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Vietnam could be in for a bumpy ride
The US financial crisis has led economies around the world into a much deeper and widespread downturn since the middle of 2008, and everyone has failed to forecast exactly when the global economy will once again turn for the better. As such, Vietnam’s plan to lessen the impacts of the global crisis has been made a priority in the nation’s socio-economic development strategy, writes Professor Nguyen Mai.
At the meeting of G20 finance ministers and central bank governors on March 14, the World Bank predicted negative global growth for first time since World War II, and that global industrial production value in the first half of this year would plummet 15 per cent against the corresponding period of last year.
The bank’s report noted that international trade had seen the worst collapse, with Japan’s export value in January hitting a sharp 46.3 per cent decline, the US seeing a 31 per cent fall, China dropping 17.5 per cent and Taiwan 42.9 per cent on a year-on-year basis.
There have been a growing number of reported bankruptcies in the US, which has also seen its national unemployment rate rise to its highest level, and the public confidence index fall to its lowest since the 1980s. The credit rating firm Moody’s predicted that the US’s gross domestic product (GDP) would decline 5 per cent in this year’s first quarter.
Similarly, 15 European Union members have entered into the recession, while the globe’s second largest economy, Japan, recorded a 10 per cent fall in industrial production value and 5.9 per cent in every Japanese family’s spending for the first month of this year. In the same vein, China’s GDP growth this year was forecast at a positive 5 per cent.
Falling consumer demand and shrinking investments have consequently brought down prices for many different commodities, including crude oil, which cost around $50 a barrel compared to its peak of $147 a barrel.
A year ago, global economies, including Vietnam, were haunted by inflation, however, now deflation is posing a high risk in most of the global economies. The head of the International Monetary Fund (IMF), Dominique Strauss-Kahn, warned that the risk of deflation had reached a century high because bankers continued to cut credits, enterprises faced financial pitfalls and prices drastically fell. Global prices across 2009 were forecast to fall an average of 20 per cent against 2008 and only to rise a modest 0.5 per cent in 2010.
New York University Professor Nouriel Roubini, who predicted the collapse of the US housing market and the global recession three years ago, said that the global recession would be U-shaped for a period of at least three years. At a meeting in New Delhi on March 7, Roubini said, “policy makers are moving in a right direction, but they are too few and too late.”
Many countries have already taken substantial steps to support their economies and restore growth by boosting domestic demand and jobs, salvaging enterprises that are on thebrink of bankruptcy and raising investments, the consequences of which have birthed trade protectionism, directly contradicting the trade liberation movement.
The principal case was US president George W. Bush’s first economic stimulus package announced in October last year, which barred foreign enterprises from enjoying the package’s benefits. Growing international protests then urged the US government to make changes to the rules, giving more equal treatment to enterprises’ access to the stimulus package.
Needless to say, each nation have to respond first to its people’s need for stable employment and income, and that nation can not neglect its domestic markets and enterprises. The world community has raised its awareness of addressing these issues and attempted to find appropriate measures to restore the growth of any single nation along with the global economy, but not in contradiction with the globalisation trend.
In this spirit, nations and international organisations around the world have come together and taken action to deal with these common challenges. On April 2, world leaders met at the G20 Summit in London to discuss measures to tackle the worst financial crisis, address bad debts and restore bank lending, improve global institutions in monetary policies to prevent a new crisis from coming, reform banking and financial institutions on a global scale and minimise the global economy’s dependence on the US dollar.
In Asia, ASEAN, China, Japan and South Korea have made principle agreements to establish a common forex reserve fund worth $100 billion, aiming to protect the devaluation of their currencies against the US dollar.
Vietnam on the screen
Forecasts of Vietnam’s economic recovery still differ. The optimists argued that Vietnam’s economy would overcome the crisis and restore its growth within the year. But others gave more practical arguments that: “Despite critical government measures to prevent a repeat of the recession, Vietnam’s economy in this year’s first quarter still confronted difficulties, requiring policy-makers to give accurate forecasts and take bold steps in recovering national socio-economic growth.”
