Banks latest reports notes the price to pay for continued economic growth.
ANZ has released research about Vietnam’s economy, in which it states that it’s in a period of broad recovery. Securing the targeted economic growth of 6.5 per cent this year, however, will come at a cost. The current account balance will slide from surplus to deficit and a range of other economic targets and restrictions will need to be relaxed to accommodate this dynamic and allow growth to rise.
As economic recovery gains traction, for the first time in three years Vietnam is almost certainly poised record a current account deficit. In the first half of the year the deficit came in at $3.8 billion, as imports surged 17.1 per cent year-on-year. Vietnam will likely post a current account deficit of 0.5 per cent of GDP for the year and then 1 per cent in 2016.
ANZ indicated that as Vietnam’s economic recovery broadens imports should rise to aid investment growth and to expand production capacity, and this rising growth will be accompanied by a narrow current account deficit in the medium term.
Regarding international trade and the exchange rate, various incentives have been introduced to prop up export production while capping import growth. As a result, Vietnam posted thin trade surpluses for three straight years. This allowed the central bank to limit VND devaluations to 1-2 per cent per annum. At the same time, the surplus in the current account allowed the State Bank of Vietnam to build its official foreign exchange (FX) reserves.
In order to secure the targeted economic growth rate there are some targets and restrictions in need of relaxation, ANZ has proposed.
As GDP growth continues to rise the continued transformation of Vietnam’s production possibility frontier must be maintained. This will only occur if imports rise to enable investments in export production capacity.
To achieve import targets the SBV has three options. Firstly, it can cap imports to a monthly average of $12.5 billion. Secondly, it can try to accumulate FX reserves as fast as import growth. Third, it can devalue the VND exchange rate further, which goes against the target of limiting FX devaluations to 2 per cent in 2015.
If necessary adjustments to the exchange rate are allowed to reflect the reality in external payments, the exchange rate will eventually stabilize external trade to a more sustainable path.
With new laws allowing 100 per cent foreign ownership in selected industries from September, ANZ expects the inflow of foreign investors to increase imports further. However, if the devaluations to the VND are limited to 2 per cent per annum at a time when the current account is in deficit, then the risk of depleting the official FX reserves will resurface.