Viet Nam’s inflation rate is anticipated to moderate 6.8 per cent average in 2012, however, it will remain high this year at 13.3 per cent average, the Asian Development Bank (ADB) said yesterday.

The inflation rate, measured on a year-on-year basis, is expected to continue to increase over the next few months. To bring the rate down to a single digit by the end of the year, the average monthly rate must stay below 0.4 per cent.

Inflation in March reached a 25-month high at 13.89 per cent.

The implementation of Resolution 11 would slow Viet Nam’s near-term economic growth rate, but the Government must persevere as it will take time to lower inflation, the ADB said in its Asian Development Outlook 2011 report.

“It is challenging but achievable,” said Ayumi Konishi, ADB country director for Viet Nam.

The Socio-economic Development Strategy for 2011 – 20, approved by the Communist Party of Viet Nam in January, targets rapid average GDP growth of 7-8 per cent. In February, however, the Government indicated that it would prioritise stability over growth in the near-term when it committed to Resolution 11.

The resolution is aimed at curbing inflation and stabilising the economy through tighter fiscal and monetary policies. In addition, restoring investor confidence is believed to require sustained and consistent policy actions until inflation is subdued.

The ADB expected Viet Nam’s growth to hover at 6.1 per cent this year, then to pick up again to 6.7 per cent in 2012 as a more stable economic environment stimulates consumption and investment.

“Viet Nam should now focus on improving the efficiency of its economic systems in order to deepen its integration into regional and global value chains,” Konishi said.

While the ADB is very confident about Viet Nam’s strong potential over the medium term, it noted that State-owned firms are a drag on the economy and further reforms are needed to safeguard the financial system.

The Outlook 2011 report indicated that the large increase in the domestic credit stock, about US$100 billion during 2007-10, raised concerns over the quality of bank assets, as did bank exposure to real estate and State-owned enterprises.

While Viet Nam’s foreign exchange reserves last year dropped to an estimated $12.4 billion, about 1.9 months of import cover, from $14.1 billion in 2009.

The latest Viet Nam Country Report by the Economist Intelligence Unit (EIU) last month predicted that real GDP would average 7.2 per cent a year in the 2011-15 period, underpinned by strong growth in consumption, investment and exports. However, this forecast is subject to downside risks.

The EIU expected consumer price inflation to accelerate to an average rate of 14.3 per cent in 2011from 9 per cent in 2010, before slowing to an average of 7.8 per cent a year in 2012-15. And policymakers are likely to face an ongoing battle to keep the Vietnamese dong stable against the US dollar.

It also forecasted that the dong will depreciate from VND19,127 per US dollar in 2010 to VND23,873 per US dollar in 2015. The current account will remain in a deficit over the next five years, but capital and financial inflows (including official foreign borrowing) will increase from the low levels they reached in 2009.

Earlier, BNP Paribas predicted that real GDP growth would slow to 6.5 per cent in 2011 before picking up in 2012, which is slower than the Government’s projection of between 7-7.5 per cent year-on-year growth under its medium-term plan for 2011-15.

Regarding confidence in the Vietnamese dong, BNP Paribas analysists assumed that although confidence has been shaken and the level of foreign reserves has been falling, it is incorrect to conclude that the Vietnamese economy is heading towards a 1997-style Asian currency crisis.

Although Viet Nam’s current account deficit in 2010 and 2011 is similar to what Thailand and Malaysia experienced in 1996, the saving grace for Viet Nam is its capital controls and the size of the banking system’s net foreign assets.

According to IMF figures, the banking system is sitting on a $19 billion net foreign asset position, equivalent to 20 per cent of GDP.

Source: VNS