Inflation not too worrying, property bubble controlled: says expert

Vietnam’s economic picture in the first half of 2021 is becoming clearer with the GDP growth target for the full year facing great difficulty due to the resurgence of Covid-19 and impending inflation risks.

Can Van Luc, Director of the BIDV Training and Research Institute
Can Van Luc, Director of the BIDV Training and Research Institute

Nhan Dan held an interview with economist Can Van Luc, Director of the BIDV Training and Research Institute, on this matter.

Q: Several international organisations have revised their growth forecasts for Vietnam in 2021 and warned of inflation and property bubble risks. What are your thoughts on this?

It is correct that Vietnam is facing the pressure of inflation and the property bubble due to external impacts and increased prices of some goods at home.

In the world the overall commodity index in the first five months of 2021 jumped by 23% from the end of 2020. Vietnam is an import country so increases in global commodity prices will definitely exert a major impact on domestic prices and inflation in the short term.

Property bubble risks are also emerging globally when major economies have pledged to introduce support packages equivalent to 15% of GDP, with the US measures amounting to 25.5% of its economy.

No data on the disbursement of such stimulus packages are available yet but it can be affirmed that the world is adopting an unprecedented loosening of fiscal and monetary policies which will result in a property bubble as cheap money flows into speculative channels, pushing prices higher to create a property bubble and raise inflation.

As a result, global inflation is predicted to increase from 2% in 2020 to 2.8% in 2021 before dropping to 2.5% in 2022.

We agree with international organisations that this is temporary inflation, but we cannot be complacent because the impact of inflation can last for 3-6 months or even longer.

At home, the inflation pressure comes from hikes in the prices of raw materials, logistic costs, food prices and property prices, though the government is unlikely to increase the prices of government-regulated goods and services such as electricity, water, healthcare and education).

With the impact of recent Covid-19 outbreaks, Vietnam’s GDP growth in 2021 is expected to reach 6.1-6.3% in our basic scenario, which is lower than the government’s target of 6.5%, while inflation is estimated at 3.4-3.6%, compared to 3.2% in 2020.

Q: In addition to imported inflation, Vietnam is facing pressure from domestic factors as you mentioned above. So, what are the grounds to be assured that Vietnam can keep inflation in check?

A: Vietnam’s inflation in 2021 will increase but not too fast for three reasons. Firstly, demand remains weak. Let’s take tourism for example. Even when prices are cut down sharply, demand cannot be bolstered immediately if the pandemic remains complicated. In addition, retail sales and services in May declined by 3% against April and 1% compared to a year earlier, despite a very modest rise in the same month last year.

Secondly the cash conversion cycle (CCC) is very slow. Theoretically, if the CCC is fast and there are many cycles, inflation will increase and vice versa. Not only in Vietnam but all over the world the CCC has slowed down because the economy is really struggling.

But the “route” of money is more complicated. Cheap money is flowing rapidly into risky investment channels such as property, securities and cryptocurrency, and was one of the reasons behind recent fevers in such markets.

Thirdly, the government has been consistent in the goal of maintaining macroeconomic stability, so the coordination of monetary policy, fiscal policy and price regulation is quite good.

Instructions were made to ensure essential goods are in sufficient supply, even when social distancing rules were imposed, so prices have barely increased since the start of the year.

These are the reasons to believe that inflation in 2021 will be well curbed at below 4%.

Q: Warnings of the property bubble has been issued since the end of the first quarter. With the current rate of global economic recovery and the likelihood of pandemic containment following the Covid-19 vaccination campaign, are you worried that money will continue to flow into risky sectors such as the stock market and property?

A: Recently the property market and stock market have increased relatively fast so there must be risk warnings and control measures. Domestic property prices in 2020 surged by 20-36% from a year earlier, much higher than the global average of 5-6%.

The prices of undeveloped land recently shot up by 50-70% in some localities such as Bac Giang, Thanh Hoa and Hai Phong where there is rumour about the planning of new infrastructure such as airports, bridges and seaports. The regulators already identified the problem and took various actions to cool down the fever.

For the stock market, total outstanding margin loans as of late 2020 were estimated at VND81 trillion (US$3.5 billion), up 48% from late 2019. In the first quarter of 2021, the figure reached VND101.4 trillion (US$4.4 billion), a year-on-year rise of 53%.

The stock market continues its upward trend, but the pace of growth has slowed down. The banking system’s total outstanding loans to the property market and the stock market are still within the limits, without the need for too much tightening.

The Ministry of Finance and the State Bank of Vietnam have recently issued warnings and moved to control the money flow more strictly, so the fever for undeveloped land has been abated and the money flow readjusted.

Q: In addition to controlling the money flow into risky investment channels, it is also necessary to boost lending to enterprises so as to make the economy recover. The Ministry of Planning and Investment is proposing that commercial banks reduce lending rates by 3-5% and restructure existing loans. Do you think there is still room for implementing these policies?

A: With regards to monetary policy, I think that the implementation of the State Bank’s circular on restructuring debts for customers affected by Covid-19 has been effective in supporting enterprises to restore their production and business.

This is a policy to support both enterprises and banks. Enterprises will have their current debts restructured and are allowed to continue borrowing at relatively low interest rates.

For banks, they can avoid profit shocks thanks to the plan to set aside funds for provisioning. However, bad debt has been increasing and credit institutions should take notice of this, especially if the pandemic remains complicated.

I think lowering interest rates is not a bottleneck since demand for credit remains weak. Interest rate cuts should not be implemented broadly, instead the government should consider a support package with low interest rates for small and medium-sized businesses, which have been hit hardest by the pandemic.

Funding for the package should come from the government budget like what many countries are doing. It was already put on the table in 2020 but implementation was delayed due to the question over which sectors are most severely affected. But now it is all too clear.

The lending rates can be half the market rates and government funds must be used to compensate the difference. According to our calculations, the size of this package can be around VND50-60 trillion (US$2.2-2.6 billion). With a lending term of about one year, the compensation for lower interest rates is around VND3 trillion (US$130 million).

In addition, one of the sectors hit hardest by Covid-19 is the aviation industry. The national flag carrier Vietnam Airlines reported a loss of VND10 trillion (US$434 million) in the first half of 2021. Governments around the world all injected cash to rescue and maintain their airlines because they are an important part of the economy.

Therefore, it is necessary to soon address the obstacles so that a VND4 trillion (US$174 million) loan package for Vietnam Airlines can be disbursed under a special mechanism, which allows the carrier to borrow despite financial losses. Other private airlines also need support in terms of mechanisms and policies.

Such support measures must be time-limited and conditional, such as requiring them to restructure and use cleaner energy. I believe that the aviation sector’s post-pandemic recovery will be very quick, around 2-3 years at most.

Thank you very much.