VINACHEM

HCMC - HSBC Bank in a macro economic report released on April 2 predicted Vietnam’s inflation at around 5.5% this year as price pressures have subsided.

In the first quarter of 2014, inflation decelerated to 4.8% from 5.9% in the fourth quarter of 2013. March’s inflation slowed to 4.4% year-on-year from 4.6% in February.

“Capital and labor are underutilized, with the output gap likely to stay negative this year and next year. Although social costs are expected to rise at the end of the second quarter, we expect inflation to average only 5.5% in 2014 from 6.6% in 2013,” the bank said in the report.

According to the report, with consumer confidence low and credit growth negative, prices have decelerated in Vietnam. Housing prices contracted in the past two months, and garments and drinking demand have also decelerated.

While Vietnam’s average month-on-month increase of the consumer price index (CPI) is 0.9% in the past eight years, it has slowed to 0.5% in the past two years. With the current trend of sluggish global commodity prices, ample global rice supply, and low appetite for consumption, the path of inflation may even go lower, it said.

However, the bank noted that inflationary pressures were very seasonal in Vietnam. The summer months, especially in August and September, tend to have high inflationary pressures stemming from higher tuition, health costs, and electricity prices. Additionally, as economic activity picks up to meet the yearly target, demand also gradually rises as the year-end approaches.

The bank’s inflation projection for Vietnam this year is much lower than that of the Asian Development Bank. The ADB forecast Vietnam’s inflation can be kept at the average of 6.2% this year and 6.6% next year in its latest Asian Development Outlook 2014 report announced in Hanoi on Tuesday.

HSBC said credit growth contracted by 1% in the first quarter, a sign of low confidence in the future and a financial system burden by high levels of debt.

Despite the seasonal festivity, which has historically driven up demand for goods, inflationary pressures have been subdued.

The country’s economic growth decelerated to 5% year-on-year in the first quarter from 6% in the fourth quarter of 2013, with the agriculture sector performing the worst. But Vietnam’s gross domestic product has a seasonal effect, in which the first quarter tends to be the worst and economic activity accelerates as the year progresses to meet targets.

The central bank reduced the open market operations (OMO) rate by 50 basic points to 5% to spur demand on March 17. But only VND1 trillion was pumped through the OMO on Monday, as there were no bidders in the past several weeks.

The HSBC’s report says liquidity is not the issue as the overnight rate has been low at about 1.5% thanks to modest demand and steady foreign direct investment (FDI) inflows. With high levels of bad debts, domestic firms do not have the appetite to make further investment, the bank explained.

Besides, retail sales decelerated sharply in March to 6.3% year-on-year from 12.7% in February.

Disbursed FDI inflows rose 5.6% in the period but pledged FDI fell sharply by 50%.

“While disbursed FDI growth in 2014 should stay intact, we believe Vietnam’s current model of foreign led investment is not sustainable, especially as reforms to its financial market continue to stall,” the report said.

“Domestic activity should stay subdued, unless officials unveil reforms to offload the bad debts and improve management. We do not expect any substantial reform to be implemented in the next year, as Vietnam is still slowly trying to grow out of its problem rather than tackling it head-on.”