MACRO-ECONOMICS AND MACRO FINANCIAL CRISIS

MACRO-ECONOMICS AND MACRO FINANCIAL CRISIS Dr. Lê Xuân Ngh a 1. The world economy and perspectives. The recovery of the US economy continues to face difficulties. The CPI decreased by 0.1% in June indicating a decrease in consumption. The confidence level of contractors reached the lowest in July during the last 15 months. The June retail figure also decreased for the second consecutive month at a pace of 0.5%, two times higher than the forecasted level of 0.2%. Second quarter economic growth slowed down at 2.4% - much lower than the adjusted rate of 3.7% in first quarter and also lower than the forecasted 2.5% for second quarter due to the expansion of trade deficit. The US trade deficit suddenly widened to 4.8% and reached the highest level of the last 18 months (USD42.3 billion). It is noteworthy that the US trade deficit with China was USD22.3 billion, an increase of 15.4% on preceding month and 10% on the same period in 2009. Given the high unemployment rate, this has caused concerns. Under these circumstances Fed has lowered its growth prediction for the US economy to 3% - 3.5%, a considerable decrease from 3.2% - 3.7% and at the same time raised unemployment rate to 9.2% - 9.5%, higher than the previously predicted rate of 9.1% - 9.5%. The Dollar has lost its value to the Euro, reaching the lowest level of the last 14 months (1.32USD/Euro) following Fed announcement. However, there are some good news on the US economy. The budget deficit of the first nine months has decreased slightly to USD1.004 trillion from USD1.086 trillion during the first two quarters of 2009. Of this decrease the June figure of budget deficit went down strongly by 27% compared with last year s same period, standing at USD68.42 billion lower than the predicted amount of USD70 billion. Besides, despite the loss of 125,000 jobs in June, the unemployment rate has decreased to 9.5% from the level of 9.7% in May. Fed is considering several measures to strengthen the recovery process. Europe s economy made several positive steps. Greece economy is recovering nicely. Its budget deficit decrease 46% in the first half of this year compared to the same period last year, higher than the expected level of 40%. Greece also successfully issued Euro1.625 billion of 6 month bonds at 4.65%. The economy of the 16 Euro zone countries is growing with May industrial output continuing to climb for the third consecutive month 0.9% on previous month. The Euro continues to gain value over other currencies indicating an improvement of the economy s health. In the UK, the number of unemployed decrease by 1

34,000 between March and May to 2.47 million. The unemployment rate in the same month stood at 7.8% - the lowest level during the last year. However, the concern regarding debt crisis emerged again in Europe when Ireland was downgraded one rank, from Aa1 to Aa2, and the Hungary IMF negotiation got in an impasse. Asia s economy is strengthening. ADB adjusted its forecast of economic growth of East Asian emerging countries to 8.1% from an earlier 7.7% in April. ADB also predicted Asia s economic recovery to take a V shape. Singapore achieved record growth rate, its second quarter GDP grew 19.3% on the same period last year and 26% on first quarter. Japan s economy also shows positive signs, especially regarding production and export and its growth is expected to reach 2.6%. China s economy showed signs of slow-down in second quarter 2010 with GDP growth rate of 10.3% bringing the growth rate of the first half year to 11.1%. The cooling down of this economy is due to the Chinese Government s monetary and financial adjustments to control the real estate price increase which was too hot. In June real estate price went down by 0.1% compared to the preceding month marking the first month of price decrease since the first quarter of 2009. Accordingly, inflation pressure also lessens when CIP only increased 2.9% in June on the same period last year, lower than the growth rate in May of 3.2%; the CPI increased 2.6% in June compared to the same period last year, but it raised again 3.3% in July. Since the economy shows signs of slowdown, the Chinese Government is planning to loosen monetary policies. However, there are still doubts that lending figures might have been modified. Fitch estimated that new lending of the world s third economy during the first 6 months would be RMB5,900 billion, much higher than RMB4,600 billion as reported by the Central Bank of China. Generally, the world economy is recovering in 7/2010 but there are still difficulties ahead. Although IMF raised the global growth forecast to 4.6% but there still remain the following uncertainties and risks: (1) The world economy might fall into a double recession due to deflation in big economies such as the US, Japan and Euro zone; (2) Unemployment has not improved in almost all countries, the US unemployment rate was high at 9.5% in June, while it was 10% in Europe, and according to the Japanese Statistical Office it actually raised from 5.2% in May to 5.3% in June 2010 the highest rate during the last 7 months; (3) Deficit and public debts continue to be at alarming level in many countries; (4) China s too hot growth and its property bubble are threatening to collapse which would negatively impact the national bank system and the global economic recovery. 2

