HCM CITY — Viet Nam's credit-expansion-led growth has ground to a halt, decelerating to 4 per cent in the first quarter from 5.9 per cent last year, an HSBC study said.
With real credit growth falling into negative territory, there was no fuel to accelerate the growth engine, it said.
The State Bank of Viet Nam's monthly statement showed that credit shrank in January and February, suggesting that, while growth would rebound, the pace would not be as fast as hoped for.
With credit growth having a lagged effect of six to nine months, the economy would continue to feel the pain in the coming months.
With the service sector making up 37.7 per cent of the economy, its slowdown this quarter to 5 per cent from 8.7 per cent in the fourth quarter of 2011 posed a significant drag on the economy.
The real estate sector suffered the most, contracting 1.7 per cent (versus 0.1 per cent in Q4, 2011), while other service sectors saw growth rates decelerate significantly. The slowdown in services reflected consumers scaling down consumption as a result of high borrowing costs as well as falling inflation expectations.
"We expect services to continue to be subdued in the coming quarters even as lending rates drop to reflect lower inflation and policy rates."
In the industrial and construction sectors, which make up around 40 per cent of GDP, the effect of tighter credit conditions was most felt by the latter, which contracted 8.3 per cent compared to 10.5 per cent in the previous quarter.
In contrast, higher commodity prices supported the gas and mining sector's expansion, allowing the overall industrial and construction sector to improve marginally in the first quarter to 3.2 per cent.
"While we expect the contraction of the construction sector to abate due to easing lending rates, we do not anticipate a significant recovery."
The agriculture, fishery and forestry sectors were also affected by tightening measures, though less than the services and industry sectors. They expanded by 4.5 per cent compared to 7.4 per cent in the previous quarter.
However, since growth tended to accelerate in the last quarter in Viet Nam, the 4.5 per cent growth in the first quarter reflected both a strong harvest as well as robust demand externally for Vietnamese agriculture goods despite tight credit conditions.
Weak external demand
Growth in Viet Nam was also hit by weaker demand abroad. A slowdown in China as well as the Eurozone are expected to impact demand for Vietnamese goods.
Weaker demand from China is reflected in year-on-year contraction in the growth of the electrical and computer parts, steel, coal, and chemical sectors.
In March exports rose 23 per cent year-on-year (versus 60.6 per cent in February), representing first-quarter export growth of 24.5 per cent. But they fell by 17.9 per cent from February, the effect of Tet being in January rather than February this year, which made the seasonal adjustment less robust.
The strong export growth in March despite weak demand from China and the Eurozone reflected high commodity prices, especially that of oil.
One positive effect of weak external and domestic demand was the slowdown in import growth.
A more cautious consumption behaviour saw demand for imports drop significantly. They grew by a mere 2.6 per cent year-on-year in March, down from a massive 47.4 per cent in February, again due to the effect of Tet being in January rather than February.
On a seasonally adjusted basis, imports declined by 23.1 per cent month-on-month from 55.8 per cent in February.
Even with higher oil prices, year-to-date imports expanded by only 9.0 per cent.
In the first quarter, the trade deficit was only $236 million compared to $1,619 million a year earlier. Trade deficit for the year was likely to be $9.6 billion, down from $9.8bn in 2011.
The SBV's efforts to dampen demand to combat inflation had succeeded, causing the economy to decelerate in the first quarter. As a result, price pressures would continue to ease.
Even with a 10 per cent increase in oil prices in March, inflation had slowed to 14.2 per cent year-on-year from 16.4 per cent in February.
Core inflation slowed to 12 per cent from 12.7 per cent.
But on a month-on-month basis, core inflation rose to 1 per cent in March from 0.5 per cent in February.
Food prices slowed sharply in March to 17.8 per cent from 21.2 per cent. With food making up 40 per cent of the CPI basket, significant deceleration in food prices would bring down inflation in the coming months.
Further cuts forecast
"With a favourable base effect and dampened domestic demand pushing price pressures down, we forecast inflation to continue its downward trend, and the SBV lowered interest rates by 1 per cent on 13 March, 2012, to show the public that it is doing everything it can to ease lending rates, we forecast the SBV will cut rates by 1 per cent every quarter this year."
While the rate cuts would help ease lending rates, what was more meaningful was the actual growth of credit, which slowed in the first two months.
The SBV still had a cap of 17 per cent on credit growth (for some institutions the cap was lower). The report expected credit to expand by 13 per cent this year.
"Our 2012 growth forecast of 5.7 per cent faces significant downside risks even with expected acceleration of growth in the coming quarters. Slower growth, especially with contraction in the real estate and construction sectors,
suggests that the ratio of NPLs (non-performing loan) for smaller banks that are more exposed to real estate loans might rise. SBV Governor Nguyen Van Binh recently stated that the NPL ratio was 3.6-3.8 per cent for 2011.
"However, every cloud has a silver lining. While growth has slowed, dampened demand has helped ease inflationary pressures as well as improved the trade deficit. The growth engine may chug along slower than the long-term average of over 7 per cent in 2012, but it will also help create a more stable macroeconomic environment." — VNS