QE in VN?

In a one-party state with no independent central bank, it is to be expected that de facto “quantitative easing” of the money supply has regularly taken place. This would be reflected in government deficit spending not being fully financed by either marketed bond issues or loans, so therefore to some extent by the central bank. According to the IMF, the past three years` annual Vietnamese government net borrowing requirement (a proxy for the budget deficit) has been running at an average of 6.3% of GDP; this has mostly (c. 80-90%) been funded inside Vietnam and the rest externally, but MM hasn’t found enough historic data to say how much of the internal funding has successfully come from the market, and how much via the back door from the central bank.

Western and Japanese QE over the past five years has been all about stimulation at the top of the pipe, i.e. the central bank explicitly buying government debt. It hasn`t resulted in incremental CPI inflation partly because the lower-down parts of the pipe, like loans from the banking sector into the real economy, have generally remained very sluggish; moreover the leaks in the pipe, like money flowing off into risk assets like emerging markets, are prominent.

In Vietnam over 2000 – 2010, it is clear that the lower-down parts of the pipe were flowing fast: bank lending grew at a CAGR of a mammoth 32%. This, regardless of the inadequate data at the top of the pipe, was enough to stoke major asset price inflation (for example, a quadrupling of property prices in the four years to 2007) and two big bouts of inflation – one that peaked at 28% in 2008 and a 23% peak in 2011.

As with the underlying asset value inflation generated by western QE, inflationary episodes in Vietnam have exacerbated inequality: this is because of the large number of hand-to-mouth poorer people, the heavy weight of inflation-prone food in total consumption, and the superior inflation-hedging abilities of the rich. This said, in general Vietnam continues to be characterized by lower inequality levels than many other countries, which makes it more akin to a Switzerland or Scandinavia than a Thailand, China or US:-

Gini coefficient for income (Lorenz curve)* – 15 nations, ranked

Sweden           25      Relatively very equal, like all Scandinavian countries
Germany         31
Switzerland     34
India                34      Shows up as more unequal on different methods

Vietnam           36      Probably the 3rd most equal major country in Asia

Japan              38       Can show up as less unequal on different methods

Indonesia        38
Whole world    39
Thailand          40
Russia             40       Looks low – oligarch offshore money not included?
USA                 41       World`s most unequal major developed nation
China               42
Philippines       43       With China, among the most unequal in Asia
Nigeria             49       Very high inequality, like most of Africa
Brazil               55       Very high inequality, like most of Latin America
South Africa     65       World`s most unequal major nation

*A scale of 0 to 100, with 0 representing perfect income equality of all citizens, and 100 representing the total inequality of one person having all of the country`s income. Sources: 2014 UN Human Development Report; World Bank Gini Index, Feb 2015


Is openly practiced QE at the top of the system, by explicit central bank buying of government debt or even by it posting cheques to all citizens, appropriate in Vietnam? Hell, no. Vietnam is a growth story, not a case of European or Japanese stagnation. In addition, you can only “do QE” successfully when you have lots of credibility built up over a long time. So, credit to the Vietnamese government for clamping down on inflation since 2011 by reigning in system loan growth to an annual average of just 12% over the past four years. This, with the strong balance of payments picture, has resulted in an impressively stable currency, in fact a strong one – the dong`s real effective exchange rate (as measured by the IMF) rose 15% in the four years to year-end 2013 (with more still in 2014). A good start to growing long term credibility indeed.

Mekong Man

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