2. The Vietnam Economy. a) Growth and inflation: The economy grew 6.4% in second quarter, the highest since fourth quarter of 2008. But in July the economy showed some stagnating signs. Specifically, industrial output in 7/2010 in comparative price grew 12.3%, much lower than 14.6% of June and it is by 1.2% lower than the average rate of the 7 month period (13.5%). Increase in non-state investment during the 6 month period only reached 9%, much lower than 54% of the same period last year. In addition, stock continued to increase in July reaching 38.6% on the same period last years and much higher than the 27.5% of 6/2009. Foreign investment is not satisfactory reaching only USD9.1 billion or 68.2% compared with the same period last year. All this shows that there are still many difficulties. However, in broad term, the economy is growing steadily. Although subscribed foreign investment capital decreased, the disbursement amount during the first 7 months increased 1.6% on last year, reaching USD6.4 billion (In China, FDI in real term increased 14.6% during the first 6 months compared with the same period last year). Trade deficit has improved, with July figure being USD1.15 billion or 19.8% export. The total trade deficit of the first seven months is USD7.4 billion or 19.45% of export, within the targeted 20% set by the Government. However, this deficit has almost doubled last year s corresponding figure of USD3.8 billion. Inflation also stabilized when the CPI in July only increased 0.06% on the preceding month. This was the lowest increase since 4/2009. For the 7 month period CPI only increased 4.84% on and the monthly average increased 8.67% on the same period last year. Food price increase, due to natural disaster in many countries, and the recent gasoline price adjustment on August 9 are not expected to lead to price increase during the last 2 months of third quarter. Inflation in August and September is only estimated to increase 0.3% per month. In the fourth quarter, prices may go up due to seasonal factor. However, considering that many difficulties continue world economy in 2010 and 2011 and that many bottlenecks in the domestic economy still exist, price of basic commodities such as food, gasoline would not fluctuate considerably. The average inflation rate in October, November and December would be around 0.5% per month. So, inflation is well under control and CPI is expected to be under 8%. 3

b) Interest rate and bank s liquidity: There are some positive signs regarding interest rate at the end of 7/2010. The average borrowing interest rate of 36 commercial banks was 11.09% per annum and privileged lending interest rate as imposed by the government decreased 0.5% - 1.5% compared with I/2010. Under that scheme the short term interest rate varied between 12-12,5% per annum and long term interest rate varied between 13-14% per annum. However, the market lending interest rate was very high, at 15-16% and small and medium sized enterprises can not access bank credit easily. These are the efforts of the government and banks to promote investment by enterprises and individuals. However, the results are modest. If this was to continue, it would negatively impact the stable economic growth in the coming months. On 31/07/2010, credit balance increased 12,97%, and mobilization increased 16.3%, of which credits in VND increased 4% in 7/2010, bringing the growth of the seven month period to 5.7% higher than the figure at the end of 2009. However, this increase was still lower than foreign currency credit increase of 34%. Generally, the VND lending increase is positive and it was due to the cut of interest rate to 12% for small and medium sized enterprises, to export enterprises and to rural agriculture. It is expected that lending in VND in the coming month would continue to increase when the foreign currency credit resources are exhausted and when the State Bank increases money supply to commercial banks via open market as directed by the Government. Despite positive signs there are still administrative barriers hindering the interest rate from developing as fast as expected. These are bottlenecks not for the banking system only but for the whole economy. Specifically, the money supply on the open market during the last 2-3 months has provided the market with sufficient money, but under the constraints regarding the lending of money on the interbank market many banks who do not have enough money for lending cannot access the abundant and cheap money on the interbank market. As a consequence, these banks must find ways to mobilize money by raising borrowing interest rate. And, other banks must follow suite to be competitive and both lending and borrowing interest rates do not decrease as fast as hoped for. Furthermore, this unreasonable stipulation has forced banks who have liquidity problem to go round by offering almost the same interest rate for all saving terms. By doing so banks can borrow short term money without violating the State Bank s regulation limiting 30% of short term borrowings for medium and long term lending. At the same time banks 4

pushed up real interest rates because it depends not only on the percentage, but also on the term and computation method. Besides, stipulations in Circular 13 dated 20/5/2010 of the State Bank which is effective on 01/10/2010 regulating the ratio of lending vs. mobilized money also raised concerns about scarcity of credit in the coming months. In a nutshell, if the State Bank sticks to the above impractical regulations the goal of 10 in 12 out shall be even more difficult to achieve. From the above analysis, it is evident that unreasonable rules should be removed both on the money supply and credit market. Considering the positive development regarding inflation, the State Bank could look into increasing money supply to the economy by purchasing government bond on short term. That would lessen the pressure on market interest rate, support investment for a sustainable recovery. c) Foreign exchange market The US Dollar exchange rate in July and the first 7 months experienced many changes as follows: - During I/2010 there was a severe imbalance between demand and supply of foreign exchange, and a gap between official and black market exchange rates. At times the USD was more than VND20,000. - In II/2010, the pressure lessens. At the second half of II/2010 the black market exchange rate was even lower than the official rate. It is noteworthy that this is an exception, but not an indication of good exchange rate management. It reflected the fact that the insignificant difference between lending rate in USD and VND has produced a large amount of unreal foreign exchange supply. This not only distorts the foreign exchange supply market, but also produces complicated consequences for the exchange rate management in later phases. 5

