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21 Jul 2008

International Economy

Vietnamese Economy, 2008: High Inflation & Trade Deficit, Impacts on Thai Firms (Current Issue No.2085)

The Vietnamese economy in 2008 has been rife with problems of price stability amid spiraling inflation plus a huge trade deficit that have affected their current account balance, which may eventually undermine the country's economic stability. However, Vietnamese policymakers have recently adopted a tighter monetary policy to control liquidity in the system, especially hike in the benchmark rate and a curb on credit growth at 30 percent (after experiencing growth of 54 percent last year) as well as more frugal constraints to public spending and reduced investment by state enterprises.
These measures are expected to tame their high inflation rate that hit 26.8 percent in June. Cuts in investment are expected to result in slower import growth, particularly for capital goods, which will help ease the Vietnamese trade deficit over the remainder of this year after the country suffered a hefty USD14.7 billion trade deficit during 1H08. Meanwhile, Vietnam's exports are expected to record steady growth, thanks in part to the softer Dong. An improved trade balance will ease the pressure on their current account balance, while also strengthening the nation's economic stability. The Vietnamese economy in 2008 is projected to grow in a range of 6.5-7.0 percent, against the growth of 6.5 percent in 1H08, and down from 8.5 percent in 2007. As for their average inflation rate in 2008, it is projected to be in a range of 20-22 percent compared to the 20.4 percent in 1H08 and 8.3 percent in 2007.
Thai businesses having trade and investment connections in Vietnam may experience positive and negative impacts by the latest developments in Vietnam as described in the following notes:
FPositive Impacts
- Thai investors in Vietnam may benefit from the higher Dong-denominated investments due to the weaker Dong. However, this advantage may be offset by rising production costs as runaway inflation of around 20 percent will push wages, transportation costs and real estate rents higher.
- Thai export-oriented businesses in Vietnam will receive a windfall from the Dong's depreciation. The cheaper exports in the eyes of overseas consumers will help boost their competitiveness and result in higher US Dollar-denominated export income. However, this advantage may also be offset by increasing production costs amid spiraling inflation in Vietnam.
- Thai tourism-related businesses in Vietnam, e.g., hotels, restaurants, and retail stores are likely to benefit from the easing Dong that will make Dong-denominated expenditures of tourists in Vietnam cheaper, resulting in higher tourist arrivals to Vietnam.
FNegative Impacts
- Thai businesses that depend on imports (for example, trading firms) or investors who have built production bases in Vietnam and need to rely on imported raw materials or intermediate goods, as well as capital goods are likely to suffer from higher import costs due to the depreciating Dong.
- Thai businesses focusing on the domestic market may be hit by the falling purchasing power of the Vietnamese currency amid skyrocketing inflation, which has bitten into consumers' affordability.
- Thai exporters may indirectly feel the impact of stiffer competition from Vietnamese export goods in third-country markets. The improved price competitiveness of Vietnamese exports as a result of the softer Dong will make their prices cheaper for foreign buyers, especially if producers in Vietnam are able to effectively manage rising production costs, preventing supply-side inflation from being passed on to consumers via higher retail prices.

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International Economy