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Six ways Europe’s debt crisis will impact Vietnam
Deputy Chairman Le Xuan Nghia of the National Finance and Monetary Supervision Committee, says that all else being equal, exports will suffer, interest rates will stay high, money will flow to safe havens, foreign exchange will be harder to manage and perceived ‘country risk’ may scare off foreign investors.
Thoi Bao Kinh Te Vietnam asked the renowned economist to speculate on how the European debt crisis could impact Vietnam’s economy.
1. Our exports will suffer
The debt crisis in Europe has slowed down the world’s economic recovery. Both unemployment and inflation are up in Europe and the euro has lost value. GDP growth is flagging, which has reduced the real incomes and people’s propensity to consume imported products.
Some experts argue that European consumers may in fact shift to Vietnam’s typically medium and low grade products.
However, it is clear that the debt crisis will have negative impacts on Vietnam’s export and GDP growth. We’re estimating that it will reduce our GDP growth rate by 1.7 percent this year. China (-2.8 percent) and the UK (-1.9 percent) will be even harder hit.
2. Our businesses must bear high interest rates
Many central banks in developed countries have been maintaining the historic low interest rates in order to stimulate the economic recovery. The prime interest rates in the US, UK, Japan and the Euro zone are one percent or less.
In Vietnam, however, both the deposit and lending interest rates are now relatively high. Businesses now have to borrow capital at roughly 15 percent per annum for short term loans, and about 16 percent for medium and long term loans.
If the inflation rate for 2010 is less than 10 percent, enterprises taking such loans will need to earn profits of about 25 percent, which is well above the average 20 percent return on equity in 2009.
3. FDI flows from Europe to Vietnam will shrink
The debt crisis in Europe may have two contradictory impacts on foreign direct investment. Other advanced countries will benefit from capital flight from the EU to places that offer safety plus lower taxes on income.
Countries like Vietnam will not benefit from this due to the overly wide gap in technology levels.
4. Gold will boom, sucking wealth from the stock markets
Investors in the world are pouring money into gold, considering it a safe shelter in the context of the spreading debt crisis. Gold is now trading for over $1300 per ounce.
This will have a bad impacts on the securities markets. The more investors hold gold, the less they’ll channel into stocks and bonds. As the result, foreign portfolio investment will be scarce.
5. ‘Country risk’ will scare off investors
The debt crisis in Greece has made international investors more skeptical of countries with a high ratio of debt to GDP; overspending (The budget deficit is big in comparison with GDP); and falling GDP (Which influences a nation’s ability to manage debt).
Vietnam has a high debt ratio and a chronic budget deficit. It is listed among the high risk countries. To insure investments here, foreigners must pay a relatively high credit default swap premium, or CDS. Vietnam’s CDS is currently 263, compared to 321 for Greece. This makes us less attractive to portfolio investors, direct investors and banks with money to lend.
6. Foreign exchange rates have become unpredictable
The European debt crisis will create immeasurable impacts on foreign exchange rates. The dollar and the yen will appreciate against the euro.
In June, the dollar/euro exchange rate fell to 1.19/1, down from 1.4/1 in early March. This has created difficulties for firms that regularly borrow and pay in foreign currencies, and to foreign currency trading activities of commercial banks.
Also, the sharp appreciation of the dollar in the context of our increasing trade deficit will put pressure on foreign exchange availability and may force adjustments in the last months of 2010.
vietnamnet, TBKTVN
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