Development of black market and official exchange rates 19,800 19,400 19,000 18,600 18,200 1/1/10 1/31/10 3/2/10 4/1/10 5/1/10 5/31/10 6/30/10 7/30/10 TT tu do Mua TG Vietcombank Giá mua TT tu do ban TG Vietcombank Giá bán * TT tu do mua: Black market purchasing rate TT tu do ban: Black market selling rate TG Vietcombank gia mua: purchase price of Vietcombank TG Vietcombank gia ban: selling price of Vietcombank - Until July, after two months of standing around VND19,000 to the Dollar, the rate seems to go up. The purchase and selling prices at commercial banks are more or less the same at VND19,000/USD, the price of the USD on the black market during the 10 days in the middle of July went up by 150 points, ranging from 19,170 to 19,200 VND/USD. The fact that the rate on the black market moved to a higher level was a good sign that the regulation limiting lending of foreign currencies started to have an impact and that the unreal USD supply to the market is being removed. However, the fact that the purchase price often equates the selling price has indicated that the stagnation which was common in 2009 may have come back. It shows that commercial banks start to have foreign exchange problems and some unofficial fees have been collected in trading activities at these banks. It is expected that the USD exchange rate would experience complicated development in the time to come, especially in IV/2010, due to some changes in the demand supply as follows: - (i) Import surplus during the 7 months stood at USD7.355 billion or double the level of the first 7 moths of 2009 (USD3.888 billion) and this would continue to increase 6

towards the end of the year because import of machinery, material would increase as the economy recovers. - (ii) Foreign exchange lending tends to decrease as VND interest rate decreases while foreign exchange interest rate increase. In addition, commercial banks are curbing such lending because they are concerned about changing exchange rate. Therefore, the (unreal) supply of foreign exchange would decrease. - (iii) Enterprises purchasing USD for loan repayment would drive exchange rate up, especially that loan agreements in foreign currencies mature at this time (regarding agreements shorter than 3 months) and about to mature (agreements longer than 3 months). In 4/2010 alone, growth of foreign exchange credits reached VND28,000 billion, of which export credits accounted for VND 22,000 billion with terms ranging from 3 to 6 months. One can see that firms would need a large amount of foreign currencies for debt service. - (iv) The psychological factor is also important. As the population believes that firms would buy foreign exchange, they would keep and wait for better rate. - (v) Considering the inflation in the US and Vietnam, the VND is loosing its value to the Dollar. According to the National Committee on Financial Supervision, based on RER and base year of 2000 the VND is valued 13.2% higher than its actual value. So, at this time the 2009 pressure on exchange rate still exists although slightly reduced. - (vi) Fitch report downgraded Vietnam from BB- to B+. Among the factors, long term creditworthiness went down most rapidly due to 3 reasons: (i) unstable macroeconomic frame; (ii) High level of dollarization; (iii) External sources account for 79% foreign exchange reserves (in 2009, this was only 35-37%). This may be the factor that would influence the foreign exchange market in the time to come. The State Bank should calculate and forecast the amount to be sold when intervention is needed, especially during the third quarter when, due to import requirements and when foreign exchange loan agreements mature, the demand abruptly increases. Slight exchange rate adjustments might be taken already in III/2010 or at the beginning of IV/2010 when signs on foreign exchange market become more evident. d) Fiscal policy Although the government has granted some relaxed tax regulations such as 30% tax reduction for agriculture, forestry and fishery; reduction of enterprise income tax payment period; 50% VAT reduction for 16 commodities groups; etc. the budget revenue in 2010 has 7

improved. The budget deficit in the first 6 months was only VND30,650 billion, lower than the first 6 months of 2009 and accounted for only 25.6% of the annual planned deficit. This progress is due partly to the reduced stimulus package and partly to the stricter control of expenditures and investments. However, the ratio of public debt on GDP is rising from 33.8% in 2007 to 44.6% in 2010 as estimated. External debt accounts for more than 60% total public debt. Three areas deserve attention regarding public debt: (i) The debt statistics and management should be improved towards international transparent standards, (ii) Since budget deficit is mainly funded by foreign loans, the exchange rate risk is increasing, especially the inflation rate in Vietnam is high by international standards, (iii) Investment efficacy and public debt monitoring are the most concerned areas in the coming years. To cut it short, monetary risk is the most important macro financial risk that Vietnam would face in the medium to long term. More specifically, it is the exchange rate since the pressure to devaluate the Dong is coming from all directions such as the big deficit in current balance (the difference between the investment and saving ratio on GDP is as high as 12%); Net foreign asset of the banking system (foreign exchange reserve of the entire system) decreased substantially (a decrease by 30% compared with 31/12/2009). The ratio of external capital increased from 37% in 2009 to 80% during the period when the exchange rate is inflexible and the domestic currency is prized above its value. The factors relating to the slow recovery in the world economy may result in reducing the capital inflow into Vietnam. The devaluation expectation increases, dollarization shall be more severe and the international payment balance weakens. 8