Vietnam Economy 2008: Tough Challenges

The year 2008 would go down into history because of its specific characteristics. The global economic slowdown has occurred globally in both poor and rich nations, developed and developing countries. Vietnam is not an exception. In 2008 Vietnam witnesses two events: inflation and deflation. The Government of Vietnam and economists have twice adjusted its policy making to work out proper solutions to each time.   

 

“Unexpected changes”….  In thefirst sixmonths of 2008, Vietnam officially announced its crisis because of high prices of materials, fuel, foodstuff, steel... all over the world. Vietnam’s high inflation was not only due to negative impacts of the global economic slowdown but also internal problems. The internal problems were firstly due to high target of economic growth rate or “overheating growth”, leading to the increase in the total payment balance, and high outstanding credit debts.   

Normally, coefficient between total payment rate and GDP growth rate is less than 2.5 times, but that in Vietnam has increased: in the 2004 - 2007 period, the total payment increased around 30.3 per cent per year on average, while GDP growth rate was 8.23 per cent per year, coefficient between total payment rate and GDP growth rate reached around 3.7 times, one and a half time higher than other nations; the coefficient was farther higher in 2007.   

Lending interest rate was low, money poured into the stock market and real estate was high. Economic growth rate with contributions from investment factors accounted for 57.5 per cent, from higher workforce, 20 per cent and from general factors (efficiency of investment, productivity...) only 22.5 per cent.  

Investment efficiency is manifested by ICOR index. ICOR measured by annual investment divided by annual increase in GDP. Compared to previous years, GDP growth rate in recent years has increased (in 2005 was 4.85 times, in 2006 was 5.04 times, in 2007 was 5.38 times, and in 2008 possible reaches 5.9 times). High ICOR means low investment efficiency.  

The internal problems and global economic slowdown have made the national inflation higher than that of 2007 (the whole year was 12.63 per cent – means one per cent for one month on average, for last two months of 2008 reached 2.07 per cent per month), inflation became higher in first months of 2008 (six months of 2008 increased by 2.86 per cent per month).   

Not only inflation, Vietnam also reported high trade gap. In 2007, trade gap reached US$14.12 billion, on average US$ 1billion for one month, trade gap for last two months of the year was higher), trade gap was especially higher in first five months of 2008 (on average US$2,695 million per month). In the context of high inflation and trade gap, international organisations and experts warned that Vietnam’s 2008 inflation and trade gap would excess 30 per cent and US$30 billion, respectively. They also warned the country’s currency devaluation of 20- 25 per cent and advised the nation to ask for support from IMF.

  
However, in June and July, inflation and trade gap eased. Inflation from July to November reduced to 0.38 per cent per month, very lower than first six months of the year, and even lower than the same period last year (0.79 per cent), lower than deposit interest rate. Trade gap from June to November stood at less than US$1 billion (on average US$529 million per month).  

There were many reasons for the achievements. Top reason was that the Government has given more priorities to curb inflation than economic development. Another reason was the implementation of eight solution packages, including monetary tightened policy...  

In July and August, the world market and the local market saw sudden changes from “hot” crisis to “cold” crisis. Export turnover has been on the downtrend since August. Since July, industrial growth rate has also been in the same situation. The number of international tourist arrivals to the country since September has decreased and tourists’ spending has been also down. Indirect investment attraction also decreased and VN-Index always reached the bottom and even equal to the point of departure three or four years ago.

 

Risk of economic slowdown became more possible. Once again this year, the Government has had to change its development strategy from giving priorities to curb inflation with monetary tightened policy to prevent economic slowdown with five solution packages, of which consumption stimulation is a top policy. The consumption stimulation package may be more than US$ 1billion as announced before. It may reach US$6 billion or nearly VND 110 trillion (including VND17 trillion from the State Treasury – not US$22 billion from foreign currency reserves; VND20 trillion from Government’s advanced capital last year; VND20 trillion from tax reduction for enterprises that the Government has not collected; VND30 trillion from foreign loan guarantee); VND20 trillion from Government bond issuance.  

The capital though is still far lower than that of powerful economies; it is big compared to the country’s economic growth and capacity. Compared to the national GDP in USD based on this year’s average on exchange rate (around US$88.5 billion), the stimulation package accounts for around 6.8 per cent; compared to the national foreign currency reserve (around US$22 billion), the package makes up around 26 per cent.  

This has showed the government’s flexibility in market forecast, change in policy and determination to prevent the national economic slowdown.  

