Vietnam’s credit growth may spur inflation, Morgan Stanley says

A branch office of ABBank in Ho Chi Minh City. Vietnam’s credit growth may spur inflationary pressures as the government encourages lending to boost the economy amid a slump in overseas demand, Morgan Stanley said.

Property prices in some projects have increased as much as 30 percent in Vietnam and new loan creation this year is equivalent to about 17 percent of gross domestic product, economists Deyi Tan, Chetan Ahya and Shweta Singh wrote in a note published Wednesday. Vietnam’s economy accelerated in the second quarter as stimulus spending that the government values at more than US$8 billion helped drive loan growth and buoy construction activity. The nation’s banks have lent more than VND389 trillion ($21.8 billion) to businesses as part of the government’s loan-subsidy program as of July 30, according to the central bank. “Credit disbursement has provided a cushion at a time when external demand indicators remained weak,” the economists wrote. “The current mode of policy-driven recovery could face limitations. With Vietnam having a functional banking system to push out liquidity via credit growth, strong credit acceleration could pose inflationary concerns.” Inflation slowed for an 11th straight month in July, with consumer prices rising 3.3 percent from a year earlier, compared with a 3.9 percent gain in June, according to General Statistics Office figures. Monetary policy Vietnam’s inflation will soon begin accelerating again, driven by commodity prices, a weakening currency and increased bank lending, HSBC Holdings Plc economist Prakriti Sofat said last month. Inflation will probably begin accelerating in September after dropping to about 2 percent in August, she said. The State Bank of Vietnam on July 20 said it will manage monetary policy in the second half to ensure credit grows as much as 27 percent for the year. Loans growth so far this year is about 20 percent, Morgan Stanley said. “If the lending target is to be adhered to, credit disbursement for the second half will have to slow to less than half the pace of the first half,” the economists said. “The delicate task of policy adjustment will likely have to take place to reduce the possibility of demand-pull inflationary pressures.” The central bank has kept the key interest rate at 7 percent since January, after reducing it six times from 14 percent in October, to slow inflation. Shipments from Vietnam dropped 13 percent to $32.35 billion in Januaryto-July from the same period a year earlier, according to data from the General Statistics Office. Exports from Vietnam, the world’s second-biggest shipper of coffee and rice, are poised to recover as commodity prices and production increase, fund manager Dragon Capital told investors this month. “Limitations to a policy-driven recovery due to potential inflation and trade deficit pressures suggest that the growth baton will have to be passed from policy-makers to make way for a market-based export-driven recovery,” the Morgan Stanley economists said. “We believe a market-based export-driven recovery is in the cards.” Source: Bloomberg