Inflation and Pressure on Businesses

Although global economies are forecast to revive and grow up in 2010, this process will continue facing up with numerous difficulties and challenges. Inflationary pressures may explode on the global scale. These challenges indirectly engender heavy pressures on regulating macroeconomic policies in all nations, including Vietnam, and impacts on businesses will turn more severe.

High inflation risk

At the “Inflationary pressure and financial and monetary policies” forum held by the Vietnam Business Forum Newspaper, in Hanoi, Mr Pham Gia Tuc, Vice President and General Secretary of VCCI, said: Vietnam has made uplifting achievements and ensured macroeconomic stability. In the first quarter of 2010 quarter, the country’s GDP growth reached 5.83 percent, much higher than the rate of 3.14 percent in the corresponding period in 2009. Thus, the targeted GDP growth of 6.5 percent in 2010 is within reach. Most areas have made impressive strides, pinning high hopes on a higher growth rate when the world demand really recovers.

According to Mr Tuc, many are very concerned about whether inflation occurs when the economy is recovering from crisis, and, which degree it may be? The March CPI rose 0.75 percent from February, much lower than the February rate but unusually higher than other Marches. This makes macroeconomic stability more difficult and complex. In the first quarter of 2010, the consumer price index climbed 4.12 percent, making the target of keeping the inflation at 7 percent or lower this year a more difficult task.

Mr Vu Dinh Anh from the Institute for Pricing Research Science under the Ministry of Finance said it was very difficult to forecast inflation rate this year, given the shortage of data, even when the consumer price index in March was announced. Besides, inflation is also affected by fiscal and monetary policies. The coordination of these two policies is crucially important because it directly helps reduce inflationary pressures on the economy.

However, Dr Duong Thu Huong, Secretary General of the Vietnam Banks Association, remarked: “Inflation will be higher this year but will be below 10 percent.” According to Dr Huong, the ceiling interest rate is a major matter of monetary policy. Thus, depositors, borrowers and banks must find out a common point of harmonious interests to reduce psychological pressure on the concerned parties.

“Under the current conditions, banks have lowered lending rates. The entire banking system is also determined to bring down interest rates to widen credit access for enterprises. Interest rates will be reduced in coming period but they depend on inflation, which is however expected at 7 percent,” Huong said.

Pressure on businesses

According to Mr Tuc, the question for enterprises in 2010 is to solve a balance of production input and output costs as well as the capital source for production. In recent years, prices of important commodities like electricity, coal, water and fuel have continuously risen, triggering very heavy pressures on enterprises.

“Inflationary pressures are becoming a significant challenge for the development of Vietnamese enterprises, especially those relying on export and import,” Mr Tuc added.

Besides, interest rates are still too high for enterprises to make a profit. According to Mr Anh, it is still good to witness a GDP growth of 6.5 percent and inflation of around 10 percent this year. Earlier, real interest rates were unclear as banks were imposed ceiling rates while businesses were thirsty for capital. But now, thanks to the negotiated interest rate mechanism, banks can publicly balance their business. Currently, deposit rates are reasonably hovering at 11-12 percent per annum and lending rate is at 14 – 15 percent. From now to the end of this year, the State Bank of Vietnam and commercial banks have to determine to bring down the deposit interest rate to 9 – 10 percent per year and the lending rate to 12 – 13 percent.

To achieve these goals, according to Mr Anh, Vietnam needs to accept the current interest rate and needs to be patient. The Government needs time to push inflation down to 8 – 9 percent to lay the ground for the formation of a new interest rate level. Importantly, to improve the trade balance and control trade deficit, Vietnam needs specific solutions to restrain the importation of luxury or unnecessary goods, support basic material production and export-oriented industries.

Also, according to Mr Anh, the central bank should take measures to valorise exchange rates because exchange rate fluctuations will cause inflation. At present, the supply of foreign currencies is relatively stable as companies tend to sell the greenback because of lower interest rates on USD deposits and higher rates on VND deposits. However, the exchange rate of USD against dong will sink deeply. “Therefore, the central bank should buy USD to boost foreign exchange reserves to intervene the market for the purpose of stabilisation in case of necessity,” said Mr Anh.

To access bank loans, according to Mr Dang Minh Hai, Deputy General Director of An Binh Commercial Joint Stock Bank (ABBank), Hanoi Branch, said: Each business per se must strive to improve their capacity, especially financial transparency, no bad debts and overdue debts. It must convince banks of the clear efficiency of its investment projects.

“Through the knowledge and assessment of ABBank on business financing situation at ABBank and other banks, restraints on businesses’ access to bank loans come from outdated techniques and technologies, financial non-transparency, personnel and managerial limitation, lack of security assets, limited market information access, low rate of owners’ equity and bank loan-relying production,” said Mr Hai.

According to Dr Duong Thu Huong, enterprises should choose proper banks to be close customers as banks usually offer softer interest rates to patrons. If they borrow from different banks, they off course will incur higher interest rates.

VCCI

Tags: Vietnam businesses, Vietnam inflation