Inflation under pressure due to rising consumption and public investment

It is expected that the government will issue a major resolution soon on new solutions to assist businesses, stabilise the macro-economy, and bring inflation under control which is predicted to increase in the coming months due to a series of factors – including rising demands for consumption and public investment.

According to the General Statistics Office (GSO), though the consumer price index (CPI) in the first half of this year has been reined in, at a year-on-year rate of 3.29%, it may augment remarkably in the coming months to come due to a soar in travelling, an increase in consumption of goods and services, and especially the impacts of the on-going acceleration of public investment disbursement.

In the first six months of this year, the price of the group of cultural, entertainment, and travelling increased 3.74% year on year due to the successful control of the COVID-19 pandemic and a soar in the public demand for entertainment and travelling (leading to a rise of 0.17% in CPI). What is more, the year-on-year price soared 65.72% for air tickets, 32.34% for train tickets, and 11.12% for passenger cars’ tickets.

The total six-month retail and consumption revenue in Vietnam hit 3.016 quadrillion VND (125.66 billion USD), up 10.9% as compared to the corresponding period last year when the rate climbed 11.7% year on year.

Also, the goods retail revenue in the first six months of 2023 stood at 2.38 quadrillion VND (99.16 billion USD – up 9.3% year-on-year, in which the price of many important groups of items also increased, such as food and foodstuff (13.5%), garment (9.5%), home appliances (4%), and travelling means (except for automobiles) up 2.5%.

The total six-month revenue from travelling services is estimated to be 14.5 trillion VND (604.16 million USD), up 65.9% year on year, on account of a strong rebound in cultural and tourism activities taking place nationwide. Among the many localities with expansion in revenue from these services are Danang (174%), Hanoi (106.9%), Haiphong (93.2%), Ho Chi Minh City (78.5%), Quang Ninh (51.7%), Khanh Hoa (33.6%), Can Tho (19.9%), and Lam Dong (12.8%).

Quickening public investment disbursement

Prime Minister Pham Minh Chinh has said many times that public investment will be one of the key drivers for economic recovery and growth in this year.

Figures from the Ministry of Planning and Investment showed that cumulative public investment disbursement for January-May 2023 reached 22.2% of the prime minister’s approved allocation of 707.4 trillion VND (29.5 billion USD) for 2023, an increase of about 9% as compared to the same period in 2022. So far, nearly the entire huge sum has been allocated to disbursing ministries and provinces

“Public investment disbursement remains slow. There are so many causes, with the biggest are disconnected projects and cumbersome procedures which have yet to be decentralised, coupled with lax disciplines. This has led to slow disbursement with effectiveness not high,” PM Chinh said at a recent meeting between him and ministries and localities on this issue.

He required ministries, state agencies and localities to disburse at least 675 trillion VND (28.46 billion USD) in public investment, or 95% of the goal, within this year.

The Asian Development Bank (ADB) proposed that effectively accelerating public investment will help Vietnam earn various positive results such as employment, larger engagement of private investment into the economy, and this will lead to greater contributions from enterprises to the state budget.

“It is critical to accelerate the disbursement of 29.5 billion USD in public investment. Along with the continued implementation of the stimulus program endorsed in January 2022, this spending will generate substantial multiplier effects, creating strong motivation for the whole economy,” the ADB said. “In the long term, financial reform should continue to reduce dependence on bank finance and enhance transparency in bond markets.”

New forecasts

Trading Economics has just said that the inflation rate in Vietnam is expected to be 2.2% by the end of this quarter. In the long-term, the Vietnam Inflation Rate is projected to trend around 5% in 2024 and 4.40 percent in 2025, according to our econometric models.

Meanwhile, FocusEconomics stated that Vietnam’s inflation decelerated to 2.4% in May (April: 2.8%), driven by a stronger decline in transport prices.

“Price pressures are poised to accelerate on average this year compared to 2022, although they should remain below the central bank’s 4.5% target. Monetary policy easing and oil price fluctuations are key factors to watch,” FocusEconomics said. “Our panellists see consumer prices rising 3.8% on average in 2023, which is unchanged from one month ago, and rising 3.5% on average in 2024.”

On the outlook, analysts at the Economist Intelligence Unit commented, “Inflation will ease more rapidly over the second half of 2023 as declining global energy prices translate into easing cost-push pressures across a range of goods and services, while a higher base of comparison from the year earlier period will also come into play. A strong El Niño weather phenomenon, bringing hot and dry weather, could add upside pressure on inflation via the disruption of food supply later in the year, but only to a limited degree because of high rice stocks and surpluses of a range of other crops.”

According to the ADB, in Vietnam, services are expected to expand by 8% in 2023 on revived tourism and associated services.

“China initially left Vietnam off the list of the countries that could receive its outbound tourists. On March 12, 2023, though, a revised list added Vietnam, allowing group tours from China to Vietnam to resume on March 15. As China is Vietnam’s largest tourist market, the country will benefit considerably from this development,” the ADB said.

The ADB also underscored the need for the government to control inflation which may increase strongly in the months to come.

“Vietnam should continue to prioritise price stability because escalating geopolitical tensions and accelerating disbursement of public investment may still stoke inflation in 2023,” the ADB said. “Inflation is forecast to increase slightly to 4.5% in 2023.”