News Room - Business/Economics

Posted on 23 May 2008

Goldman Sachs releases forecast on Vietnamese economy

The US leading bank Goldman Sachs recently released the Asia Economics Flash report including a part concerning Vietnamese economy titled "Vietnam—Rising Inflation, growth setback and a likely roadmap of policy response". 

According to the report, Goldman Sachs bank's researchers assessed, inflation is the outstanding problem as for Vietnamese economy at the moment. Last month, Vietnam's CPI rose by 21.4% relatively year-on-year, which was much higher than the last August's 8.6%.

High inflation has threatened Vietnam's macroeconomic stability as well as the foreign capital flow into the newly emerging market, and due to this, the FDI disbursement—regarded as the power for growth—could be interrupted.

If the situation gets worse, the result can be the considerable unbalance in the payment scale in the near future, quoted the report.

The foreign bank predicted Vietnam's GDP growth could decline within this year and 2009 down to 7.3% and 7.8% in turn against the 8.5% growth rate of 2007. Meanwhile, the country's inflation will continue standing at high with the forecasted levels of 19% and 10% in 2008 and 2009 against 8.3% of last year.

In addition, according to Goldman Sachs' point of view, the sharply increased money supply is mainly to be the key reason causing the highly rising inflation in Vietnam, which has appeared since 2006 and been boosted by early 2007. Asian Development Bank's statistics showed that Vietnam's M2 money supply [M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is key economic indicator used to forecast inflation] grew from 34% in 2006 to 54% in 2007 along with the lending growth also rising from 29% up to 54%.

To keep the dong/US dollar forex rate at a stable level, the State Bank of Vietnam purchased a large volume of US dollar in and pumped extra dong into the economy. Meanwhile, in a bid to avoid the US dollar glut, the central bank also issued compulsory T-bills and increased the mandatory reserve ratio, however a huge volume of abundant money still exists in the economy.

As another measure, Vietnam quickly expanded the banking system, especially commercial joint stock banks and foreign banks. Apart from boosting lending market share, Vietnamese banks also sought ways to increase outstanding debts to ensure the compulsory reserve ratio of 3% for securities mortgage lending by the end of 2007.

The report provides that now is the very important time for Vietnamese lawmakers to have reasonable forward steps to help the economy soft landing.

Based on the above analysis on inflation, the foreign bank's experts said that monetary policy must be Vietnam's key anti-inflation tool at the moment.

Since last June, SBV has applied a lot of monetary policies to curb inflation such as increasing compulsory reserve ratio, using repurchase specification, issuing T-bills, rising interest rates, and loosening forex rate amplitude to help the dong appreciate against the greenback.

However, from now on, SBV will have less monetary policies for options to apply in the market. Among remaining measures, Vietnam should focus on increasing interest rate and monitoring lending.

The SBV's decision of removing ceiling deposit rate and fixing the maximum deposit rate at 18% per annum on May 17 was assessed to be Vietnam's positive forward step in the fight to combat inflation, said Goldman Sachs.

Yet, in the current context that banks' transparency is tightened up from SBV issued 20 trillion dong in compulsory T-bills in March, there appeared a risk factor in the whole banking sector. Therefore, the report proposes that SBV should provide additional transparency to banks instead of seeking ways to withdraw money from circulation in short-term.

Regarding the dong/US dollar forex rate, Goldman Sachs predicted that the dong will continue depreciating against the greenback in the next time. SBV will not use the forex rate tool to raise the dong price because the government wants to continue boosting exports and attracting FDI.