Vietnam Gains Plausible Growth

Vietnam’s growth of six % is plausible for the first quarter of 2010, the World Bank (WB) said in its latest “East Asia and Pacific Economic Update - Emerging Stronger from the Crisis” released. Vietnam navigated the global crisis better than many regional countries although there are still macro risks like inflation and foreign currency strains.

Mr Martin Rama, chief economist for the World Bank in Vietnam, said the Government’s timely responses with fiscal and monetary policies have brought in very good results.

 

According to the report, Vietnam navigated the global financial crisis better than expected, given the high ratio of exports to GDP and the overall openness of its economy. Real GDP grew by 5.3 % in 2009, led by a surge in construction largely due to the sizeable stimulus program set by the government between late 2008 and mid-2009. A large budget deficit, rapid credit growth and pressure on state-owned enterprises resulted in a doubling of total investment in 2009, pushing up the investment rate to 42.8 % of GDP. The state sector accounted for about a third of the total. The recovery has consolidated in recent months, with real GDP posting 6.9 % growth in the last quarter of 2009 year-on-year, and growth of 6 % is plausible for the first quarter of 2010.

 

“Reliance on domestic demand to support economic activity resulted in pressures on the balance of payments. At a fundamental level, the external position of Vietnam is sustainable. Exports decreased by 9.7 % in 2009, the first decline since the beginning of reforms two decades ago. Imports contracted by 14.7 %, which brought the current account deficit down to about 7.8 % of GDP, compared to 11.9 % in 2008. Inflows of foreign direct investment are estimated to have declined by a relatively modest 13 % in a difficult year. For 2009, the capital account surplus roughly offset the current account deficit,” said the report.

 

Meanwhile, inflation shows sign of accelerating. Prices rose 6.5 % in 2009 as a whole, down from 19.9 % in 2008. However, on a monthly basis inflation started accelerating in the last quarter of 2009. There is strong seasonal pressure in the months around the Lunar New Year, which makes it difficult to isolate a trend. However, higher international commodity prices, the devaluation of the dong, and the adjustment of energy prices to align them with international comparators are bound to result in higher inflation rates. The inflationary pressure is even more visible in asset markets, with the stock market index on an upward trend for months in a row, and land prices escalating. These developments suggest that the limits of the expansionary policy stance adopted by government since 2008 are being reached. With the global economy doing substantially better now than in 2009, the time to gradually phase out Vietnam’s stimulus program is rapidly approaching.

 

According to Mr M. Rama, the target for real GDP growth in 2010 is an easily attainable 6.5 %, although it will be very difficult to keep the inflation rate below 7 %.

 

Remarkably, according to WB experts, Vietnam remains a good investment destination. Mr M. Rama said some US$5,000 billion may be injected into the economy but much money remains illiquid and is kept at bank accounts to awaiting investment opportunities. “Stability is the way to persuade other countries that Vietnam is a good investment destination. It may be not very good in the first half but it will be brighter in the second quarter,” said Mr M. Rama.

 

However, reliance on domestic demand to support economic activity resulted in pressure on the balance of payments. Unusually large errors and omission items in the balance of payments (about 10 % of GDP), and the dollar trading outside the dong band in parallel markets, indicate a lack of confidence in the dong. Throughout 2009, households and domestic enterprises (including large state-owned economic groups) have been betting on a devaluation of the dong. In Vietnam, the fiscal deficit reached almost 10 % of GDP in 2009, including off-budget spending, the highest in the region.

 

On the other hand, the acceleration of inflation, a spike in the domestic gold price and a widening gap between the parallel and the official exchange rates made it obvious that the expansionary stance was not sustainable much longer. Excessively low interest rates also made government bond issuances unattractive. In spite of a substantial increase in rapidly disbursing ODA, and the drawdown of government deposits in commercial banks, financing the budget deficit was becoming increasingly difficult. This policy rebalancing has continued well into 2010, and may be pursued further in the coming months. The speed at which this could occur will very much depend on the assessment of the current situation. There has been limited appetite to raise policy rates, but this pro-growth stance may be softened if new data on consumer and price data make it clear that inflation is back and some turbulence could be expected in the coming months.

 

The WB has raised the projection for real GDP growth in the East Asia - Pacific region to 8.7 %, up by almost a %age point above the November 2009 forecast. However, the update report warned countries to retain stimulus plans launched in the time of crisis, especially tax reductions. But it may be premature at this stage to withdraw fiscal stimulus in many countries, as the growth of this region still relies on both exports and domestic consumption.

 

According to the WB, the East Asia and Pacific region may grow rapidly in the next decade, but on the condition that Asian countries reshuffle their economic structures. For China, this means reducing reliance on exports, lifting domestic consumption and developing the service sector. For middle-income countries like Vietnam, the Philippines, Thailand, Indonesia and Malaysia, it means upgrading the production and manufacturing sectors. Low-income countries like Cambodia and Laos need to develop industries to diminish dependence on agriculture and mining.

 

Especially, according to the WB, East Asian - Pacific countries need closer cooperation to boost trade, reduce costs and enhance competitiveness.