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Vietnam’s economy: one year, two crises
It is unusual that this year Vietnam has been affected by two continuous shocks, called the “two crises” by some experts.
Also this year, Vietnam has had to change its priorities twice. The two shocks have brought the country face to face with the threat of stagnation.
The first crisis
That was the crisis of fuel, food, steel prices, etc. in the world. Some said that as Vietnam has crude oil and rice for export, so the country might have benefitted from this crisis and avoided negative impacts.
It is true that Vietnam exports crude oil, but it imports plenty of petroleum. The increase of food prices in the global market also made food prices in the local market rise.
Vietnam’s high inflation was due to local factors, plus impacts from the global crisis. The local factor originated from the country’s pursuit of high economic growth, which brought about an increase in the total mode of payment, an increase of outstanding debt higher than the growth of GDP.
The normal ratio between the increase of the total mode of payment and the growth of GDP is less than 2.5 times, but Vietnam’s was always higher than the average. In the period of 2004-2007, the total mode of payment rose by 30.3% per year while GDP growth was 8.23% per year. The ratio between the growth of the total mode of payment and the GDP growth reached as high as 3.7 times. The figure was even higher in 2007.
Meanwhile, lending interest rates were low and the volume of capital pumped into the stock market and real estate was high. Economic growth contributed by investment capital accounted for 57.5%, by labour 20%, by productivity increase and other factors (investment effectiveness, labor productivity, etc.) just 22.5%.
Investment efficiency is shown through the Incremental Capital-Output Rate or ICOR (the ratio of investment to growth, equal to one divided by the marginal product of capital. The higher the ICOR, the lower the productivity of capital. The ICOR can be thought of as a measure of the inefficiency with which capital is used. In most countries the ICOR is in the neighborhood of 3). The ICOR has increased in recent years, from 4.85 in 2005 to 5.04 in 2006, 5.38 in 2007 and perhaps 5.9 this year.
These factors, plus inflation in the world pushed up inflation in Vietnam (up to 2.86% in the first half of 2008). Besides inflation, Vietnam’s trade deficit was very high. The trade deficit in 2007 was $14.12 billion or more than $1 billion per month. In the first five months of 2008, the trade deficit averaged $2.695 billion per month.
International organisations and experts warned Vietnam that its inflation in 2008 might exceed 30% while its trade deficit might surpass $30 billion. They recommended that Vietnam devalue its currency by 20-25% and ask for the International Monetary Fund’s assistance.
But the reality turned out not as bad as this. Since June and July, inflation and the trade deficit, the two principal problems of Vietnam, have fallen. Inflation from July to November was 0.38%/month, much lower than the level of the first half of 2008 and lower than the savings interest rate. The trade deficit from June to November was less than $1 billion ($529 million per month on average).
There were many reasons for this. The main reason was the government’s timely change of the priority from economic growth to controlling inflation. Another was the government’s eight groups of solutions, especially the solution of tightening the monetary policy.
The second crisis
Those two problems having just been solved, the real estate and credit crisis in the US erupted in mid-September, spreading very quickly to the financial, monetary, labour sectors and to other countries.
This crisis has finally hit Vietnam, an economy in which 60% of its growth depends on foreign investment and exports, an economy that has been a member of the World Trade Organization (WTO) for just two years.
The country’s export revenue has decreased month by month since August. Industrial growth has been dropping since July. The number of foreign tourists coming to the country has been falling since September. The flow of portfolio investment is more out-going than in-coming. The VN-Index is stumbling and has returned to the starting point of 3-4 years ago.
The threat of economic stagnation has appeared. Once again, the government has had to change its goals from controlling inflation to preventing economic stagnation, with an urgent package of five solutions, emphasising demand stimulation, and by introducing a financial package.
The demand stimulus package is not restricted to $1 billion as the government said before. The total value could reach $6 billion. This figure is much lower than the packages of big countries but it is big compared to the country’s resources. This financial package is equivalent to 6.8% of Vietnam’s GDP in 2008 (around $88.5 billion), and 26% of the country’s foreign currency reserve (over $22 billion).
This is the government’s great effort in the situation of overspending and modest foreign currency reserve. The change reveals the government’s sharpness in forecasting and determination to prevent economic slowdown.
How to stimulate demand?
The demand stimulus plan has been researched by macro-plan making agencies. However, there are two great concerns: the criteria to choose which projects benefit from the stimulus package and the pace of the plan’s implementation.
First of all, the money for economic stimulus is the government’s money, no matter its source. As it is state money, it is necessary to reject the ask-give mechanism and transparency is a must.
In choosing projects to benefit from the economic stimulus plan, related agencies need to follow the major goal of demand stimulus: preventing economic slowdown. Demand stimulus should focus on the industries where products are in stock (coal, steel, cement, fertiliser, some key agricultural products) and key export items; and labour-intensive industries to create more jobs and create purchasing power.
Secondly, demand stimulus projects must be implemented very quickly, otherwise they will have little influence.
Thirdly, the government should pay attention to a significant method of demand stimulus – price reduction, including further cutting prices of petroleum, transport fees. It also should simplify administrative formalities so that demand-stimulus projects can be carried out very quickly.
TBKTVN
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