Vietnamese Economy to Expand 5.5 % in 2009

 

According to the report, the global financial crisis and economic recession slowed economic growth in Vietnam. Thus, the World Bank forecasts a growth rate of 5.5 % for 2009 as a whole, or more than 2 %age points below the trend. However, according to the WB, Vietnam’s economy navigated the crisis relatively well.

 

The WB said the government announced its stimulus package which included various measures, from an interest rate subsidy, to tax breaks, and to additional capital spending. As a result, GDP grew by 4.5 % in the second quarter and 5.8 % in the third, raising real GDP growth to 4.6 % year-on-year for January-September.

 

Notably, while the manufacturing sector is still facing tough challenges because of falling demand, the construction sector is a leading factor of the recovery, with value-added in the sector projected to reach a double-digit growth rate for the whole year.

 

Also according to the WB, domestic consumption is also an important factor of the recovery process, with retail sales increasing 9.3 % in real terms during January-August from a year earlier.

 

The report said the global economic recession has had a significant impact on Vietnam’s external sector. The main concern is the performance of exports that are equivalent to 70 % of GDP. Export turnover is down across most items and most of Vietnam’s traditional markets. This decline is less than in other developing countries, but could make 2009 the first year with declining exports since the beginning of Vietnam’s economic reforms.

 

The decline was even more dramatic for imports which fell 28.2 % year-on-year in the first eight months of 2009. The relative decline in exports and imports helped narrow the trade deficit and the current account deficit. The latter is projected to be about 5 % of the GDP in 2009, down from 11.9 % in 2008. The fiscal deficit is expected to widen to 9.4 % of GDP in 2009, reflecting a decline in revenues and a significant increase in expenditures.

 

The WB forecast the actual level could be higher if the economy consolidates its current recovery. Although the projected current account deficit should be manageable, foreign exchange reserves declined from $23 billion at the end of 2008 to about $16.5 billion by August 2009.

 

“While Vietnam is able to call for some additional external financing, a sizeable financing gap remains and the government may need to reconsider its stimulus package to maintain the fiscal balance at a manageable level,” a WB official recommended. Low interest rates also make it difficult for the government to issue bonds, and were associated with the reluctance of exporters to sell their foreign exchange.

 

According to the WB, East Asia’s rebound from the economic downturn has been surprisingly swift and very welcome.

 

A vigorous and timely fiscal and monetary stimulus in most countries in East Asia, led by China and Korea, along with decisive measures in developed economies to prevent a financial meltdown, have stopped the decline in activity and set in motion the regional rebound.

 

With growth projected at 8.4 % in 2009 in China and its demand increasing faster than the world, exporters of consumer goods, electronics parts and crude materials for China benefited from positive impacts. Thus, the WB forecast real GDP growth for developing East Asian countries and Pacific is 6.7 % in 2009 and 7.8 % next year.

 

Enterprises – both formal and informal – adjusted to weaker demand through reducing hours worked and often through cutting wages and incomes and less often through letting workers go. Where workers were laid off in the formal sector, employers began by cutting temporary and part-time workers and only as a last resort did they reduce permanent employees. Factories have preferred to reduce the working hours of trained and skilled workers so as to contain eventual re-recruitment and training costs. Companies cut overtime, extra shifts and part-time workers, while preserving full-time workers. Reduced demand for labour during the downturn typically meant reduced work hours or lower wages, rather than outright layoffs.

 

The crisis has slowed the pace of poverty reduction in the region. It is estimated that there will be about 14 million more extreme and moderate poor in the region – people earning less than $2 day – in 2009 and they will remain in poverty in the region in 2010 as a result of this crisis.

 

According to Mr Vikram Nehru, East Asia and Pacific Regional Chief Economist, the rebound has yet to become a recovery.

 

Mr Vikram Nehru said after 2009 developing East Asia can sustain rapid growth, even if the rest of the world grows slowly. But such an outcome will require substantial policy efforts. These countries need to prevent against protectionism, open their economies and integrate further, not less, into the regional and world economies.

 

Mr Nehru added: “Moving up the value-added chain in global production networks will present an additional impetus to growth, as the benefits of new technology and innovation spread more broadly through the countries in the region.”