Transcript Global Recession and Vietnam`s Economy

By Nguyen Tien Dzung
Lecturer, College of Economics
Vietnam National University. Hanoi
October 2nd, 2009
Plan of the Lecture
 Vietnam’s Economy at a Glance
 Global Recession and Vietnam’s Economy
 Policy Responses to the Economic Slowdown
 Economic Prospect and Challenges Ahead
Vietnam Economy at a Glance
 Vietnam has a small economy with GDP amounting to
around 90 billions USD and GDP per capita of around
1000 USD.
 Vietnam has a large population of 86 millions and
young population structure.
 More than 60% of the population live in rural areas
and work mainly in agriculture.
 Vietnam has maintained a relatively high economic
growth over the last two decades.
 High economic growth has led to a substantial
improvement in living standard and poverty reduction.
Vietnam’s Economy at a Glance
 Agriculture plays an importance role in the economy. The
manufacturing sector is dominated by agriculture-related and laborintensive activities.
 Most of Vietnam’s exports are natural-resource based (crude oil and
agricultural products), and labor-intensive products (leather, textile
and garments).
 Most of Vietnam’s imports are capital goods and production inputs,
ranging from petroleum, iron and steel, fertilizers, plastics and
chemical, electronic parts and products and materials for textile and
garments.
 Vietnam’s exports have been largely directed toward the EU and US,
and Japan, while the country’s imports have been largely sourced
from China, ASEAN and other East Asian countries.
Vietnam’s Economy at a Glance
Economic Composition
Private
services
30%
Employment Structure
Agriculture
22%
Mining
9%
Public
services
8%
Construction Utility
3%
7%
Public
services
4%
Other
services
21%
Industries
14%
Manufacture
s
21%
Construction
5%
Agriculture
56%
Vietnam’s Economy at a Glance
 Economic reforms conducted over the last two decades have
transformed Vietnam from a centrally-planned economy to an
open market economy.
 The integration with the regional and world economy has been
recently accelerated with the recent acquisition of WTO
membership and the participation in the regional FTAs.
 The investment regimes have been liberalized through the
simplification of administration procedures and deregulation, a
greater autonomy for domestic and foreign investors. Foreign
investments are allowed take different forms of investment,
ranging from direct investment, acquisition and merging, and
portfolio investment.
 Trade and investment liberalization have contributed to the
overall economic growth.
Global Recession and Vietnam’s Economy
 The housing and banking crisis in the US has led to a
widespread economic recession. Almost all economies have
experienced a sharp contraction in the later half of 2008 and the
first half of 2009.
 Similar to other emerging economies, Vietnam has been
severely affected by the global economic recession through the
falling demand for its exports, the falling export prices, and the
sharp drop in the inflows of foreign capital
Global Recession and Vietnam Economy
A Sharp Drop in Exports
 After decades of rapid growing, exports have dropped
sharply following the sharp economic contraction in the
major export markets (Japan, US and the EU).
 The drop in export revenue has further worsened by the
sharp decline in the export prices of raw materials and
agricultural products.
 On a year-over-year basis, export revenue has dropped by
more than 10%, largely caused by the drop in the exports
of crude oil and major agricultural products
Global Recession and Vietnam Economy
A Sharp Drop in Exports
Annual Export Growth (%) Export Growth by Markets (%)
60.0
80.0
50.0
60.0
40.0
40.0
30.0
Total Exports
20.0
20.0
US
Manufactures
10.0
Agriculture
2003 2004 2005 2006 2007 2008 2009
2003 2004 2005 2006 2007 2008 2009
-20.0
-10.0
-30.0
Japan
0.0
0.0
-20.0
EU
Minerals
-40.0
-60.0
Global Recession and Vietnam Economy
Falling Capital Inflows
 The economic recession and tight credit condition in the
developed countried have led to a sharp contraction in the
inflows of capital to developing countries, and to Vietnam.
 The inflows of FDI into Vietnam dropped sharply in the first
half of 2009 as compared to the corresponding level in 20072008.