At an exchange meeting of the Government late 2008, Prime Minister Nguyen Tan Dung noted that: we had to work out urgent solutions to economic slowdown, recover production, business activities, and speed up economic growth rate. In the second half of 2008 (or from July to the end of the year), the country has seen signs of economic slowdown with low industrial production values. Construction sector also reported decrease of 0.33 per cent in the first nine months of this year compared to the same period last year. Export turnovers, investment attraction, State budget collection, stock market, tourism, transport, service and consumption power also down. Natural disasters have damaged more than 200,000 hectares of rice crops, causing big losses for people in the North and Central of Vietnam. Therefore, agencies, ministries should exert all efforts and take initiative in implementation of solutions to prevent economic slowdown, maintain the economic growth rate and ensure social security. Five key solutions:

 

Firstly is boostingproduction and export. Ministries and agencies should map out specific measures to help local enterprises, especially farmers, and poor households deal with problems and difficulties including tax favours, banking loans, delay of debt payment, support in plant seed and animal breeding … Secondly, stimulating consumption and investment with capital of VND1.5 trillion from the Government bonds and ODA sources. The country should encourage involvement of all economic sectors, enterprises to join the national stimulation package and create favourable conditions for non State-run enterprises to invest in infrastructure, transport, electricity and cement … For consumption, it is necessary to develop distribution network, and retail network nationwide especially in remote and mountainous regions so as to ensure supply of essential goods to the regions and stimulate consumption of local goods. Thirdly, carrying out flexible monetary policy to boost production and export, stimulate consumption and ensure social security. The State Bank of Vietnam defines proper exchange rate and interest rate; work out measures to help enterprises, especially small and medium-sized enterprises more easily approach credit loans; flexibly adjust policies on exchange rate, interest rate as well as shares and help enterprises overcome difficulties. The Ministry of Finance should soon consider tax reduction and exemption for enterprises, creating favourable conditions for them to recover and boost production. Fourthly, carrying out measures toensure social security. From early 2009, the country should soon work out and implement policies on financial support for 61 poorest districts in the country; taking the regulation on unemployment insurance into effect; ensure food safety for flood-hit regions. Fifthly, givingtimely, flexible and effective guidelines to deal with possible changes of the global market. More important is forecast and analysis capacity; ministries and agencies should pay more attention to regular forecast …; speeding up administrative reforms related to investment, construction, site clearance, tax payment, customs procedures; improving effectiveness in State-run enterprises’ operation… maintaining important role of State-run economic sector beside other economic sectors. stimulating consumption and investment with capital of VND1.5 trillion from the Government bonds and ODA sources. The country should encourage involvement of all economic sectors, enterprises to join the national stimulation package and create favourable conditions for non State-run enterprises to invest in infrastructure, transport, electricity and cement … For consumption, it is necessary to develop distribution network, and retail network nationwide especially in remote and mountainous regions so as to ensure supply of essential goods to the regions and stimulate consumption of local goods. carrying out flexible monetary policy to boost production and export, stimulate consumption and ensure social security. The State Bank of Vietnam defines proper exchange rate and interest rate; work out measures to help enterprises, especially small and medium-sized enterprises more easily approach credit loans; flexibly adjust policies on exchange rate, interest rate as well as shares and help enterprises overcome difficulties. The Ministry of Finance should soon consider tax reduction and exemption for enterprises, creating favourable conditions for them to recover and boost production. carrying out measures toensure social security. From early 2009, the country should soon work out and implement policies on financial support for 61 poorest districts in the country; taking the regulation on unemployment insurance into effect; ensure food safety for flood-hit regions. , givingtimely, flexible and effective guidelines to deal with possible changes of the global market. More important is forecast and analysis capacity; ministries and agencies should pay more attention to regular forecast …; speeding up administrative reforms related to investment, construction, site clearance, tax payment, customs procedures; improving effectiveness in State-run enterprises’ operation… maintaining important role of State-run economic sector beside other economic sectors.

 

It can be said that 2008 is the special year of the global economy as well as Vietnam economy. Due to negative impacts of unexpected changes of the global market, the country has suffered losses. However, we have gradually adapted with the changeable situation. More important, the Government and macro-economy policy makers and enterprises themselves have flexibly implemented measures to help the national economy recover and continue its development strategy. The 2009 will be more difficulties for Vietnam. However, we still believe that experience of the year 2008 will help Vietnam and especially its enterprises better adapt with any possible changes…  

 

Seven years in a row of economic growth above 7 per cent, culminating in 2007 with 8.5 per cent, allowed a dramatic take-off of the Vietnamese economy. Between 2001 and 2007, GDP doubled and exceeded US$71 billion, while exports more than tripled, reaching up to US$48.5 billion. This exceptional growth came with an accumulation of imbalances (rapid widening of the trade deficit, increase in public expenditure and public deficit, spiralling of banking credit and inflationary trends). The Vietnamese authorities, warned against the risks linked to an economic overheating, reacted from May 2008 onwards, increasing interest rates, cutting down budget for some public investments, and reinforcing legal procedures on imports, notably in terms of means of payment, whichforced to reduce some importations. These measures partly bear fruit, but imbalances remained important: the trade deficit will probably jump from US$14.1 billion in 2007 to US$19 billion (some 25 per cent of GDP) for the whole year 2008 and inflation, although decreasing since October, remains high.

