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Goldman Sachs: 3 reasons for optimism about Vietnam's economy 9th June 2008

Leading US investment bank Goldman Sachs on June 3 released a report on Vietnam’s economy. The report themed “Vietnam: Rising cyclical risks”, is optimistic about Vietnam’s economy at the present.

Reasons for worries:

Statistics newly announced about Vietnam’s economy, including high inflation and trade deficit and changes over the past time in the VND/USD exchange rate make international investors worried. Goldman Sachs said that in the short term, inflation continues to be a big threat for the macro economic sustainability of Vietnam.

In the first five months of this year, Vietnam’s trade deficit reached 14.4 billion USD, increasing 70 percent over the same period of last year and 2 billion USD higher than that of all last year. The figure raised worries of whether there is enough USD for Vietnam to import, while the USD flow into Vietnam is decreasing.

According to Goldman Sachs, to face the situation, Vietnam has applied a series of measures to control inflation including public spending cuts, price controls, interest rate increases and credit control, however, it is not clear that these measures are effective. It is possible that in the coming time, Vietnamese policy-makers will be forced to intensify the tight monetary policy and put pressure on the securities market to curb inflation.

In terms of VND, economists from Goldman Sachs said that it is impossible for the State Bank of Vietnam (SBV) to accelerate the VND/USD exchange rate in the short term, however, the SBV could further hasten the exchange rate increase so that the VND is not fixed at a price higher than its actual value.

Reasons for optimism:

However, the report of Goldman Sachs also shows factors suggesting that a balance of payment crisis will not happen in Vietnam as in Thailand in 1997.

The factors include:

First, FDI, ODA flow, investment capital invested in the security market and remittances continue to flow into Vietnam. Accordingly, Vietnam’s trade deficit could be made up with these sources.

In the first five months, FDI flow invested in Vietnam doubled over the same period of last year, to 14.7 billion USD. Moreover, disbursement is also improving.

The report expects that FDI will continue to flow into Vietnam until the end of this year because large investment projects have been inaugurated and because stable capital flows into the gas and information technology sectors.

Additionally, in spite of Vietnam’s falling security market, foreign investors still continue to buy stocks.

Second, Vietnam’s short-term loans from foreign countries are limited, differing from the situation of Thailand when the country fell into financial crisis in 1997. Statistics show that Vietnam’s short-term debts make up 8.6 percent of GDP, in comparison with 26.3 percent for Thailand in 1996. Furthermore, Vietnam never depends on these debts to compensate for its trade deficit.

Due to the strict stipulations of the SBV about foreign debts, Vietnam’s short-term debts are usually small and relate to export credits. Over the past 12-18 months, there is no sign of change in foreign short-term debts. Vietnam’s total foreign debt is a little larger than its foreign currency reserves, but they are mostly middle- or long-term debts with preferential provisions.

Third, up to now, increasing demand for USD in Vietnam is mostly due to export. Goldman Sachs said that the recent sudden increase of import turnover will get back to normal as the tight monetary policy through credit control takes effective. Moreover, Vietnam’s ports for imported commodities are operating at full capacity.

According to the report, a direct threat to the money of foreign monetary speculators in Vietnam is unlikely. However, if inflation proves long-lasting, domestic capital will pour into gold and USD, putting pressure on Vietnam’s monetary system.

Source: VNN

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