Vietnam: Inflation expected to be reined in for 2021

• May 19, 2021

In a bid to continue successfully controlling inflation this year amid a rise in local consumption, the government is taking drastic action, with the stabilisation of prices of key items in the market a priority.

Although the four-month consumer price index (CPI) remains low, at 0.89% as compared to that of the same period last year, the Ministry of Finance (MoF) has just sent a document to leaders of localities nationwide requiring them to apply sound solutions to keep prices in the market on the right track. 

Close control

Specifically, the MoF has asked the people’s committees of provinces and centrally-ruled cities to increase their management, monitoring, and stabilisation of prices, and take the initiative in calculating and formulating pricing schemes for items whose prices are determined by the government.

The MoF’s fresh move is aimed at supporting the government’s efforts to implement the dual task of stabilising prices in the market to support enterprises’ performance and help remove the difficulties of them and people’s life, while assisting the economy’s growth and avoiding abnormal fluctuations in prices that can affect socio-economic activities.

Localities have also been asked to closely follow price developments in the market so that timely and sturdy measures are to taken to stabilise prices under the law, especially indispensable items in business and production.

Localities have, in addition, been required to closely work alongside ministries and agencies in circulating and distributing goods in order to prevent partial high price hikes caused by shortages in goods or unfavourable reductions in the prices of agricultural goods due to stagnant circulation and distribution.

All related difficulties must be reported to the government’s Steering Committee on Price Management.

Besides that, localities have to stringently manage price quotations in the market, especially in regard to medical products used for the fight against the COVID-19 pandemic, and other indispensable items. Frequent inspections must also be carried out to prevent violations, with transparency of all items in the market essential. 

Keeping CPI at a low level

According to the General Statistics Office (GSO), the government has up to now been successful in subduing inflation, and this effort is projected to continue until late this year.

In the first four months of 2021, the CPI climbed 0.89% year-on-year, the lowest rise in the first four months of the year since 2016.

Concretely, the first-four-month rates were 1.41% in 2016, 4.8% in 2017, 2.8% in 2018, 2.71% in 2019, and 4.9% in 2020.

In the first four months of 2021, although there has been an escalation in the prices of some items, such as foodstuffs (0.2% year-on-year), catering services (2.07%), gas (14.69%), and petrol (2.49%), this 0.89% CPI hike was small as compared to the same period last year, when the pandemic began its onset in the economy.

The GSO says that the CPI, however, remains low as local consumption and production are yet to completely recover. In the first four months, total retail and consumption service revenue reached close to VND1.7 quadrillion (US$73.9 billion), up 10% over the same period last year when the rate dropped 2.8% year-on-year. 

Action from the government

The GSO pointed out a number of big reasons behind such a CPI year-on-year reduction of 0.89%.

Specifically, since last year, the government has been deploying support solutions both public and enterprises hit by COVID-19. For instance, the State Bank of Vietnam deployed a package worth VND180 trillion (US$7.82 billion) for businesses and households, in the form of debt payment deferral and preferential loans.

Last September, the government also promulgated Decree No.109/2020/ND-CP, dated September 15, 2020, providing deadline extensions for excise tax payments for domestically manufactured or assembled cars.

Decree 109 extended the time limits for payment of the payable excise tax amount incurred in the tax periods of March, April, May, June, July, August, September and October 2020 for domestically manufactured or assembled automobiles.

Recently, state-owned Electricity of Vietnam (EVN) decreased its electricity prices for its customers. Accordingly, the average power price in the first four months of this year went down 5.88% year-on-year, resulting in a 0.19% reduction in the CPI.

However, EVN has reported that all of its activities were expanding year-on-year in the first quarter of 2021.

EVN’s total gross industrial output was estimated to be VND52.83 trillion (US$2.3 billion), a year-on-year rise of 3.18%. Commercial electricity was 50.79 million kWh, a year-on-year climb of 3.18%. Of which, electricity for agro-forestry-fishery was 3.97% of total electricity consumed, while this rate was 56.01% for construction and industrial activities and 31.46% for households.

Notably, EVN’s total revenue from sales of electricity was estimated to be more than VND94 trillion (over US$4 billion), up 4.11% year-on-year.

In another case, according to the GSO, the low first-four-month CPI of 0.89% can also be attributed to the fact that state-owned Vietnam Railways Corporation, airlines, and travels firms have been carrying out programmes on price discounts to spur on travel and tourism activities. For instance, ticket prices for trains since January 2021 have dropped 7.4% year-on-year. Meanwhile, air ticket prices have also declined 17.4% as compared to that in the same period last year, and full-package tours’ average price have also decreased 3.32%.

Global analysts FocusEconomics said that this year, price pressure is expected to ease slightly compared to 2020 amid a projected appreciation of the dong, with the group’s panelists seeing inflation average well below the government’s estimate of 4.0%.

“FocusEconomics Consensus Forecast panelists expect inflation to average 2.9% in 2021. For 2022, the panel projects inflation to average 3.6%,” said FocusEconomics in its May bulletin sent to Nhandan Online.

The Asian Development Bank (ADB) has also highly lauded Vietnam’s efforts to control inflation, saying that rising international oil prices on the back of the global economic recovery and increased domestic consumption are expected to edge inflation up to 3.8% this year and 4% in 2022.

The International Monetary Fund (IMF) also forecast that inflation in 2021 in Vietnam may be only 2.4%.

“Inflation continued to be well contained at 3.23%, below the authorities’ target of 4% in 2020,” said an IMF report on Vietnam’s economic prospects. “Authorities have set targets for GDP growth of 6.5%, and inflation at around 4% in 2021 in line with the goals set in the national 10-year Socioeconomic Development Strategy (2021–2030).”

Long-term outlook (six-to-24 months) for Vietnam’s economy

Source: Fitch Solutions: 

We maintain our expectations for the dong to remain on a gradually weakening trend against the US dollar over the long term. Factoring a stronger 2021 forecast, we have revised our 2022 average forecast to VND23,200/USD, from VND23,600 per US dollar previously. This is due to the dong’s persistent overvaluation and higher structural inflation in Vietnam versus the US. The Vietnamese dong’s real effective exchange rate is 4.5% above its 10-year average, which continues to suggest slight currency overvaluation and could lead to some weakening pressures over the coming quarters. Moreover, higher structural inflation in Vietnam versus the US will also weigh on export competitiveness and thereby incentivise imports, which combined, will pressure the dong further. We forecast inflation in Vietnam to average 3.5% in 2021 and 2022, relatively similar to the 3.2% in 2020. Our forecasts for Vietnam lie above our 2.6% forecasts for the US over the period. Despite these slightly bearish drivers, Vietnam’s strong economic growth prospects, in which we foresee real GDP growth of 8.6% in 2021 and 6.7% in 2022, far exceed the 4.1 and 1.8% we expect for the US. This suggests that continued strong investment flows to Vietnam will limit the scope for the dong to weaken.

Nhan Dan

Source: https://vietnamnet.vn/en/business/inflation-expected-to-be-reined-in-for-2021-737887.html