VIETNAM Deflation could be negative

Deflation could be negative

HA NOI — An unexpected decline in the consumer price index (CPI) in June will demonstrate that the Govern-ment has successfully controlled inflation.

However, economists are also urging the Government to scrutinise the figure, saying that a deflationary period could have negative impacts on the economy if it extends for several months.

The General Statistics Office reported that CPI in June declined by 0.26 per cent from the previous month, the first monthly decrease in 38 months. US-based JPMorgan Chase Bank called these statistics "surprisingly positive", suggesting that easing inflation would have two positive effects. Monetary policy might be further loosened to support the weak economy, it said, and lower inflation was likely to improve the balance of trade and stabilise the nation's balance of payments.

But local economists worry that the drop in inflation reflects a downturn in industrial production and demand. Economist Le Dang Doanh attributed June's CPI figures to the sharp reduction in local demand, suggesting that the reduction was therefore not entirely good news, especially when many local producers were burdened with high inventories and experiencing stagnant production.

The economy is indeed facing major challenges. According to the GSO, up to 70 per cent of the country's businesses reported losses in the first half of the year and nearly 22,000 firms went bankrupt. National GDP also grew by only 4.5 per cent during the period, well below the pace of recent years. The inventory index of many products surged sharply while consumption continued to decline.

However, GSO director Do Thuc noted that June was only the first month to see a reduction in CPI, too early to affirm that the economy in a deflationary trend. "We have to base such a judgment on CPI statistics of six consecutive months," Thuc said. He noted that the health of the economy showed signs of improvement in other areas during the past month. Industrial production grew only 4 per cent in the first quarter but surged by 8 per cent in June, compared to the same period a year earlier. The inventory index, despite remaining high, also fell compared with the previous months.

A CPI decline in June did not mean the economy was facing deflation, agreed the former director of the National Centre for Economic and Social Information and Forecast, Le Dinh An. A reduction in inflation, meanwhile, was expected to help the Government in capping interest rates to support business expansion and to boost the disbursement of official development assisstance (ODA) funds.

An urged the Government, however, to keep a close eye on the decline in order to take timely action if needed.

So far, the Government has applied policies aimed at boosting the economy by easing credit and giving tax incentives to production and consumption.

Former Minister of Trade and Investment Tran Xuan Gia urged that policies be kept moderate and flexible to avoid a return of the high inflation of 2008-09 that continued at a brisk pace into last year.

Gia said that the CPI decline in June could be a short-term result and high inflation could recur at any time. He therefore cautioned the Government against further loosing of monetary policies at the end of the year.

Anh argued, however, that looser monetary policies were necessary to boost production and consumption, but should be targeted to the agricultural, manufacturing and processing industries, which generate many jobs, and to exporters.

The GSO has forecast that CPI would be remain at low levels over the next few months but increase at year's end to achieve a year-on-year rate of 6 per cent as against the Government target for the year of 7-8 per cent. — VNS

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