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VIETNAM’S ECONOMY UNDER THE GLOBAL RECESSION

VIETNAM’S ECONOMY UNDER THE GLOBAL RECESSION. By Nguyen Tien Dzung Lecturer, College of Economics Vietnam National University. Hanoi October 2 nd , 2009. Plan of the Lecture. Vietnam’s Economy at a Glance Global Recession and Vietnam’s Economy Policy Responses to the Economic Slowdown

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VIETNAM’S ECONOMY UNDER THE GLOBAL RECESSION

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  1. VIETNAM’S ECONOMY UNDER THE GLOBAL RECESSION By Nguyen Tien Dzung Lecturer, College of Economics Vietnam National University. Hanoi October 2nd, 2009

  2. Plan of the Lecture • Vietnam’s Economy at a Glance • Global Recession and Vietnam’s Economy • Policy Responses to the Economic Slowdown • Economic Prospect and Challenges Ahead

  3. Vietnam Economy at a Glance • Vietnam has a small economy with GDP amounting to around 90 billions USD and GDP per capita of around 1000 USD. • Vietnam has a large population of 86 millions and young population structure. • More than 60% of the population live in rural areas and work mainly in agriculture. • Vietnam has maintained a relatively high economic growth over the last two decades. • High economic growth has led to a substantial improvement in living standard and poverty reduction.

  4. Vietnam’s Economy at a Glance • Agriculture plays an importance role in the economy. The manufacturing sector is dominated by agriculture-related and labor-intensive activities. • Most of Vietnam’s exports are natural-resource based (crude oil and agricultural products), and labor-intensive products (leather, textile and garments). • Most of Vietnam’s imports are capital goods and production inputs, ranging from petroleum, iron and steel, fertilizers, plastics and chemical, electronic parts and products and materials for textile and garments. • Vietnam’s exports have been largely directed toward the EU and US, and Japan, while the country’s imports have been largely sourced from China, ASEAN and other East Asian countries.

  5. Vietnam’s Economy at a Glance

  6. Vietnam’s Economy at a Glance • Economic reforms conducted over the last two decades have transformed Vietnam from a centrally-planned economy to an open market economy. • The integration with the regional and world economy has been recently accelerated with the recent acquisition of WTO membership and the participation in the regional FTAs. • The investment regimes have been liberalized through the simplification of administration procedures and deregulation, a greater autonomy for domestic and foreign investors. Foreign investments are allowed take different forms of investment, ranging from direct investment, acquisition and merging, and portfolio investment. • Trade and investment liberalization have contributed to the overall economic growth.

  7. Global Recession and Vietnam’s Economy • The housing and banking crisis in the US has led to a widespread economic recession. Almost all economies have experienced a sharp contraction in the later half of 2008 and the first half of 2009. • Similar to other emerging economies, Vietnam has been severely affected by the global economic recession through the falling demand for its exports, the falling export prices, and the sharp drop in the inflows of foreign capital

  8. Global Recession and Vietnam EconomyA Sharp Drop in Exports • After decades of rapid growing, exports have dropped sharply following the sharp economic contraction in the major export markets (Japan, US and the EU). • The drop in export revenue has further worsened by the sharp decline in the export prices of raw materials and agricultural products. • On a year-over-year basis, export revenue has dropped by more than 10%, largely caused by the drop in the exports of crude oil and major agricultural products

  9. Global Recession and Vietnam EconomyA Sharp Drop in Exports Annual Export Growth (%) Export Growth by Markets (%)

  10. Global Recession and Vietnam EconomyFalling Capital Inflows • The economic recession and tight credit condition in the developed countried have led to a sharp contraction in the inflows of capital to developing countries, and to Vietnam. • The inflows of FDI into Vietnam dropped sharply in the first half of 2009 as compared to the corresponding level in 2007-2008. • The inflows of portfolio investment also dropped sharply as the consequence of economic slowdown and tight credit condition in foreign countries.

  11. Global Recession and Vietnam EconomyFalling Capital Inflows FDI Inflows to Vietnam Billions USD Portfolio Inflows to Vietnam (Millions USD)

  12. Global Recession and Vietnam EconomyEconomic Slowdown • After a rapid economic growth in 2005-2007, the growth rate slowed down in the later half of 2008, and continue to decline in 2009. • The current economic slowdown is largely attributed to the global economic recession and the resulting sharp drop in exports and capital inflows. • The adverse impacts of the global economic recession has been mitigated as domestic demand (private consupmtion and investment) rises and partly compensates for the falling exports

  13. Global Recession and Vietnam EconomyEconomic Growth (%)

  14. Global Recession and Vietnam EconomyIncreased Macroeconomic Instability • The economic slowdown has been accompanied with an increased instability in the macro-economy as reflected in the rising budget deficit and increasing depreciation pressure on Vietnamese dong, and imminent inflation. • The budget deficits is planned to rise to 8% of GDP this year as a result of falling revenue (oil and other tax revenue) and rising public spending. • In the foreign exchange market, the falling exports and capital inflows have made it more difficult to finance the trade deficit, causing continuous pressure on Vietnamese dong to depreciate . • The price increases have been low so far, but inflationary pressures is rising as the world prices are recovering from the recession.