 

Encouraged by these “cooling measures”, international economic operators and most of the observers looked optimistic on the country’s capability to smoothly adjust and to avoid a payment balance crisis through a balanced monetary and fiscal policy. On the short term, they foresee for 2009 a decrease in exports (brought by falling raw material prices on the one hand, and by falling demand of manufactured products on the American, European and Japanese markets on the other hand), offset by a mechanical decrease in imports, some FDI and remittances inflow.

 

To protect growth against the foreseeable fall in exportation, the business community pushes for the implementation of measures of reinforcement of competitiveness for local companies; access to credit, strengthened controls over the banking system, privatisation of state-owned enterprises, implementation of WTO recommendations, especially in the distribution sector, acceleration of infrastructure projects, checks on increases in wages.

 

On the medium term, Vietnam still faces structural problems: the development of infrastructures, which would require an estimated US$139 billion over 5 years, particularly in the energy and transport sectors; modernisation and stabilisation of the banking sector; lack of skilled manpower; modernization of the public sector in particular the SOEs.

 

By pledging higher ODA commitments for 2009, the bilateral and multilateral donors once again displayed their confidence in Vietnam’s capability to face the international crisis as well as long-term challenges for the country. Midway on its five-year socio-economic development plan, Vietnam has been encouraged to accelerate its program of structural reforms, in particular the equitization of state-owned companies, to upgrade the quality of the financial and fiscal information, and to implement a well-balanced monetary and fiscal policy between growth and stability.

 

I can only agree with Prime Minister Dung declaring at last CG meeting that socio-economic stability remains the absolute priority against the impacts of the international crisis, relying on the implementation of a strict and flexible economic and social policy, which take into account the foreseeable downturn of the driving forces of the economy: exports, foreign direct and indirect investment, and remittances. I also praise Vietnam will to carry on with its international integration, in particular by moving forward with its bilateral and multilateral commitments.

 

 

During the first half of 2008 the Government managed to cool down the economy avoiding a sudden stop provoked by the overheating of the economy. However the external environment has changed dramatically in a few weeks. Now we are sailing through different and unknown waters. Contrary to what is happening in Western economies, where the problems started in the financial sector and then spread to the real economy, in the case of Vietnam and in most of Asian countries, the impact seems to strike on the real economy through possible difficulties in export, tourism and capital inflow. The economic cycle seems to be much more correlated between countries and regions, all markets are suffering and credit has become scarce as lenders act in a more conservative way. Besides, in a recession market sentiment is even more important as investors become more demanding and distrustful, competition increases and the fight for savings intensifies. This makes policy makers life even more difficult because not only they have to manage the internal situation but they must be aware that their measures, their decisions, will be closely monitored. It is not only what policies you implement but how are they perceived. Communication and transparency are now critical. Still, as in any other country the room for action is necessarily limited by macro stability and balances.

 

The Government has announced a stimulus package that together with falling interest rates are aimed at pushing up internal demand. These measures are all important, as ensuring that SMEs have access to credits. It is also important to pay special attention and assist the most vulnerable and those hit by the crisis. This country has achieved enormous progress in this area in the past years. While short-term measures are important it is also critical to keep the process of structural reforms and other long term issues. In my opinion, a key issue is transport infrastructure. It is becoming a bottleneck that needs to be addressed with a comprehensive approach. Solving this requires a new incentives and a lot of capital, donors and foreign investors can help as they recognize that Vietnam has strong growth potential, this confidence was clearly showed by international donors at the recent CG Meeting in Hanoi by pledging more than US$5 billion for 2009.

 

 

Vietnam has achieved impressive economic growth and poverty reduction outcomes in recent years. Trade has been a key driver of such impressive results. Exports now constitute over 78 per cent of Vietnam’s GDP, 2.5 times higher than the 30 per cent share recorded in the mid-1990s. Investment has also been a major factor in Vietnam’s economic growth. According to official statistics, Australia ranks 18^th in overall foreign direct investment in Vietnam. 

 

In 2007, Vietnam achieved the important landmark of WTO accession and continues to work to implement that important set of commitments. Australia strongly supported Vietnam’s entry to the WTO and will continue to assist Vietnam with the implementation process.  Under this program, Australia provided A$1.3 million in 2007-08 to support Vietnam’s ongoing integration into the global economy. 

Good quality infrastructure is also crucial for successful growth and development. Australia is supporting the construction of the Southern Coastal Corridor linking Vietnam, Laos and Cambodia which will facilitate regional trade integration. Australia is also committed to ongoing cooperation with the Vietnamese Government to help free up bottlenecks in key transport corridors. 

 

Vietnam’s rapid economic growth has generated large demand for goods in which Australia has considerable expertise. These include metals, wheat, dairy produce, machinery, petroleum-based products and live animals. Two-way trade between Australia and Vietnam grew an average of 20 per cent a year over the last five years to reach A$6.9 billion in 2007-08. We expect this to expand further as Vietnam continues to implement its WTO commitments. The ASEAN-Australia-New Zealand FTA, once signed, will also contribute to bilateral and regional trade outcomes.