Vietnam’s export-import revenues hit the worst impacts of the global crisis in this year’s first quarter. The Ministry of Industry and Trade (MoIT) figures indicated that the nation’s export value between January and March this year had reached almost $13.5 billion, or a modest 2.42 per cent increase against last year’s first quarter. During the same period, Vietnam’s import value fell 45 per cent to $11.8 billion due to domestic production stagnation, cutting the demand for imported machinery, equipment and raw materials.
The MoIT also reported a 3.76 per cent drop in Vietnam’s industrial production value in the first quarter of this year - the lowest growth in the last two decades. Noticeably, state-run enterprises’ industrial production value fell 4.4 per cent in January and February, while non-state and foreign-invested sectors saw slower growth of 6.6 per cent and 3.3 per cent, respectively.
It was forecast that Vietnam’s industrial production value in this year’s second quarter would suffer further drops because prices of power, coal and other raw materials had risen while domestic and international demand had dropped. The Vietnam National Coal and Mineral Industries Group announced it would raise its coal prices up to 3.25 times on the current levels in the second quarter, while the Electricity of Vietnam’s power tariff rose 8.92 per cent on March 1.
The Ministry of Planning and Investment (MPI) released reports showing a 65 per cent decline in Vietnam’s newly-pledged foreign investment capital (FDI), down to $6.15 billion in this year’s first quarter compared to the same period last year.
In the past 17 years, Vietnam, for the first time, has gained an export surplus of $1.65 billion in this year’s first quarter as a result of the nation’s increased gold exports. Economists argued that this export surplus was not a positive signal because it reflected the stagnation of new investments and technological transfers in the country.
In the past, despite trade deficit, Vietnam still succeeded in maintaining its balance of payment and increasing the forex reserve.
Economists feared that this balance would become fragile this year as a result of declines in non-trade foreign currency earners like tourism, labour exports and remittances. The IMF forecast that global remittance across 2009 would plummet 20 per cent, with developed economies receiving less than $40 billion in remittances.
In the same vein, the nominal incomes of Vietnamese people are also declining. Compared to December, 2005, Vietnam’s consumer price index (CPI) in December 2008 rose 60 per cent, with prices of a number of commodities doubling, including food and foodstuff, which normally account for 70 per cent of Vietnamese low-and-medium income earners’ spending. At the same time, Vietnamese people’s incomes from salaries, bonuses and other allowances increased by merely 20-30 per cent - half of the CPI rise in the period of three years.
Although the National Assembly approved an adjustment to the nation’s GDP growth of 6.5 per cent this year, economists argued that the target would be hardly within reach, given the first quarter’s GDP growth of 3.1 per cent and the second quarter’s GDP growth projected at 4.2 per cent. Most recently, the World Bank predicted Vietnam’s GDP growth at 5.5 per cent in 2009.
Finding solutions
It is advisable that Vietnamese policy-makers learn from the experiences of the US financial crisis and then apply them to Vietnam’s current situation in mapping typical measure packages in the bid to restore the nation’s growth. Additionally, Vietnam should also heighten cooperation and act together with international organisations and nations around the world to deal with this global downturn.
The US financial crisis originated from the rise of subprime mortgage loans worth $2 trillion. The question is now whether Vietnamese bankers will follow US bankers’ failures, and if Vietnam will take this lesson as a critical issue to be addressed in 2009.
The US government admitted there were loopholes in controlling the operations of local banking and financial institutions, and considered government neglect as a major cause of the collapse of US banking giants. In regard to Vietnam - a socialist market-economy - fragile supervision over banking and financial institutions would be a result of the nation’s incomplete and non-transparent legal system.
To address this, the Vietnamese government should immediately take bold steps in amending legal loopholes in governing the financial and banking sector, tightening control over local financial and banking institutions and making the inflow of cash, credit and forex transparent.