  15. Global Recession and Vietnam EconomyIncreased Macroeconomic Instability Current Account Balance Millions USD Inflation and Exchange Rate Annual Change %

  16. Policy Responses to the Economic Slowdown • Different policy meassures have been employed to cope with the global recession and maintain macro stability • Fiscal stimulus package • Monetary loosening • Foreign exchange control and the enforcement of the official exchange rate • Other policies

  17. Policy Response to the Economic SlowdownFiscal Stimulus • Fiscal stimulus package is introduced to boost domestic demand and takes different forms: interest subsidies, tax exemption, government investment. • Interest subsidies: the government provided interest subsidies for the short-term borrowings. Interest subsidies for medium- and long-term investment were also introduced. • Tax exemption: the exemption of the personal income tax was introduced for the first half of 2009. Enterprises were exempted partly or completely from the corporate income tax. • The current stimulus package is relatively small as compared to that in other countries. Discussion has been going on a greater stimulus package. However, as deficits are rising high, the room for further stimulus meassures is limited.

  18. Policy Response to the Economic SlowdownMonetary Loosening • The monetary and credit supply was tightened in 2008 to fight inflation, but has been then cautiously loosened to cope with the economic recession • The interest rate has been reduced in combination with interest subsidies, and lending restrictions on the real estate and stock market has been relaxed. • The credit growth is targeted at around 30% this year, which is roughly the same rate of 2008, but much lower than the rate of monetary expansion of 50% in 2007.

  19. Policy Response to the Economic SlowdownCurrency Controls • From 2006 to the first quarter of 2008, the surge in the inflows of FDI and portfolio investment caused an appreciation pressure on Vietnamese dong. The central bank intervention to maintain the fixed exchange rate was largely translated into rapid monetary expansion and partly contributed to the rising inflation in the later half of 2007 and early 2008. • Since the later half of 2008, Vietnamese dong has come under the depreciation pressure. The burst of the asset bubble has caused a reversion in the inflows of portfolio investment. The global economic recession has also led to a sharp decline in exports and the inflows of FDI. • Foreign exchange control has been employed in combination with a gradual devaluation to respond to the continued pressure on dong. Commercial banks are enforced to obey the official exchange rate, and they are required to sell foreign exchange to the sectors of priority. The official exchange rate is devaluated, and the trading band is widened.

  20. Policy Response to the Economic SlowdownSocial Policies • The minimum wage was raised by 20% in early 2009 to offset the high inflation in 2007-2008. This wage increase in a period of relatively low inflation has contributed to rising private consumption and domestic demand. • The government gives fiscal incentives to assist firms to deal with redundant workers, and for the first time introduced an unemployment payment scheme.

  21. Prospects and Challenges Ahead • Despite the adverse impacts of the global economic recession, Vietnam has managed to maintain a positive growth and macro economic stability. However, economic problems remain and may further worsen. • The economy is expected to improve in the latter half of 2009 and 2010, but economic growth could remain slow in the context of a possible slow recovery of the global economy. • In the medium-term, it could be even more challenging to maintain high economic growth in a post-crisis period.

  22. Prospects and Challenges AheadStimulus package and Macro Stability • The major short-term issues are to improve the effectiveness of the stimulus policies and maintain the macro stability at the same time. • The inflationary pressure is currently low, but could increase as the world prices are recovering from the recession. Excessive monetary expansion and wage increase may fuel inflation later this year and in 2010. • The effectiveness of the fiscal stimulus (tax exemption and interest subsidies) is still questionable. Given the rising trade and budget deficits, the room for large-scale stimulus is limited and fiscal stimulus must be well targeted, focusing on the sector with strong impacts on economic growth and job creation.

  23. Prospects and Challenges AheadAddressing Trade Deficits • Vietnam often has large deficits in the trade balance and current account, and these deficits are financed by large capital inflows, including portfolio and other indirect investments. • Currency controls are employed to curb imports when capital inflows and exports fall. These control measures could only be effective in the short-run. • To cope with the large trade deficits, Vietnam may need a better exchange rate policy (to avoid exchange rate appreciation) and a better industrial policy (to reduce the dependence on imported inputs and materials)

  24. Prospects and Challenges AheadImproving the Quality of Capital Inflows • Vietnam has attracted a large amount of FDI in addition to a large inflows portfolio investment in recent years. However the implementation ratio is low and there is also a strong bias toward real estates and non-traded sectors. • In the future, greater emphasis must be put on the quality, instead of quantity of FDI. FDI must be directed toward sectors with potentials to export and to create jobs, in order to maximize the contribution of FDI inflows to the future economic growth and industrialization. • Improved infrastructure and the availability of well-trained labor forces are needed for FDI attraction and industrial upgrading. • Greater prudence toward the inflow of portfolio investment may be called for. As shown in the recent years, these capital inflows seem have not contributed to the country’s production capacity, but instead inflating asset prices and causing macro instability.

  25. Prospects and Challenges Ahead Realizing the benefit of economic integration • Future economic growth would require further industrial upgrading and the diversification of exports. The advantage based on natural resources and cheap labor is eroding as income is rising. • Economic integration does not only offer opportunities for exports, but also comes with increasing competition in the domestic market, the export market as well as in the competition for foreign investment. • The realization of the potential benefits of regional economic integration depends on Vietnam’s effort to improve infrastructure and human resources, and to attract FDI into the potential exporting industries.

  26. Thanks for Your Attention

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