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Vietnam’s central bank tipped to cut rates
Trong Khuong
Vietnam’s policy-makers appear to have brought inflation under control, giving the central bank scope to further reduce interest rates this year, according to the latest report by U.K. bank Standard Chartered.
Since peaking at 28.3 percent in August last year, Vietnam’s inflation rate has calmed significantly. Government figures show the consumer price index (CPI) was 11.2 percent in March, year-on-year.
In its “Vietnam – What a different year makes” report, dated April 9, Standard Chartered said inflation could fall as low as 2 percent in the fourth quarter of this year.
“Provided that oil and food prices sustain their stable trend this year, Vietnam’s inflation could drop to the low single digits in second half of 2009,” Tai Hui, regional head of Standard Chartered Economic Research, said in the report. “This would give Sate Bank of Vietnam further room to cut interest rates.”
The State Bank of Vietnam has reduced the official interest rate from 14 percent in August last year to 7 percent now. Standard Chartered expects the official rate to be reduced to 5 percent this year.
Standard Chartered also forecast Vietnam’s economy will grow by a “respectable” 4.2 percent this year and 5 percent in 2010. The U.K. bank’s forecast is lower than the 6.2 percent economic growth posted in 2008 and Vietnamese government’s expectation of 5 percent growth this year.
Vietnam’s economy will experience “great challenges” this year, the report said, although the country had a number of advantages that will help cushion the effects of the slowing economy over the medium term.
Standard Chartered said Vietnam’s large – and young – population was one of the country’s advantages. Citing a United Nations forecast that Vietnam’s population will swell to 110 million by 2035, the report said the growing population would create a “formidable force in supporting labor-intensive manufacturing and domestic consumption” and double Vietnam’s purchasing power within the next six to seven years.
The growing population, as well as Vietnam’s stable political environment and low cost of production, also meant the nation was increasingly being regarded as a good alternative to China for international firms to set up manufacturing bases.
The Standard Chartered report also said Vietnam’s economic outlook was vastly different to what it was a year ago, when inflation was surging and the trade deficit was a “massive” 9 percent of gross domestic product (GDP).
“By late 2008, it was apparent that both of these problems had been brought under control but the challenges facing the economy shifted from domestic issues to external ones,” Tai said in the report.
In the first quarter of 2009, Vietnam recorded a trade surplus of US$1.6 billion, compared with a deficit of $8.4 billion in the same period in 2008.
“With Vietnam’s first oil refinery starting production this year, the country should be better protected from high oil prices, which are widening the country’s trade deficit in energy products,” the report said.
The gloomy sentiment globally has yet to be seen in local consumption. Household spending has maintained its momentum and retail sales have even increased, the report said.
“Surprisingly, the global economic slowdown has yet to hurt foreign direct investment (FDI),” the report said. The country attracted $6 billion of pledged FDI in the first quarter of 2009, slightly higher than the $5.2 billion reported in the same period in 2008.
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