Pacific Money

2012: A Tough Year for Vietnam

The State Bank of Vietnam has cut interest rates for the 6th time this year. Will Vietnam’s economy pick up steam?

As 2012 winds down, Vietnamese leaders are probably glad to see the end of what has been a difficult year.  Despite there still being a few days of activity left, the General Statistics Office recently announced that Vietnam’s GDP increased by only 5.03% this year.  This is the lowest rate of growth since 1999 and is well below previous targets for 2012, which were generally above 6%.  Notably, even this low rate of growth was only achieved after a slight fourth quarter upswing.

Another point of concern is inflation, which has remained stubbornly high and rose from 5.04% year-on-year (YoY) back in August, to 6.81% YoY in December. Meanwhile, the sixth month inflation rate ending in November was 7.08% and the full-year inflation rate for 2012 was 9.21%.  

Despite the inflation situation, Hanoi’s central bank, the State Bank of Vietnam, made cuts to several key interest rates last week that went into effect on December 24th. This includes cutting the discount rate to 7% from 8%, a 1% cut to the refinance rate, and similar 1% cuts to agriculture lending rates and the short term deposit ceiling. This is the sixth time in the last year that Vietnam has cut interest rates.

Offering some respite from ongoing difficulties, exports performed fairly well over the year, giving Vietnam a net boost in this category.  Given slow overall growth rates, it is not surprising that the central bank has moved to ease the monetary situation even in the face of inflation.  Real interest rates remain positive (are higher than inflation). In addition, fallout from a high rate of non-performing loans, especially in the State Owned Sector, continues to be a drag on economic activity.

Whether or not the rate cuts will be enough to boost growth remains to be seen. The reforms necessary to shift the economy to domestic consumption and to limit the ability of State Owned Enterprises (SOEs) to obtain financing at the expense of the private sector are still underway.    

The external situation is seeing some improvements — as already being reflected in the trade account. The worst of the Eurozone crisis seems to be over, which is particularly crucial for Vietnam as the EU recently overtook the U.S. to become Hanoi’s largest export market. Furthermore, slight pick-ups in the U.S. and UK suggest that a global turnaround, however weak, may finally be in the cards.  The external environment will have an enormous impact on Vietnam’s outlook for 2013. 

That being said, numerous obstacles to growth remain to be tackled and there is no guarantee that 2013 will prove any kinder to Hanoi than 2012.