Economic recovery to cause current account deficit: ANZ

Monday, Jul 13, 2015 08:50

Workers load rice bags for exports at the northern Hai Phong Port. Viet Nam's trade deficit widened to US$3.8 billion throughout H1. — Photo

HA NOI (Biz Hub) — Recent domestic indicators continue to show that Viet Nam's economic recovery is broadening, but the progress will have important consequences.

Those consequences include the current account balance sliding from surplus into deficit, and a range of economic targets and restrictions will need to be relaxed to accommodate this dynamic and allow growth to broaden.

ANZ Bank economists in South Asia, ASEAN and the Pacific, Eugenia Victorino and Glenn Maguire, made the statement in a research paper dated July 8, which the bank released to the media last week.

As of Q2, gross domestic product (GDP) growth rose marginally to 6.3 per cent year-on-year, overcoming market expectations of 6.2 per cent year-on-year. Meanwhile, persistently soft inflation has kept the growth of retail sales robust, averaging 8.4 per cent over H1 2015.

Also, auto sales rose more than 60 per cent year-on-year, while the growth of industrial production accelerated to an average of 11.3 per cent year-on-year, almost doubling its growth over the same period in 2014.

"As Viet Nam's economic recovery broadens, imports should rise to aid investment growth and to expand production capacity," the economists said.

Throughout H1 2015, the trade deficit widened to US$3.8 billion as imports surged 17.1 per cent year-on-year, almost twice as fast as the expansion of exports.

The country is forecast to post a current account deficit of 0.5 per cent GDP this year, which will widen further to 1 per cent GDP next year.

Viet Nam has posted thin trade surpluses for three straight years, with various incentives introduced to prop up export production while capping the growth of imports, in line with economic targets aimed at more sustainable growth.

This allowed the State Bank of Viet Nam to limit the devaluation of the dong to 1-2 per cent per year. At the same time, the surplus in the current account allowed the central bank to build its official foreign exchange (FX) reserves.

But external trade is increasingly poised to pull the current account into the deficit zone.

"Times have changed, so targets for external payments have to be realigned," the economists reported.

National socio-economic targets for this year, in pursuit of the sustainable growth model, stated that the total dong devaluation should be capped at 2 per cent in 2015, while the central bank has already reached its maximum planned devaluations for the year.

Additionally, the trade deficit should be no more than 5 per cent of total exports, and the H1 deficit of $3.8 billion has remained more than 4.8 per cent of the total exports over the same period.

The economists said this target is at risk at the moment, however, as they estimated the nation's trade deficit would reach $7.5 billion to $8 billion by the end of 2015, assuming that the current momentum of economic activity is maintained.

They also estimated that the import cover has declined to 11.1 weeks, narrowly missing the government's target of 12 weeks.

The International Monetary Fund estimated Viet Nam's FX reserves would reach $34.6 billion last December. Without official estimates, the economists assumed that the official FX are around $35 billion.

The economists also said the inevitable current account deficit over the next couple of years is positive, as GDP growth continues to rise to its potential rate of 6.5 per cent for both 2015 and 2016.

"You can't have it all," they wrote, adding that the potential for net exports to track "a J-curve" and switch back into a surplus depends upon which targets will be adjusted.

The central bank can achieve the import cover target to 12 weeks by capping imports to a monthly average of $12.5 billion, accumulating FX reserves as fast as import growth and devaluing the dong exchange rate further, they suggested.

"If necessary, adjustments to the exchange rate are allowed to reflect the reality in external payments, the exchange rate will eventually stabilise external trade to a more sustainable path," they said.

"With the new laws allowing wholly foreign ownership in selected industries by September 2015, we expect the inflow of foreign investors to increase imports further."

"However, if the devaluations of the dong is limited to 2 per cent per year at a time when the current account is in the red, then the risk of depleting the official FX reserves will resurface." — VNS

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