Dr Vo Tri Thanh, deputy director of the Central Institute for Economic Management, told VnExpress online newspaper that given the current context and gloomy global economy, deflation is likely to occur if business production continues to slow down and bad debts are not completely settled.

Dr Le Xuan Nghia, former Vice Chairman of the National Financial Supervisory Council, told the Vietnam Economic Forum that inflation will be kept at a minimum if there is 17 percent credit growth by the year’s end. In contrast, high inflation will return if the yearly credit growth is 12 percent and the growth is sustained in the six remaining months of the year.

Dr Vu Thanh Tu Anh, director of research at the Fulbright Economics Teaching Programme, warned in Thanh Nien (Youth) newspaper that loosening public investment and accelerating credit growth toward the 12-13 percent target could cause high inflation and new macroeconomic instability.

A risk of deflation

It is evident that Vietnam has contained galloping inflation, a factor that causes macroeconomic instability.

In its report released on August 2, the Hong Kong and Shanghai Banking Corporation (HSBC) stated that the Vietnamese government has succeeded in balancing its economic growth and controlling inflation.

However, this is only an initial positive sign. At the monthly Cabinet meeting for July, Minister and Chairman of the Government Office Vu Duc Dam said that although the consumer price index for June and July was negative, its ‘core’ inflation remains positive if energy and food were not included in calculations.

At an online Q&A session on August 5, he confirmed that the estimated seven-percent CPI for this year is rather high compared to five percent the government has set for the following years.

In its review report, the National Financial Supervisory Council stated that the negative CPI in the two previous consecutive months was a worrying sign for the national economy, but low inflation was temporary and inflation could increase in the coming months and next year if looser financial and monetary policies are introduced.

Public investment and inflation links

The crux of the matter is how increasing public investment and credit growth could fuel inflation, and what level is acceptable.

Minister Dam told a recent press briefing in Hanoi that the low inflation in the first months of this year means the Government sill has more tools for controlling the economy in the coming months to shore up production.  

One of those tools, according to Dam, is investment capital from the State budget which is estimated to reach more than VND20 trillion per month in the second half of this year.

However, he played down public concern about the return of high inflation, saying total public investment has already been earmarked for this year, and it will not raise the total money supply, a key indicator used to forecast inflation.

Increasing public investment in the remaining months of the year does not mean stimulating market demand or using up allocated capital at any price, confirmed Dam.

The government has already earmarked approximately VND30 trillion for public investment in 2013 to ensure key State invested projects will be speeded up and inflation will be kept at safe levels.

Echoing Dam’s view, Dr Vu Viet Ngoan, Chairman of the National Financial Supervisory Council, told the Government Portal that with the sluggish credit market, a more flexible fiscal policy will, in part, help support total social investment capital.  

Ngoan said the Government has planned to allocate VND225 trillion from the State budget and Government bond sales this year and VND30 trillion as an advance for next year.

This means social investment capital will account for 33 percent of total GDP, a figure which, Ngoan said, is acceptable and is much lower than the 40 percent in previous years.

According to the head of the national financial supervisory watchdog, given the current situation, inflation will go up only when monthly development investment capital amounts to more than VND90 trillion and lasts for five to six consecutive years. 

Dr Cao Sy Kiem, former governor of the State Bank of Vietnam, said with the central bank’s decision to lower the credit growth target to 8-10 percent this year, total monthly credit allocated for the economy will reach VND20 trillion, plus VND21 trillion to be disbursed from the State budget.

He ruled out the possibility that these figures could cause galloping inflation in the coming months.   

Can Van Luc, a senior expert of the Bank for Investment and Development of Vietnam (BIDV), also shared the view that commercial banks are speeding up credit growth at an estimated 1 percent per month.

Together with more than VND100 trillion to be disbursed for public investment in the remaining months of this year, the banks’ move cannot fuel inflation, Luc confirmed.

Public investment under scrutiny

To avoid the worse case, ministries, agencies and localities have been asked to keep a tight grip on the use of public investment capital sourced from the State budget and Government bond sales.

The Ministry of Planning and Investment and the Ministry of Finance have also been asked to work on allocating capital for investment projects to ensure it will be used efficiently.

The Government has stressed many times the need to prioritise inflation control and macro-economic stability in 2012 and the following years, and work toward achieving steady growth and sustainable development.

The bottom line, however, is that accelerating growth should go along with stabilising the macroeconomy and nipping the return of high inflation in the bud.