Deflation risk emerges in Vietnam after years battling high consumer prices Vendors sell produce at the Cho Hom market in Hanoi. Photo credit: Bloomberg This holiday season, economists have observed a peculiar trend in Vietnam: consumers are apparently not buying as much as they should be.  After years of trying to curb high inflation, which has weighed down the economy, the country seems to be facing a new risk for the first time: deflation.  Inflation consistently cooled in recent months, signaling slowdown in an emerging market driven by a young population with growing disposable income.  Consumer prices declined 0.2 percent per month in the past five months, mostly due to cheaper oil prices. In January, inflation increased a meager 0.9 percent year-on-year, compared to 6.5 percent recorded the same time last year, according to a report issued by HSBC last week.  "Should inflation continue to fall, the economy may not grow nominally fast enough to service its widening fiscal deficit," the report said, adding that oil export revenues are set to decline in 2015. Nguyen Ngoc Tuyen, director of the Institute of Economics and Finance under the Ministry of Finance, said deflation risks have emerged due to weak domestic demand.  Retail sales increased only 10.6 percent last year, compared to over 20.9 percent in 2006 and 23.3 percent 2007, according to the General Statistics Office. High levels of bad debt in the banking system have also prevented banks from boosting lending to support business activities. Vietnam aims to reduce the ratio of bad debt to 3 percent of total loans by the end of 2015, from 5.4 percent at the end of last September. Deflation will create "many challenges" to Vietnam’s economy, Tuyen said. He warned that as talks about deflation continue, consumers could suspend their spending on goods and services to wait for further price drops, even though the Tet(Vietnam's Lunar New Year) holiday season should see them open their pockets more.  This austerity trend would then discourage investment as businesses find it hard to earn high profits and quickly recoup their capital, resulting in higher unemployment rate, and lower tax collection, he said.  Deflation will hinder the government from increasing its state budget and repaying debts, he said.  "If deflation prolongs, macroeconomic stability could be threatened,” he said, adding that Vietnam would increasingly lag behind other countries in economic development. Echoing Tuyen, economist Ngo Tri Long said the supply-demand imbalance would happen as companies stop expanding when prices plunge. It could trigger the risk of having another cycle of high inflation later due to weak supply in the future, Long said. Vietnam battled excessively high inflation in 2011, with inflation peaking at 23 percent in August of that year. To deal with deflation risks and boost economic growth, the government needs to increase its support for businesses, ease monetary and fiscal policies, and promote economic reforms, said Le Quoc Phuong, deputy director of the Center of Industry and Trade Information, under the Ministry of Industry and Trade. The government should also considered giving enterprises more time to pay taxes and simplifying tax and customs procedures, Phuong said. Electricity price hike Economic growth rate for this year is set at 6.2 percent, and inflation is predicted by the government to be held at 5 percent. The country's average inflation slowed to 4.09 percent last year.  However, economists say inflation could be much lower than the targeted 5 percent.  The National Financial Supervisory Commission, a watchdog agency, said in a new report that fuel prices have fallen sharply, contributing to lower input costs for many products. The agency said further drops in oil prices will bring inflation down to 3 percent.   Economist Tuyen's inflation forecast for this year is between 2 and 3 percent. Inflation could stay within that band for the next five years. he said.  Inflation could be kept at a low, reasonable level, and the economy could still expand as long as bad debt is reduced, Tuyen said.    Some economists believe deflationary pressures could ease soon, when oil prices stabilize.  Hong Kong-based HSBC economist Trinh Nguyen said in a report early this month that the recent drop in crude prices has pulled down everything, from transport to household consumption costs in Vietnam. However, oil prices may be kept stable around the current level in the next six months, the economist said.  The government will likely use this opportunity to raise electricity prices, she said. According to the Ministry of Industry and Trade, electricity prices will be increased by up to 9.5 percent in 2015. An electricity price hike will then raise the costs of goods and services, and gradually improving domestic demand and higher credit growth will also likely put some upward pressure on prices, she added. HSBC has predicted Vietnam's economy will grow 5.9 percent in the first quarter, and 6.1 percent for the whole year.  By Ngan Anh, Thanh Nien News