 The inflows of portfolio investment also dropped sharply as the
consequence of economic slowdown and tight credit condition
in foreign countries.
Global Recession and Vietnam Economy
Falling Capital Inflows
FDI Inflows to Vietnam
Portfolio Inflows to Vietnam
(Millions USD)
Billions USD
70.0
Portfolio Investment
7000
60.0
6000
50.0
5000
40.0
Commitment
Disburstment
30.0
4000
Portfolio
Investment
3000
2000
20.0
1000
10.0
0
2005
0.0
2004 2005 2006 2007 2008 2009
-1000
2006
2007
2008
Global Recession and Vietnam Economy
Economic Slowdown
 After a rapid economic growth in 2005-2007, the growth rate
slowed down in the later half of 2008, and continue to decline
in 2009.
 The current economic slowdown is largely attributed to the
global economic recession and the resulting sharp drop in
exports and capital inflows.
 The adverse impacts of the global economic recession has
been mitigated as domestic demand (private consupmtion and
investment) rises and partly compensates for the falling exports
Global Recession and Vietnam Economy
Economic Growth (%)
16.0
14.0
GDP
12.0
Agriculture
10.0
Manufactures
8.0
Services
6.0
4.0
2.0
0.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
Global Recession and Vietnam Economy
Increased Macroeconomic Instability
 The economic slowdown has been accompanied with an increased
instability in the macro-economy as reflected in the rising budget
deficit and increasing depreciation pressure on Vietnamese dong, and
imminent inflation.
 The budget deficits is planned to rise to 8% of GDP this year as a
result of falling revenue (oil and other tax revenue) and rising public
spending.
 In the foreign exchange market, the falling exports and capital
inflows have made it more difficult to finance the trade deficit,
causing continuous pressure on Vietnamese dong to depreciate .
 The price increases have been low so far, but inflationary pressures is
rising as the world prices are recovering from the recession.
Global Recession and Vietnam Economy
Increased Macroeconomic Instability
Current Account Balance
Inflation and Exchange Rate
Millions USD
Annual Change %
0
25.0
2002 2003 2004 2005 2006 2007 2008
20.0
-2000
15.0
-4000
10.0
-6000
CA
BOP
CPI
5.0
NER
RER
-8000
0.0
2002 2003 2004 2005 2006 2007 2008
-10000
-12000
-14000
-5.0
-10.0
-15.0
Policy Responses to the Economic
Slowdown
 Different policy meassures have been employed to cope
with the global recession and maintain macro stability
1. Fiscal stimulus package
2. Monetary loosening
3. Foreign exchange control and the enforcement of the
official exchange rate
4. Other policies
Policy Response to the Economic Slowdown
Fiscal Stimulus
 Fiscal stimulus package is introduced to boost domestic demand and
takes different forms: interest subsidies, tax exemption, government
investment.
 Interest subsidies: the government provided interest subsidies for the
short-term borrowings. Interest subsidies for medium- and long-term
investment were also introduced.
 Tax exemption: the exemption of the personal income tax was
introduced for the first half of 2009. Enterprises were exempted
partly or completely from the corporate income tax.
 The current stimulus package is relatively small as compared to that
in other countries. Discussion has been going on a greater stimulus
package. However, as deficits are rising high, the room for further
stimulus meassures is limited.
Policy Response to the Economic Slowdown
Monetary Loosening
 The monetary and credit supply was tightened in 2008 to fight
inflation, but has been then cautiously loosened to cope with
the economic recession
 The interest rate has been reduced in combination with interest
subsidies, and lending restrictions on the real estate and stock
market has been relaxed.
 The credit growth is targeted at around 30% this year, which is
roughly the same rate of 2008, but much lower than the rate of
monetary expansion of 50% in 2007.
Policy Response to the Economic Slowdown
Currency Controls
 From 2006 to the first quarter of 2008, the surge in the inflows of FDI and
portfolio investment caused an appreciation pressure on Vietnamese dong.
