam dong grey market rate is trading fairly close to the official rate, which suggests forex demand and supply is more in balance. The closure of gold trading floors in the country and the pre-emptive weakening of the currency in February likely helped,” says the bank’s latest report on Vietnam’s economy. March exports, according to the report, are down 1.6% compared with a 2.4% rise last March. Exports of precious metals are down 98% given the high base from gold re-exports last year. Crude oil exports, which make up roughly 20% of the total, are forecast to fall 9.6%. However, the researchers say all other major exports have remained stable, with textiles picking up 8.2%, footwear growing 10% and fisheries expanding 14.5%. In terms of the other exports, rice shipments have declined  17% but electronics have climbed 41%, furniture has picked up 26% and rubber has risen by 104%, says the report. “Looking ahead, as the distortion from gold drops out, we expect exports to start rising in line with improved external demand.” March imports are up 37.6% compared with a 45% drop in Q1 of 2009, and the numbers are supported by a 33% rise in petroleum imports. According to the report, there is strong demand for cotton and electronics but both are intermediate goods that are used in exports. Imports of machinery have soared 11% compared with a 42% rise at the start of the year, thus the researchers have also seen steel and fertilizer imports ease. Barclays Capital economists write in the research report: “Demand for autos and motorbikes slowed substantially, a positive development, in our view. We believe that imports will stabilize given the policy tightening.” The State Bank of Vietnam has already tightened policy quietly by removing the 12% lending interest rate cap on medium- and long-term loans. According to newswires, lending interest rates are currently in the range of 18%-19%, which implies an effective tightening of 300-400bp. However, although the lending cap is 12%, the actual cost to customers is roughly 15% after taking into account extra processing costs.