VietNamNet Bridge – Last year’s budget deficit reached an estimated 7% of nominal gross domestic product (GDP), the highest level since 2000, the Vietnam Institute for Economic and Policy Research (VEPR) said in a quarter-four report.

According to the VEPR research team, total budget spending last year could be around VND70 trillion (around US$3.2 billion) higher than estimated. With the nominal GDP growth lower than projected, the country might face a budget deficit of 7%.

Budget deficit in the past four years has been higher than 5% as targeted, according to the report released on January 25.

Meanwhile, as budget revenue from oil export is likely to be below the 2016 target, budget deficit would continue rising this year if the Government does not take measures to control spending, especially official development assistance (ODA) loans.

The report showed that total outstanding loans as of December 18, 2015 had picked up 17.02% against early last year, putting pressure on domestic deposit rates.

VEPR cited statistics of the State Bank of Vietnam as saying that 11 banks adjusted deposit rates up 0.1-0.5 percentage point last month. While credit was growing fast, nominal GDP inched up only 6.48% last year, lower than in previous years.

According to VEPR, that credit growth is higher than GDP growth is putting macroeconomic stability at risk.

There are many similar issues in 2009 when inflation stayed low and the economy had signs of recovery thanks to fiscal and monetary loosening. Previous experiences showed high inflation could return if money supply was not tightly controlled, the report wrote.

Overall, the economy’s growth trajectory will continue this year and in the medium term.

Economic reform pledges have yet to deliver clear results but the country’s deeper international integration has created new momentum for growth. The positive impact of new trade pacts like the Trans-Pacific Partnership (TPP), the free trade agreement with the European Union (EU) and the ASEAN Economic Partnership (AEC) could support the domestic private sector and the foreign-invested sector.

The tendency to move production out of China is also opening up opportunities for Vietnam to promote light industries and make use of labor advantage.

VEPR recommended the country give priorities to stabilizing the macro economy.

In particular, the Government should ensure fiscal discipline, take strong measures to cut regular expenditures, and closely control the use of ODA capital.

The Government should monitor credit growth and quality, and avoid maintaining monetary loosening for a long time.

According to VEPR, the credit growth target of 18% for this year is too high amid a possible return of high inflation, so it proposes credit growth of 12-15%.

Deposit and lending rates are likely to be under pressure if inflation surges this year. As a result, VEPR said the interest rate cap should be removed or applied for short-term deposits only so that the market can self-adjust and balance capital demand and supply.

Tu Hoang

Source: SGT