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VEPR: Don’t pursue growth at the cost of stability
The Saigon Times Daily
Tuesday,  Jan 17, 2017,23:47 (GMT+7)

VEPR: Don’t pursue growth at the cost of stability

The Saigon Times Daily

HCMC – The Vietnam Institute for Economic and Policy Research (VEPR) has said that this year’s gross domestic product (GDP) growth target of 6.7% is high and that authorities should not try to achieve the target at the expense of macro-economic stability.

In a quarter-four report on macro-economic conditions released on January 16, VEPR attributed a decline in the industrial sector to lower-than-expected GDP growth last year, Dan Tri news site reports. Vietnam’s economy expanded 6.21% in 2016, lower than the Government’s revised target of 6.3-6.5% and the 6.68% growth rate in 2015.

Although foreign direct investment (FDI) pledges have edged up, the 6.7% growth goal for 2017 set by the Government is ambitious. Therefore, VEPR warned management agencies against striving to obtain the high target and loosening controls on the macro economy. 

There are signs that inflation would likely increase in the coming time. Therefore, the 2017 inflation target of 4% would be a tough task, VEPR said. Price hikes in the healthcare and education sectors, surging prices of goods during the upcoming Lunar New Year holiday (Tet) and a possible spike in power prices may pile pressure on inflation. 

If inflation exceeds 5%, nominal interest rates will go up. This will affect production and the financial market, and hinder economic growth.  

VEPR in the report said the corporate sector, especially the manufacturing-processing segment, is expected to become a highlight of Vietnam’s economy this year. The development of this sector is backed by the Government’s determination to streamline administrative procedures and improve the business climate, which is evident in the issuance of decrees 19 and 35 last year.

The report also pointed out that ministries and agencies would need time to join hands to implement the two decrees. Market participants and investors are keeping a close eye on how the Government will deliver on its policies. 

VEPR said controlling State budget spending, especially regular expenditures, is another challenge. Budget collections will only be enough for regular spending, so the Government will have to borrow to fund the deficit and investment projects. This will cause public debt to surge.

The institute proposed the Government strictly implement the payroll trimming plan, cut regular expenditures and eliminate financial aid for State associations and organizations.

According to VEPR, the global economic uncertainty will greatly affect the home market. The U.S Federal Reserve’s rate hike in December last year and the possibility of three interest rate increases this year would lead the exchange rate between Vietnam dong and the U.S. dollar to climb. This will affect export and result in a trade deficit in 2017. 

Besides, banks will have to revise up interest rates to maintain the value of the dong and keep money in the banking system given the greenback’s appreciation.

Interest rates may edge up, thus impacting the real estate market.

Oil exporting countries reached an agreement on an output cut in January, which could send oil prices up. Although the oil price spike would cause State budget revenues to increase, higher crude oil and commodity prices could ignite inflationary pressure. Consumer prices have inched up in recent times due to rising public service prices.

U.S. President-elect Donald Trump’s opposition to the Trans-Pacific Partnership (TPP) could discourage businesses from setting up shop in Vietnam. Therefore, to maintain growth momentum, the country will have to boost reforms to back local enterprises to expand operations and improve competitiveness.

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