Facts have proven that at a time when Vietnam is widening its integration in the global economy, it is critical that government agencies make timely forecasts and be ready to respond to the negative impacts of the global economy on Vietnam.
Economies around the world may choose two options to deal with the global recession. First, nations use stimulus packages as a priority to overcome the crisis, restore growth, resolve unemployment issues and ensure social security. Second, nations take measures to eliminate the causes of new crises.
It seems that Vietnam has been moving toward both solutions.
For the first solution, as soon as Vienam’s high inflation was reined in during 2008’s fourth quarter, the Vietnamese government decided to implement new measures to deal with the global crisis’ impacts by giving priority to expanding export markets, boosting domestic demand, cutting taxes, widening exchange rate trading bands, providing loan subsidies and improving social allowances.
In the recent months, public concerns have grown with the government’s $1 billion stimulus package to provide 4 per cent interest rate subsidies for corporate loans. Local commercial banks responded to this stimulus package by immediately announcing that they would be ready to lend VND420 trillion ($23.6 billion) to enterprises facing financial shortfalls. This announcement of the lending sum is still questionable.
It is undeniable that the stimulus package has addressed the urgent financial need of Vietnamese enterprises in such a hard period and saved the lives of enterprises that are on the brink of ruin. A number of export firms were able to obtain loans with favourable 2-3 per cent interest rates, which substantially helped them maintain production and avoid cutting jobs.
However, questions were raised as to whether the stimulus package had come to the right place and to what effect it had been used. These questions should be forwarded to the National Assembly and the government whose responsibilities are to keep close watch over the implementation of the stimulus package.
In this case, the lessons in the US and China are also something to consider. In October, 2008, George W. Bush announced the first economic stimulus package worth $700 billion aimed at rescuing the struggling economy. Three months later, executives of banking and financial institutions receiving the bailout money had to report to the federal government and the public.
In March this year, US president Barak Obama warned against giving an additional stimulus package to AIG, which took $150 billion in bailout money and then proceeded to pay out $165 million in executive bonuses. The government also decided that AIG executives had to pay 90 per cent taxes on their bonuses.
When China announced a $580 billion stimulus package, 30 per cent of which would be sourced from the central budget, the Chinese government had to employ 25 monitoring teams to control the spending of the bailouts and set strict punishments for misuse of the stimulus package.
In the case of Vietnam, to ensure the effective use of the government stimulus package, it is high time that local enterprises raise corporate social responsibility to avoid cutting jobs, maintaining production and acting together with the government to deal with the downturn. Meanwhile, the government should also make it a priority to ensure social security by promoting the principle of “people know, people discuss, people do and people check”.
By doing so, all people will be encouraged to suggest ideas and initiatives and help the government monitor the implementation of the stimulus package.
For the second solution, the government has recently assigned the MPI to build a road map to restructure the economy in the medium and long terms, aimed at reaching sustainable economic growth as soon as the current downturn is over.
It is argued that the compilation of the economic restructuring plan will require employing the cooperation and coordination of all governmental agencies and relevant economic research institutions. To do so, involved economic research institutions must be provided proper funding and support to enable them to conduct surveys and process data, based on short-term forecasts and recommendations.
In the ups and downs of the current situation, the government should be provided timely and accurate information and data, as well as short-term forecasts of global economic movements. Based on this, the government will discover responsive measures for certain scenarios.
Therefore, alongside the operations of relevant governmental agencies, it is advisable that Vietnamese government immediately set up special task forces and supervision panels to help the government closely monitor the implementation of the stimulus package, to identify misuses and suggest solutions to deal with the economic turbulence.
More importantly, the government must urgently accelerate administration reform and enhance the capabilities, effectiveness and efficiency of governmental relevant agencies, which are considered among the major forces capable to kick-start high and sustainable economic growth in Vietnam in the long run.
VietNamNet, VIR
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