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Action plan - too little, too late?
Three weeks from the trumpeting of a government plan to protect the economy from further downturn and stimulate growth, many have been left wondering how the plan actually works.
Realising the serious impact from the global financial crisis and the downturn in the economy, the government has drawn up a plan to boost investments and domestic consumption. The hope is that good growth will be maintained in 2009, settling between 6 and 6.5 per cent.
The plan includes reviving-up stagnant production and exports, fuelling weakening consumption, applying flexible monetary and financial policies and speeding-up administrative reforms. Furthermore, the government also plans to implement tax cuts, exemptions and delay levies for enterprises.
Those measures have received support from most economists. However, some claim action should have been taken earlier.
“Since last September, inflation stopped being the biggest challenge facing the economy, while domestic consumption reduced sharply. This plan should have been available then,” said Phan The Rue, chairman of Vietnam Retail Association and former Vice Minister of Trade. Although supporting the plan, economists have queried the five measures as being too vague.
“Those measures are very vague and there have been no specific action so far. Enterprises need to see more details,” said economist Ngo Tri Long, from the Ministry of Finance’s Institute for Market and Prices. Of the five points, boosting investment and domestic consumption is seen as the ‘big daddy’ of the group. The government is keen to lessen the dependence of the economy on exports.
“If we want to boost domestic consumption, we have to increase the incomes of consumers. Encouraging investment and production is a way to increase consumer incomes,” Long said. For a cash-starved country like Vietnam, the government will be hard-pressed to drum up a large bailout for the economy. Furthermore, it is also facing a 5 per cent budget deficit over the last few years.
It did, however, recently announce it would use a $1 billion stimulus package for infrastructure projects. Minister of Planning and Investment (MPI) Vo Hong Phuc said this $1 billion package would be invested into projects to lure private investors to infrastructure projects. Asia Commercial Bank board chairman Tran Xuan Gia who was former MPI minister, said the bailout was too small when compared with total investment capital of the country.
“With $1 billion, we will only be able to build a few infrastructure projects like roads or bridges. We need more money,” Gia said. Gia suggested that the government should call on all options such as private enterprises, foreign direct investment and official development assistance to drum up funds, without relying solely on the state budget.
Deputy Prime Minister Nguyen Sinh Hung said the total economic stimulus package could reach $6 billion if the government uses $1 billion to help enterprises access bank loans at low interest rates. Vietnam Association of Financial Investors (VAFI), in a document sent to the government, said that the $1 billion should be used for credit guarantees for investment projects, which would encourage private investors to borrow capital from commercial banks.
Unlike banks in the US and Europe which are asking for bailouts, Vietnamese banks have strong liquidity, while being prudent in lending to business and the property sector. On the other hand, many enterprises are reluctant to borrow from banks as the weakening economy curtails investment and consumption demand. Over the past two months, the State Bank has cut the base interest rate five times from 14 to 8.5 per cent.
“I do not think the current lending interest rate is too high for business. The most important thing is that the demand in this market is too low so enterprises cannot expand their production and investment,” Gia said. Under the government’s plan, the speeding-up of administrative reforms are considered a key factor to encourage investments and push demand in the market. This measure is not new. For years, the government has announced it would cut complicated red tape strangling the business environment. However, these problems are a long way off from resolution.
If they work out, they will boost the disbursement of foreign direct investment projects and official development assistance-funded projects worth billions of dollars. In 2008, Vietnam attracted about $60 billion in registered capital from foreign investors. International donors also committed to assist Vietnam with around $5 billion in 2009.
“We do not lack capital sources, the problem is that our complicated administrative procedures and mechanisms are hindering us,” Gia said.
The MPI first announced the plan, but has yet to let on which projects will benefit from the $1 billion. Analysts said the plan should focus on infrastructure projects such as roads and power plants.
“There are many half-done projects in the country that need to be finished. If the government focuses on building them we could both push the demand for products like cement and steel and improve infrastructure,” said Cao Sy Kiem, chairman of Vietnam Association for Medium and Small Enterprises.
A VAFI petition called for increased investment in low-cost apartment buildings for low income workers and civil servants. VAFI also suggested that the country would see greater benefits by backing private enterprise. According to VAFI, private enterprises are more effective than state-owned enterprises and should be afforded more support from the government.
While the government is further preparing the plan, economists warn of some risks. Firstly, Vietnam is still facing high inflation. Although the consumer price index dipped over the last two months, inflation was still at 21.76 per cent against last December. “If the money is not been injected in the right place but in non-performing projects, inflation will return,” Gia said.
The second risk comes from the plan’s implementation. Rue said the rescue plan had to be done as soon as possible with a large scale.
“The economy has been slowing down for months and the situation will be worse next year if the government does not put the plan into action promptly,” Rue said.
VIR
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