“Vietnam Needs to Speed up Reform,” ADB Country Director

This is the recommendation that Mr Ayumi Konishi, Country Director of Asian Development Bank (ADB) in Vietnam, spoke out at a press conference to announce the release of the Asian Development Outlook 2009 (ADO 2009) in Hanoi on March 31, 2009. According to this report, Vietnam’s GDP growth is projected to moderate to 4.5 per cent in 2009 and is expected to rebound to 6.5 per cent in 2010.

According to Mr Bahodir Ganiev of the Vietnam Resident Mission, ADB in Hanoi, The economy had a turbulent year in 2008. Inflation and the trade deficit surged, and then reversed course. Economic growth slowed and is forecast to moderate further this year, before starting to pick up in 2010. “Inflation is projected to be relatively low both years. The current account deficit is expected to widen in 2009 and narrow in 2010. The main near-term challenge is to limit the slowdown in growth while keeping the fiscal and current account deficits in check. In the medium term, the Government needs to ratchet up growth without fuelling inflation or widening the current account deficit,” Mr Bahodir warned.

 

ADO 2009 showed near-term economic prospects are clouded by an unusually high level of uncertainty, primarily for two reasons. First, the global financial crisis and economic downturn are likely to reduce FDI and remittance inflows, as well as further crimp exports, foreign portfolio investment inflows, and overall growth. The global slump will also likely weigh on world commodity prices and reduce inflation pressures. The strength and duration of these effects will depend on how long global financial conditions remain weak and how deep and prolonged the global downturn will be.

 

Second, there is uncertainty about what additional fiscal stimulus the Government might adopt (beside the measures approved in January– February this year). Stimulus measures may well lift growth, but they are also likely to widen the fiscal and current account deficits, and may stoke inflation.

 

The Asian Development Outlook 2009 further assumes that the Government will take some more fiscal stimulus measures (as well as those approved in January - February) in total amount of about US$1 billion in 2009. Furthermore, SBV is seen keeping monetary policy fairly loose, provided that inflation is subdued. Weaknesses in the banking system are not expected to lead to a systemic financial crisis.

 

Mr Bahodir said oil output is expected to rise to 15.5 million metric tons in 2009 and remain at that level in 2010. The country’s first oil refinery, which started operations in February 2009 and is capable of processing 6.5 million metric tons of crude oil annually, is expected to reach full capacity by August this year.

 

On the above basis, GDP growth is projected to moderate to 4.5 per cent in 2009. Loose monetary policy and the fiscal stimulus will support public consumption and domestically financed investment; net exports are expected to increase. However, private consumption will slacken further because of slower economic activity, higher unemployment, and lower stock and property prices. The expected decline in FDI inflows will lead to a downturn in foreign-financed investment.

 

Growth is expected to rebound to 6.5 per cent in 2010. With monetary policy remaining loose, the expansion of consumption and domestically financed investment will accelerate as the fiscal stimulus works through the economy. The forecast improvement of global financial conditions and the strengthening of external demand will bring about an upturn in foreign-financed investment and a further rise in net exports of goods and services.

 

Average annual inflation is forecast to slow to 4.0 per cent in 2009, since GDP is likely to be below its potential level and world commodity prices are expected to be substantially lower than last year’s average levels. Inflation will quicken to 5.0 per cent next year on account of loose monetary policy, the expected modest rise in world commodity prices, and the projected rebound in growth.

The fiscal deficit is forecast to widen to 9.8 per cent of GDP this year due largely to an expected decline in government oil revenue, a reduction in base corporate income tax from 28 per cent to 25 per cent, the slowdown of economic growth, and the fiscal stimulus measures. Despite the increase in oil output, oil revenue will fall because world prices are forecast to be much lower this year than last. The fiscal deficit will shrink to 5.3 per cent of GDP in 2010. An expected rise in world oil prices next year (hence oil revenue), and the rebound of economic growth will boost total government receipts. Total spending will come down since no major fiscal stimulus measures are expected next year.

 

“Because of the wide fiscal gap, the stock of public and publicly guaranteed debt will jump to 45.8 per cent of GDP in 2009 from 39.7 per cent in 2008. It will fall to 45.1 per cent of GDP in 2010 on account of the smaller fiscal deficit and larger nominal GDP. The public debt burden should therefore remain moderate,” said Mr Bahodir. 

 

The current account deficit is forecast to widen to 11.5 per cent of GDP in 2009. The start of domestic processing of oil, weak external demand, and lower export prices will reduce exports. Imports will decline even more than exports due to lower import prices, a steep drop in imports of refined oil products, and the economic slowdown. The narrowing of the trade deficit will be more than offset by smaller remittance inflows resulting from the anticipated worsening of the economic situation in origin countries. FDI inflows will decline as well, and inflows of foreign portfolio investment will remain small because of tight global financial conditions, increased economic uncertainty, and heightened risk aversion among investors. The overall balance of payments is likely to be in deficit this year.

 

In 2010, the current account deficit is expected to narrow to 9.7 per cent of GDP. Higher external demand and export prices will boost exports, and remittance inflows will pick up, but these increases will be partly offset by an increase in imports due to a rise in import prices and the rebound in domestic economic growth. Inflows of FDI and foreign portfolio investment will climb, on the back of improved global financial conditions and investor sentiment. The overall balance of payments will return to surplus.

 

In the medium term, GDP growth is likely to pick up to 7–7.5 per cent, driven by strong FDI inflows. Viet Nam remains an attractive destination for FDI despite the macroeconomic turbulence it experienced in 2008 and the serious economic difficulties it faces in the near term. Indeed, new FDI commitments more than trebled to US$64 billion in 2008 from US$20.3 billion in 2007. Although actual FDI flows are projected to decline this year, they are expected to rebound in 2010 and remain buoyant over the medium term. A government decision in October 2008 to allow full privatization of certain state enterprises, in particular through their sale to foreign investors, will likely spur further FDI inflows,” said Mr Bahodir.  

Due to rapid economic growth, Vietnam was able to reduce unemployment and poverty considerably in recent years. The current economic slowdown, however, is undoing some of these gains. According to Mr Ayumi Konishi, Country Director of ADB in Vietnam, in the short term, the Government can bolster sagging growth through expansionary macroeconomic policies. A major medium-term economic challenge for Viet Nam is to ratchet up growth without fuelling inflation and increasing the current account deficit. To this end, the Government needs to intensify its efforts to raise the efficiency of the economy and ease supply-side constraints on growth, notably by removing infrastructure bottlenecks, improving the legal and regulatory framework for private sector development, strengthening public administration, and increasing the supply of skilled labour.

 

On the other hand, according to Mr Bahodir, restructuring state enterprises is crucial for raising the efficiency of the economy, since they employ a substantial proportion of available resources but do not use them very efficiently.

 

These entities need to be restructured and their involvement in noncore businesses curtailed in order to utilize scarce resources more efficiently and to improve productivity. “It is also important to subject them to hard budget constraints and to maintain adequate control over their finances to limit the Government’s contingent liabilities. A decision by the Government in February 2009 to restrict state enterprise investments in noncore businesses (especially in financial companies) was a step in this direction,” added Bahodir. 

 

Mr Ayumi stressed It is therefore important that the Government strike a balance between stimulating growth and keeping the fiscal and current account deficits in check, as it tries to counter the impact of the global financial crisis and economic slump. Achieving this balance requires the Government to be particularly careful in taking additional fiscal stimulus measures, and to avoid spending on low-return public investment projects. It should prioritize social assistance to the unemployed and the poor, as well as support for small and medium-sized enterprises, and export-oriented industries.

Lan Anh