Opportunity for Economic Acceleration

10:30:15 AM | 19/7/2019

The growth forecast for Vietnam’s economy in 2019 has been upgraded to 6.96% from an earlier estimate of 6.56-6.81% by the Vietnam Institute for Economic and Policy Research (VEPR). The forecast is higher than the target of 6.6 - 6.8% set by the National Assembly.

In the quarterly macroeconomic report released by VEPR under the support of Konrad-Adenauer-Stiftung (KAS), forecasts were based on VEPR’s insightful analysis of following factors: Industry-specific growth, business performances, consumption and investment, balance of trade, inflation, budgetary balance, financial and monetary markets, real estate market, capital and monetary markets. At the same time, VEPR took into account impacts of U.S.-China trade war on the world economy.

VEPR data revealed a lot of negative impact indicators of the economy in the second quarter. Specifically, the agriculture, forestry and fishery sector posted a ‘gloomy’ growth of only 2.39%. The industry and construction sector grew at 8.93%, lower than the same period of 2018. Only the service sector expanded 6.69%. The Industrial Production Index (IPI) climbed 9.7%. However, in the first six months, both the consumption index and the production index marginally edged up while inventories rose to 16.1%. That may put a risk of temporary production stagnation and production downscaling of enterprises.

For businesses, the Purchasing Managers’ Index (PMI) rebounded to 51.9 points; 38,514 enterprises were established with a total registered capital of VND484.7 trillion, 30.8% more than a year earlier; corporate bankruptcies declined from the same period of last year. However, it is interesting that workers tend to move outside the industrial sector, evidenced by the lowest labor growth in three years (2.3%). The labor force in the foreign direct investment (FDI) sector accounts for less than 10% of total laborers.

In the first six months of the year, total retail sales of consumer goods and services reached VND2,391.1 trillion (US$104 billion), representing an on-year growth of 11.5%. Total social investment capital expanded by 10.3%. The non-state sector accounted for the largest share of investment capital (43.6%) and posted an on-year expansion of 16.4%. There are still uncertainties though, FDI inflows were volatile since 2018 and China continued to be the biggest investor.

The country ran a trade deficit of US$1.5 billion in the second quarter, with the domestic economic sector taking a deficit of US$8.94 billion. In the first six months of the year, the United States continues to be Vietnam's largest export market, generating US$27.5 billion for the Southeast country, up 27.4% year on year. China was still its largest import market, taking US$36.8 billion from it, up 21.8% from a year ago. With the EU - Vietnam Free Trade Agreement (EVFTA) signed on June 30, the European Union (EU) was expected to bring many opportunities for Vietnam's export industry in the third quarter and beyond.

From January to June 2019, the consumer price index (CPI) rose 2.64% on negative impacts of African swine fever. Other reasons to the CPI growth include electricity price hike, textbook price hike and tuition hike roadmap.

Budget revenue was higher than a year ago to VND597,786 billion, driven by import and export activities. Impacted by free trade agreements (FTAs) ​​and EVFTA, this source will gradually shrink. The Ministry of Finance also estimated an overspending value of VND222 trillion, or 3.6% of the country’s gross domestic product (GDP). The non-State sectors made up 8% of GDP but they accounted for 36.35% of corporate tax revenue (in 2018).

In the financial and monetary market, the exchange rate was quite stable in the second quarter of 2019, edging up only 0.3%. Although the State Bank of Vietnam (SBV) did not make an official statement, it seemed to have depreciated the dong at a reasonable level. The exchange rate was forecast to face uncertainties due to the unstable world economy in the third quarter. Foreign exchange reserves surpassed the threshold of US$65 billion. In the second quarter, the world gold price advanced, sending the domestic bullion retail price to VND39.5 million per tael. The rally of precious metal was attributed to escalating tensions between the U.S. and China and between the U.S. and Iran. The U.S. dollar in particular and hard currencies in general are constantly changing, causing investors to withdraw from risky assets.

The real estate market tended to drop sharply in both supply and demand sides. The VEPR report cited data in two big cities – Hanoi and Ho Chi Minh City. The former reported a 27% supply drop and a 45% sales decline while the latter saw a 41% shrinkage in supplies and a 41.6% slide in sales.

Capital and money markets were seen volatile despite volatile interbank interest rates. The M2 money supply increased 6.05% in the second quarter of 2019, lower than the same period in 2018 (7.96%). Credit growth was 7.33% - lowest in years and channeled for priority sectors. The Government bond market plunged strongly while corporate bonds swelled.

As trade tension continued to place U.S. and Chinese economies under uncertainties, euro plummeted against the U.S. dollar and British pound, Japan was yet to escape from the thirst of manpower, Vietnam’s economy will have certain impacts. VEPR noted that Vietnam's second quarter economic growth of 6.71% largely depended on the FDI sector. The steady price growth in educational items, foods and foodstuffs as a result of African swine epidemic and volatile fuel prices may potentially lead to high inflation in the coming time. But, the shift of FDI inflows to Vietnam to take advantage of opportunities from CPTPP, EVFTA and U.S.-China trade tension may create a wealth of growth opportunities for Vietnam.

To realize the yearly growth of 6.96%, VEPR recommended that Vietnam necessarily remove barriers to business investment, improve business accessibility to capital, information and technology, ensure tax transparency and justice. Vietnam should focus on fiscal, monetary and exchange rate policies to respond to global economic instability. Recommended policies included flexibly revising exchange rates, stabilizing interest rates, lowering financial leverages and keeping the banking system healthy; gradually building fiscal buffers by streamlining the state apparatus and cutting down on regular spending.

Nguyen Thanh