The central bank intervention to maintain the fixed exchange rate was
largely translated into rapid monetary expansion and partly contributed to
the rising inflation in the later half of 2007 and early 2008.
 Since the later half of 2008, Vietnamese dong has come under the
depreciation pressure. The burst of the asset bubble has caused a reversion
in the inflows of portfolio investment. The global economic recession has
also led to a sharp decline in exports and the inflows of FDI.
 Foreign exchange control has been employed in combination with a gradual
devaluation to respond to the continued pressure on dong. Commercial
banks are enforced to obey the official exchange rate, and they are required
to sell foreign exchange to the sectors of priority. The official exchange rate
is devaluated, and the trading band is widened.
Policy Response to the Economic Slowdown
Social Policies
 The minimum wage was raised by 20% in early 2009 to
offset the high inflation in 2007-2008. This wage increase
in a period of relatively low inflation has contributed to
rising private consumption and domestic demand.
 The government gives fiscal incentives to assist firms to
deal with redundant workers, and for the first time
introduced an unemployment payment scheme.
Prospects and Challenges Ahead
 Despite the adverse impacts of the global economic recession,
Vietnam has managed to maintain a positive growth and macro
economic stability. However, economic problems remain and
may further worsen.
 The economy is expected to improve in the latter half of 2009
and 2010, but economic growth could remain slow in the
context of a possible slow recovery of the global economy.
 In the medium-term, it could be even more challenging to
maintain high economic growth in a post-crisis period.
Prospects and Challenges Ahead
Stimulus package and Macro Stability
 The major short-term issues are to improve the effectiveness of
the stimulus policies and maintain the macro stability at the
same time.
 The inflationary pressure is currently low, but could increase as
the world prices are recovering from the recession. Excessive
monetary expansion and wage increase may fuel inflation later
this year and in 2010.
 The effectiveness of the fiscal stimulus (tax exemption and
interest subsidies) is still questionable. Given the rising trade
and budget deficits, the room for large-scale stimulus is limited
and fiscal stimulus must be well targeted, focusing on the
sector with strong impacts on economic growth and job
creation.
Prospects and Challenges Ahead
Addressing Trade Deficits
 Vietnam often has large deficits in the trade balance and current
account, and these deficits are financed by large capital
inflows, including portfolio and other indirect investments.
 Currency controls are employed to curb imports when capital
inflows and exports fall. These control measures could only be
effective in the short-run.
 To cope with the large trade deficits, Vietnam may need a
better exchange rate policy (to avoid exchange rate
appreciation) and a better industrial policy (to reduce the
dependence on imported inputs and materials)
Prospects and Challenges Ahead
Improving the Quality of Capital Inflows
 Vietnam has attracted a large amount of FDI in addition to a large
inflows portfolio investment in recent years. However the
implementation ratio is low and there is also a strong bias toward
real estates and non-traded sectors.
 In the future, greater emphasis must be put on the quality, instead of
quantity of FDI. FDI must be directed toward sectors with potentials
to export and to create jobs, in order to maximize the contribution of
FDI inflows to the future economic growth and industrialization.
 Improved infrastructure and the availability of well-trained labor
forces are needed for FDI attraction and industrial upgrading.
 Greater prudence toward the inflow of portfolio investment may be
called for. As shown in the recent years, these capital inflows seem
have not contributed to the country’s production capacity, but instead
inflating asset prices and causing macro instability.
Prospects and Challenges Ahead
Realizing the benefit of economic integration
 Future economic growth
would require further industrial
upgrading and the diversification of exports. The advantage
based on natural resources and cheap labor is eroding as
income is rising.
 Economic integration does not only offer opportunities for
exports, but also comes with increasing competition in the
domestic market, the export market as well as in the
competition for foreign investment.
 The realization of the potential benefits of regional economic
integration depends on Vietnam’s effort to improve
infrastructure and human resources, and to attract FDI into the
potential exporting industries.
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