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Viet Nam to weather storm
The World Bank’s director of strategy and operations for the East Asia and Pacific region, Sarah F Cliffe, spoke to Viet Nam News reporter Le Thanh on the sidelines of the Future of Asia conference in Tokyo last week about the Vietnamese economy and the global economic recession.
How does the fallout from the global recession affect a country like Viet Nam in the early stages of development and economic integration?
Viet Nam has made great strides to integrate commercially with the global economy, to the point where its exports represent about 70 per cent of GDP.
On the other hand, Viet Nam is still at an early stage in its financial development, which means that its commercial banks are not exposed to the "toxic" assets through which the current global crisis started, and they are not owned by foreign banks exposed to those assets either. So, it is a mixed picture, with vulnerability stemming from the trade front and not so much from the financial front.
It is also important to understand that Viet Nam faced economic turbulence of its own almost a year ahead of the current global crisis. Massive capital inflows, associated with an upbeat investor mood regarding the country’s prospects after its accession to the WTO, had resulted in asset price bubbles, an acceleration of inflation and a large trade deficit.
The government was determined in its policy response to this turbulence, and over a period of barely six months successfully stabilised the economy. Such a determined stance had a cost, in terms of economic activity. But it also put Viet Nam in a better position to navigate the global crisis. Its commercial banks were subject to enhanced supervision, and were required to increase their minimum capital by the end of 2008, which made them more resilient.
What are the prospects for the Vietnamese economy with the world economy still in recession?
The impact of the global economic crisis has also led to some excessively dramatic estimates, which should be taken with some skepticism. For sure, Viet Nam will experience a serious slowdown, but not a crisis. It is true that exports represent a large share of GDP, but Vietnamese producers are competitive and resourceful. As a result, the country is navigating the slowdown better than others in the region. Depending on whether oil or gold are included in the estimate, in the first four months of the year Viet Nam’s exports have gone up or down by only a few percentage points compared to the same period last year while, throughout the region, declines have been in the double digits.
International organisations have predicted a growth rate in the range of 3.5 to 5.5 per cent for 2009, which would clearly be below Viet Nam’s potential but would still represent a solid performance given the global environment.
What actions should the Vietnamese Government take to limit the negative impacts of the crisis and develop the economy?
The Government of Viet Nam responded in a quick and determined manner to the economic overheating in late 2007 and early 2008. It showed the same speed and determination in responding to the slowdown from the global crisis.
Understandably, the immediate response was through monetary policy. There was a need to bring interest rates down, as they had been pushed very high. There was also a need to encourage banks to keep lending to enterprises, rather than cautiously sit on their cash, as they were doing in some industrial countries. The government was also quick to provide relief to the poor on the occasion of the Tet holiday, when many migrant workers return to the rural areas.
Implementation of these measures could perhaps have been stronger, but there is no doubt that the direction was correct.
Gradually the government is moving in the direction of fiscal policy, including further support for investments in critically important infrastructure and additional spending on poverty alleviation projects. Again, this is an appropriate choice, and many other countries around the world are implementing stimulus packages in the same spirit.
There are also challenges when moving in this direction. One is finance. In the end, stimulus packages result in bigger budget deficits, which need to be financed. ODA resources are an ideal source of financing at a time when borrowing domestically can crowd the private sector and borrowing abroad is expensive. The World Bank is ready to help in this respect.
The period of economic overheating in late 2007 and early 2008 exposed many weaknesses in public investment. Costly duplication of infrastructure and real estate investments fuelled the asset price bubble. Poor project appraisal, limited consideration of environmental impacts, issues in land compensation and the inability to monitor progress in implementation were among the most obvious concerns. As it embarks in more active public spending, it would be important for the Government to strengthen the public project cycle. Some components of the stimulus package may also deserve reconsideration.
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