The macro economy in July continued to send out positive signals about the economic recovery. Although bright colors are dominating, trade deficit and budget deficit are two big challenges for the Government's management in 2015..

Bright color gamut maintained

Macroeconomic indicators released in July continued to show positive signs of economic recovery. Most of the basic indicators showing the momentum of the economy maintained an upward trend in the first six months of the year. Specifically, the index of industrial production (IIP) in July increased by 11.3% compared to the same period last year, not much higher than the 11.1% increase in June but far exceeding the 7.5% increase in May.

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The improvement of the IIP index in July was greatly contributed by the mining industry when the production index of this industry increased sharply: 13.8% over the same period; much higher than the 8.2% increase in June.

The second largest increase was the processing and manufacturing industry with 10.5%, however, this is still the industry with the largest proportion of production value, so it still contributes the most to the overall increase (about 7 percentage points).

On the demand side, the main drivers were household consumption and private investment. Retail sales in the first seven months of last year grew by 11.4%, 1.5% higher than the same period this year, but if the price factor is removed, in fact, consumption in the first seven months of 2015 (up 8.3%) was 2 percentage points higher than the same period last year (up 6.3%). The stable price level of goods is one of the reasons that encouraged people to increase spending.

In addition to consumption, investment from the private sector (partly reflected through credit growth) is also a bright spot in the economy. Currently, in the structure of total social investment capital (accounting for about 31% of GDP), capital from the state sector accounts for about 38.7%; capital from the non-state sector accounts for 36.6% and capital from the FDI sector accounts for 24.7%. Of which, the growth rate of capital investment from the private sector was the highest in the first six months of the year (up 11.4%).

Credit growth data also clearly shows this (as of July 20, it increased by 7.32%, 1.96 times higher than the 3.72% of July 2014).

The good news is that the economy is recovering well in the context of inflation at its lowest level in many years (only 0.9% higher than the same period last year). This helps people's income and purchasing power not be "eroded" by inflation. Recent signals about the price of WTI crude oil on the world market (which has dropped sharply and may return to the bottom of around 42-43 USD/barrel) may be a factor that helps maintain the price level of goods at a stable level in the coming months.

Challenges remain

Although the macroeconomic situation is improving, it does not fully offset the short- and medium-term challenges facing the Government.

Firstly, the trade deficit has not shown many signs of improvement. Preliminary data show that exports in July continued to increase quite sluggishly, only increasing by 1.2% compared to June and in the first seven months of the year, exports only increased by 9.5% compared to the previous year. Notably, exports of key agricultural and aquatic products decreased in both volume and value, such as: coffee decreased by 33.2% in volume and 33% in value; rice decreased by 3.5% and 8.7% respectively; aquatic products decreased by 15%...

Meanwhile, imports continued to expand with an increase of 16.4% compared to the previous year. Due to the characteristics of the Vietnamese economy, Vietnam is not yet self-sufficient in most raw materials as input for production and some processing and manufacturing industries such as phone production, textiles, footwear, etc. are still heavily processed and are part of the global production chain of multinational companies, so when the domestic economy recovers, imports will accelerate. However, some luxury goods are not encouraged to be imported, typically cars with an increase of up to 87.9% (completely built cars increased by 154.4%), reaching 3.4 billion USD, also contributing to the widening trade deficit (estimated at 3.4 billion USD).

The increasing trade deficit certainly puts some pressure on the exchange rate. Although the US dollar price has been quite stable over the past month and the State Bank of Vietnam has just reaffirmed its commitment to "anchor" the exchange rate at no more than 2%, the temporary waves when all factors converge can pose a challenge to the operator. Even if the commitment is kept, it may still have to consume a lot of resources.

Second, the budget deficit continues to cause difficulties for the Government in management. Although revenue has grown positively compared to the same period, it is still not enough to cover expenditures. At the same time, the issuance of government bonds has encountered many difficulties due to unattractive interest rates, but mostly due to the maturity structure (only issuing terms over five years) not meeting market demand. Fears of a shortage of spending money have caused the Ministry of Finance to resort to temporary solutions such as issuing treasury bills with terms of less than one year, proposing to borrow VND30,000 billion from the State Bank, and privately issuing government bonds with terms of 20 years.

The pressure of deficit spending affecting the interest rate level in an increasing direction and the lack of money for development investment in the budget this year (because most of the current revenue is only enough for regular expenditure) is a short-term challenge for the Government, but in the medium term it will cause the public debt ratio to increase (currently approaching the ceiling of 65% of GDP set by the National Assembly). The story of deficit spending and public debt is certainly a risk that cannot be ignored in the near future for Vietnam.

According to TBKTSG