Behind The Bright Picture

Vietnam’s GDP continued to grow more rapidly in the third quarter than in the previous two quarters and its macroeconomic performance will probably improve year-on-year. However, hurdles such as inflation, trade deficit and public debt must be coped with in the remaining three months. According to figures from the Ministry of Planning and Investment, gross domestic product (GDP) growth in the third quarter surpassed that in the first quarter and the second quarter (7.18%, 5.83% and 6.4% respectively). In total, GDP expanded by 6.52% in the first nine months. The figures even exceeded 10% in HCM City and Hanoi, prompting the latter locality to increase its GDP target for this year by 0.5 percentage point. This ministry ascribes industrial expansion of 13.8% in the first three quarters to stable growth since April (2.67% per month on average). Industrial output may soar by 14% this year, two percentage points higher than expected. Export earnings, meanwhile, jumped by 23.2% year-on-year and import spending by 22.7%. The trade deficit thus remained fairly stable, US$8.58 billion, equivalent to 16.7% of the export turnover and lower than the target ratio of 20%. These rosy statistics cannot mask simmering problems, though. In particular, the consumer price index (CPI) leapfrogged by 1.31% in September, far higher than in the previous five months (0.3% per month on average). It is worth noting that the rate of price increase in September in each of the previous nine years also trailed behind this figure. Granted, spending on education often soars at this time of year. However, the surge of 12.02% recorded in September 2010 remains sufficiently shocking. “The education system, which should receive as much support from the Government as possible, is excessively influenced by market forces,” Nguyen Quang A, a high-profile economist, said. Adverse changes in September pushed up CPI in the first nine months to 6.46%, which makes it harder to keep inflation at 7% in 2010. Higher inflation may spell trouble for the stock market and import in the fourth quarter, when enterprises often purchase large volumes of foreign materials to prepare for production in the new year. Power shortages remain a perennial scourge and, while not at their peak, continue to trail behind demand by 5-10%, just like in the dry season. Recently, Dao Van Hung, a leader of the Electricity of Vietnam Group (EVN), escorted a group of reporters to Hoa Binh Hydropower Plant to show them the extent of water scarcity there. Unsurprisingly, water paucity has often been used as an excuse for proposing power price hikes. If such requests are not entertained, EVN may turn to power cuts, which are indubitably insidious to the economy. The fact remains, however, that inclement weather is not entirely to blame for Vietnam’s power woes. After all, several thermo-power plant projects have been behind schedule due to obsolete technology and problems in selecting contractors, not to mention EVN’s investment in non-core fields during the heyday of conglomerates. The damage inflicted by power blackouts in 2010 has not been fully worked out, but it is known that a 1% increase in GDP entails a 2% rise in power consumption. The power shortfall of 5-10% at present has therefore impeded efforts at fostering economic growth and plunged producers, especially exporters, into trouble. To some extent, dwindling foreign investment in Vietnam in the first nine months (down 12.7% year-on-year) and shrinking additional investment in existing projects were attributable to the country’s appalling power supplies, too. Moreover, much to the business community’s dismay, lending interest rates have not fallen substantially. Transparency and adherence to market principles In a dialogue with representatives from the World Bank and the International Monetary Fund, Le Duc Thuy, chairman of the National Monetary Supervision Commission, highlighted the importance of transparency and conformity to market principles in nurturing macroeconomic stability and the need to accept short-term instability for the sake of long-term stability. His view generated consensus among many foreign economists. After all, the lack of transparency has caused Vinashin’s trouble, which has been brewing for years, to spiral out of control and engendered a glaring gap between expectation and reality regarding the trade deficit in 2009. The disparity of US$6.9 billion in the latter case has left Vietnam with no choice but to intervene drastically in the forex market to stabilize exchange rates and maintain macroeconomic stability. Adherence to market principles and policy coherence are a matter of long-term concerns. Thuy says that no central bank announces in advance the timing and magnitude of forex adjustments, if any. It is also ironical to have a central bank leader insist on forex stability, only to revise the official exchange rate after one week.