After years of trying to curb high inflation, which has weighed down the economy, the country seems to be facing a new risk for the first time: deflation.
Inflation consistently cooled in recent months, signaling slowdown in an emerging market driven by a young population with growing disposable income, Thanhniennews reported.
Consumer prices declined 0.2 percent per month in the past five months, mostly due to cheaper oil prices. In January, inflation increased a meager 0.9 percent year-on-year, compared to 6.5 percent recorded the same time last year, according to a report issued by HSBC last week.
“Should inflation continue to fall, the economy may not grow nominally fast enough to service its widening fiscal deficit,” the report said, adding that oil export revenues are set to decline in 2015.
Nguyen Ngoc Tuyen, director of the Institute of Economics and Finance under the Ministry of Finance, said deflation risks have emerged due to weak domestic demand.
Retail sales increased only 10.6 percent last year, compared to over 20.9 percent in 2006 and 23.3 percent 2007, according to the General Statistics Office.
Challenges
High levels of bad debt in the banking system have also prevented banks from boosting lending to support business activities. Vietnam aims to reduce the ratio of bad debt to 3 percent of total loans by the end of 2015, from 5.4 percent at the end of last September.
Deflation will create “many challenges” to Vietnam’s economy, Tuyen said.
He warned that as talks about deflation continue, consumers could suspend their spending on goods and services to wait for further price drops, even though the Tet (Vietnam’s Lunar New Year) holiday season should see them open their pockets more. This austerity trend would then discourage investment as businesses find it hard to earn high profits and quickly recoup their capital, resulting in higher unemployment rate, and lower tax collection, he said.
Deflation will hinder the government from increasing its state budget and repaying debts, he said. “If deflation prolongs, macroeconomic stability could be threatened,” he said, adding that Vietnam would increasingly lag behind other countries in economic development.
Vietnam battled excessively high inflation in 2011, with inflation peaking at 23 percent in August of that year.
To deal with deflation risks and boost economic growth, the government needs to increase its support for businesses, ease monetary and fiscal policies, and promote economic reforms, said Le Quoc Phuong, deputy director of the Center of Industry and Trade Information, under the Ministry of Industry and Trade.
The government should also considered giving enterprises more time to pay taxes and simplifying tax and customs procedures, Phuong said.
