Vietnam Economy Can Recover Quickly

ANZ Bank has released the Emerging Asia Economics Monthly - September 2009, which believes Vietnam will recover more quickly than other regional economies.

According to the report, Vietnam announced its fiscal stimulus in January 2009. The objective was to revive the economy by promoting consumption and investment, including tax cut and interest rate assistance for businesses (a reduction of 30 per cent of corporate income tax, an extension of nine months for the submission of 2009 tax payables and a temporarily refund of 90 per cent of VAT for exported goods with “justifiable payment documents), housing, schools and hospitals. On the monetary side, the plan featured 4 per cent interest rate subsidy for lending activity in targeted sectors. The subsidy is to be paid by the State Bank of Vietnam (SBV). On the fiscal side, the plan featured a reduction in corporate income tax as well as temporary VAT refunds and deferments. The cost of the stimulus plan is estimated at US$6 billion, or 6.8 per cent of GDP.

ANZ said in its Emerging Asia Economics Monthly September 2009 that the growth in Vietnam has picked up after reaching a decade low in the first quarter. GDP growth fell to 3.1 per cent (year on year) in the first quarter as exports dropped off sharply and the pace of domestic activity, mainly industrial production, slowed markedly. The slowdown reflects both the effects of tightening measures taken in the third quarter of 2008 in response to Vietnam’s “mini-balance of payment crisis” as well as the deepening of global financial crisis late in the year. As the stimulus plan took hold, growth rebounded to 4.5 per cent (year on year) in the second quarter 2. Moreover, the most recent domestic activity indicators continue to improve. The August industrial production growth reached 10.6 per cent year on year, doubling the rate of increase earlier in the year. Real retail sales (covering purchases by houses and firms) continued to strengthen as well and are now growing at over 20 per cent.

According to ANZ Bank, while year-on-year inflation has fallen from the peak of 27.9 per cent in September 2008 to 2.0 per cent in August, price pressures have begun to rise. On a short-term basis, consumer prices have been rising at 1¼ per cent to 1½ per cent on a rolling three-month basis (or 5 per cent - 6 per cent on an annual basis) for the past few months. According to ANZ, Vietnam still has an output gap of around -2½ per cent, modest prices pressures are likely to continue going forward. As inflation rises, real interest rates will fall, adding further stimulus to demand, including imports.

Meanwhile, the external sector remains a drag on a growth. Like elsewhere in Asia, exports have declined sharply since late last year. While the worst has past, shipments as of August are falling by 18.9 per cent year on year. Rice, clothing and electronic components have outperformed. On the other hand, import growth turned positive in August for the first time in 10 months, rising 5.1 per cent year on year. Electrical components and medicaments outperformed whilst steel and petroleum imports remained weak.

Additionally, a sizeable monthly trade deficit has re-emerged. From a surplus in the first quarter of this year, the trade balance has deteriorated sharply as imports have begun to recover while exports have remained weak. August trade deficit was US$1¾ billion, the highest since May 2008. Moreover, both the in-house momentum measure as well as the 12-month rolling trade deficit is now deteriorating although Vietnam is still far from the imbalances in the second quarter of 2008.

According to the report, when the trade balance has deteriorated, external financing has ebbed. This is a worrisome combination. For Vietnam, the main financing items for the current accounts are foreign direct investment (FDI) and portfolio flows. (The Vietnamese authorities have been sparing in the use of foreign reserves). Weak economic performance in source markets as well as investors’ ability to hedge long-term VND exposure have led to a decline in FDI disbursements by 22.5 per cent through July to US$4.6 billion; pledges of FDI this year to date have fallen by over 80 per cent to US$10.1 billion. Reflecting heightened global risk aversion, equity flows also slowed sharply and are running at one-fourth of 2008 levels through the end of July (US$114 million net). The combined reduction of these two potentially large inflows implies that Vietnam’s ability to run a trade deficit is limited. This, in turn, is likely to constrain the growth rate of the economy.

Additional constraints to a stimulus-led recovery are the public sector balance sheet and the policy apparatus. Vietnam’s public debt to GDP ratio at the end of 2008 was 38 per cent of GDP. Although this level is moderate for an emerging economy, there is a risk that this year’s deficit could surprise on the upside. Moreover, if global downturn persists, more surplus spending may be required and the public debt to GDP could conceivably rise above 50 per cent, a level at which sustainability concerns might begin to be raised. ANZ also notes that the policy apparatus in Vietnam is less developed and predictable, which has potential effects on investor confidence as well as the efficiency of the stimulus plan.