Manufacturing slump dangerous for Vietnam

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A worker walks by stacks of ceramic bricks at the Quang Minh Ceramics Porcelain Co. factory in Bat Trang Village on the outskirts of Hanoi. The company is among thousands in Vietnam that have cut production or closed down this year. Photo: Bloomberg

The biggest worry for Vietnam is a slowdown in industrial production caused by reduced consumption, economist Ngo Tri Long, former vice head of the Ministry of Finance's Price and Market Research Institute, tells Vietweek.

Vietweek: The economy is slowing down. Is this because of excessively tightened monetary policy? And is there a risk of deflation?

Ngo Tri Long: Deflation occurs when consumer prices continuously decrease and GDP decreases. Deflation sometimes is more dangerous than inflation, as it may be the reason for stagnant production, making job generation for laborers more difficult.

However, our consumer prices and GDP still increase despite the slowdown. But prices now see smaller hikes than previous months due to lower purchasing power.

The biggest worry for Vietnam is stagnant production and limited purchasing power. Although we have controlled inflation, our production is sluggish, and purchasing power is lower. In fact, our consumer prices still stand high.

Our goal is to control inflation. To this end, we have tightened monetary policy. Our problem is that quality and effectiveness in our economy are low, and wastefulness and corruption still exist. The government is loosening monetary policy, but this should be carefully implemented to prevent a resurgence in inflation.

Vietnamese firms suffer from low competitiveness amid high inflation and interest rates. There are no other countries with interest rates as high as Vietnam. These issues are very dangerous, and have reduced the competitiveness of Vietnamese firms.

The economic slowdown is hiding behind positive trends like lower inflation and a smaller trade deficit, which are, in fact, not due to effective policy, but lower purchasing power, and stagnant production.

Interest rates have recently dropped, but credit still shrank. Why?

Economist Ngo Tri Long, former vice head of the Ministry of Finance's Price and Market Research Institute

Our interest rates stand high, at 15-17 percent, so firms dare not access bank loans. Firms can't earn enough profits to pay the interest rates. Having few customers, banks have abundant capital, while companies face shortage of capital. The two sides can't meet each other and instead are dying together. In other countries, lending interest rates often stand at 2-4 percent, 5 percent is considered high.

In Vietnam, lending interest rates of 10-12 percent are the best companies can get. To offer firms loans with such interest rates, banks must lower deposit interest rates. But, can banks lure depositors if they lower the interest rates? This is also a big issue.

In addition, we have to consider the loan repayment capacity of firms. If firms have the ability to repay loans, new loans with interest rates of even 2 percent are still a big burden to them, causing a great risk to banks. Thus, many issues need to be solved at once.

How do you assess the impact of the government's tax relief package of VND29 trillion, or nearly US$1.4 billion?

The package could help firms in the short term. The package has started being implemented, but I think its effect is not very big. The package allows firms to extend their tax payment. However, many firms are not subject to some taxes because they earn no profits.

The important thing is to reduce lending interest rates, and help firms boost their goods sales. This means that we have to increase purchasing power.

What do you think would be good measures to increase purchasing power?

We have to seek ways to generate more jobs for local people, and consider adjusting the personal income tax.

We should also consider cutting some other taxes and fees to reduce difficulties to local people and companies. In general, we have to spur consumption to increase purchasing power. However, this should be carefully implemented to prevent the reoccurrence of high inflation.

There is a view that the government should exempt value added taxes for firms, and act as a guarantee for companies so that they can use goods in their stockpiles as collateral to access bank loans. What do you think of these suggestions?

It depends on the banks, but banks will never agree to receive goods for mortgages because their sales are not ensured. This could cause huge bad debts. Thus, we need a plan with specific measures to help firms deal with difficulties.

The current tax payment extension could have a small impact to firms. We should not place great expectations on the measure.

The best way now is that the State Bank of Vietnam should lend to commercial banks with low interest rates, helping them offer firms low-interest credit.

Can we use administrative measures to combat the economic recession?

There are three tools to manage the economy: the economic tool, the organizational tool, and the administrative tool. The administrative tool should be used for the short term. If it is imposed against economic rules, it will not have long-term effects, and it could even be counter-productive.

The most important thing is that we should use financial measures in an effective manner, and in combination with other measures. This could help spur consumption, increase investment and boost production.

I think that the government should consider exempting value added tax for companies, and cutting some unnecessary fees, to help firms reduce their input costs. In addition, the war on corruption should be strengthened to ensure that local people and firms do not have to bribe administrative staff.

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