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ADB slashes Vietnam growth forecasts

Publication Date : 04-10-2012

 

The Asian Development Bank (ADB) has lowered its forecast for Vietnam's economic growth this year to 5.1 per cent, predicting growth of 5.7 per cent next year in the context of continued weakness in external markets and domestic credit.

In April, the bank had forecast GDP growth of 5.7 per cent this year and 6.2 per cent next year.

Vietnam has been an export-dependent country relying heavily on the European and US markets, which were also experiencing slowed growth, said ADB economist Dominic Mellor, at a press conference here yesterday.

"However, there are signs that GDP is picking up due to the cyclicality of GDP, fiscal policy easing and consumption boosted by lower inflation," Mellor said.

ADB country director for Vietnam Tomoyuki Kimura said that inflation was projected at about 7 per cent this year, well below the previously-projected 9.1 per cent due to a sharp decline in food prices and weaker-than-anticipated domestic demand.

Stabilisation measures taken last year dampened demand, slowing the trajectory of economic growth, Kimura said. GDP therefore grew at a modest 4 per cent year-on-year in the first quarter and 4.7 per cent in the second quarter, resulting in growth of just 4.4 per cent in the first half of the year.

Next year, inflation was forecast to quicken to 9.4 per cent because of increases in global food prices and recovering domestic demand, while fiscal policy was likely to be relaxed, he added.

Kimura acknowledged important steps taken to date to restructure the nation's banking system, such as the mergers of several weak banks. However, he raised concerns over the risks of rampant cross-holdings among banks.

While a large bank with a stake in smaller ones could support the liquidity of these banks in difficult times as well as support these banks in improving governance, Vietnam needed clearer regulations on the issue to ensure banks were transparent in publishing these cross-holdings, he said.

The banking sector has been vulnerable as businesses have struggled and property prices fallen, putting bank earnings under pressure, Mellor said.

"Reported capital adequacy ratios appear adequate, but uncertainties remain due to the scale of bad debts, exposure to state-owned enterprises and cross-holding between banks."

Interest rates needed to be targeted at stabilising the value of the dong, which could be bolstered by strong trade and capital flows that helped improve foreign reserves, Mellor added.

The ADB's Asian Development Outlook Update said merging weaker banks was an important step. The authorities have also considered establishing a state asset management company to buy bad debts from banks, but no progress on the proposal was evident, the report noted.

The report said that, to attract foreign capital and expertise into banks, the government was considering an increase in the cap on foreign ownership in credit institutions. However, strains in the domestic banking system and reduced appetite for risk among international banks suggested that drawing substantial foreign investment might be a challenge at this time. It might also be difficult in the current environment to raise capital through the domestic securities market.

"The focus needs to remain on structural reforms," said Kimura, adding that a government commitment to a credible reform roadmap with time-bound actions should help revive lending and improve market confidence.

He said confidence in the government's willingness to address structural reforms would be enhanced with more data on the progress these reforms were achieving towards targets. Greater disclosure of financial information on state-owned enterprises and banks would provide a strong signal to the market that the government was committed to reform.

 

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