Prosperity and challenges on the horizon in 2010

By Ngan Anh - Minh Quang, Thanh Nien News

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Two workers at a bridge construction site in Ho Chi Minh City. Two workers at a bridge construction site in Ho Chi Minh City.
Bouncing off an emerging global recovery, Vietnam expects positive economic changes in 2010, specifically export and foreign direct investment (FDI) growth.

Policy makers, however, are still weary of the many challenges the developing country faces, not the least of which is the threat of recurring inflation.

Minister of Planning and Investment Vo Hong Phuc said Vietnam may post gross domestic product (GDP) growth of 6.5 percent, "or even higher."

"The 2010 economic outlook will be brighter [than last year]," he said.

The International Monetary Fund (IMF) has predicted 6 percent growth in Vietnam this year, on the back of gradual recovery in exports and FDI. The economy is estimated to have expanded 5.2 percent in 2009, according to the government.

Phuc said the ministry expected FDI increases this year, as most foreign investors at a consultative group meeting and Vietnam business forum early last month said Vietnam was their third investment priority after China and India.

The healthier global economy expected this year, associated with the recovery of key export markets such as the United States, the European Union (EU), Japan and Russia, will help boost shipments from Vietnam, said Pham Tat Thang from the Institute of Commerce Study at the Ministry of Industry and Trade.

Vietnamese products have the opportunity to infiltrate other Asian countries, he said. China is cutting import tariffs on goods from ASEAN countries, while Thailand is narrowing their investment in Laos and Cambodia, allowing Vietnamese firms more room to expand exports to such markets.

Some countries will face thinner domestic supplies of agricultural products, including rice and foods, due to recent bad weather, thus they'll have to increase imports, including those from Vietnam, Thang said.

Minister of Industry and Trade Vu Huy Hoang said the country may fulfil its export growth target of 6 percent this year despite big difficulties. Vietnam's export turnovers are estimated to have dropped 9.5 percent to $56.7 billion in 2009, according to the government.

Risk of inflation

According to the IMF, the world economy is expected to expand 3.1 percent in 2010, higher than 1.1 percent contraction in 2009, but still much lower than the increase of over 5 percent in 2006 and 2007, and 4.5 percent in 2005.

Shogo Ishii, Assistant Director of the Asia and Pacific Department at the IMF said uncertainty about the strength of recovery suggested risks that Vietnam needed to be on the lookout for, especially risks to exports, private remittances, and FDI.

Inflation is likely to rise to double digits from around 7 percent in 2009, as the recent sharp increase in credit growth and higher commodity prices feed domestic prices, said Ishii.

According to a World Bank (WB) report, the global recovery is already leading to price hikes in key commodities, surges that could accelerate in 2010.

The central bank recently devalued the dong by more than 5 percent against the dollar. The move saw the local currency weaken to 18,500 immediately. As of December 31, the unofficial exchange rate of the dong was 19,440 per dollar. A month ago, the dollar was around VND19,000 ($1.04) on the black market.

Head of the Department of Price Management at the Ministry of Finance, Nguyen Tien Thoa, warned the country against the reoccurrence of inflation due to the impacts of last year's stimulus packages. The packages were used to offer enterprises 4-percent interest subsidies, tax reductions and tax exemptions in an effort to push the economy through the recession.

"We should stand vigilant against the return of inflation," said Thoa. "If we take anti-inflation measures well, the inflation rate will stay below 10 percent in 2010."

Warning of the instability surrounding economic growth, research director of the Fulbright Economics Teaching Program in Vietnam Vu Thanh Tu Anh said the risks related to the budget deficit, trade deficit, the dong slump and balance of payments warranted attention.

Ishii said the outlook for balance of payments would be a big challenge for Vietnam. "Our projections assume that the government will be able to narrow the current account deficit to 7.5 percent of GDP from an estimated 8.75 percent in 2009 while at the same time reversing the shift in resident portfolios toward foreign currency assets."

If FDI and official development assistance flows remain firm, this would allow a modest recovery of gross international reserves in 2010, he said.

The greater risk lies with the reemergence of macroeconomic instability similar to that encountered in 2008, constraining the scope for maintaining stimulus programs, according to Ishii.

However, the difficulties are not as big as those in 2009.

Addressing macroeconomic problems

Ishii from IMF said Vietnam should tighten monetary policy and restore order on the foreign exchange market. "Going forward, it will be important that the State Bank of Vietnam remain vigilant about economic development and be given greater authority to adjust monetary and exchange rate policy as needed in a timely manner."

"In addition, the cap on lending rates should be removed," he said. A clear signal on this front, combined with a sound fiscal framework, will help boost the credibility of monetary policy and restore confidence in the dong, he added.

Ishii also suggested that fiscal policy be implemented flexibly, noting that a further tightening of the deficit may be needed if external pressures continue to intensify. The country has recently approved a 2010 budget plan to reduce the overall fiscal deficit by about 2 percentage points of GDP to around 6.5 percent of GDP.

Economists foresee hope and challenges in New Year

FDI should not be sole focus

Bui Kien Thanh, economist

Vietnam has to re-structure its economy in 2010. Investment should focus on efficiency in term of capital and labor, and foreign investments should be limited. Local investments should be encouraged to balance foreign capital. Vietnam attracted

US$71billion in foreign investment pledges while it lured $20 billion capital from local investors in 2009. It was an unbalanced investment for the country, which depends much on foreign investors for its economic development. An FDI-focused economy should not be Vietnam's economic development target in 2010 and the years to come. The country also needs portfolio investment.

Bright year for local businesses

Le Tham Duong, lecturer of HCMC Banking University

2010 will be a brighter year for local businesses than 2009, a year in which they had to struggle to survive.

Local businesses showed their optimism in a recent survey, with a majority believing that the economy was headed toward both recovery and development this year. The crisis might pass and more opportunities will open this year as the world economy sees positive signs from big markets.

However, challenges hidden in economies will emerge Unpredictable factors could lead to inflation and forex problems for local producers and exporters, which run on low-efficiency management and investments. They have little experience with planning and cooperation. Efficient use of capital, land and labors is low in Vietnam compared to other regional countries. This shows in the Incremental Capital Output Ratio (ICOR) of three to six. It means the country spent three to six dong to create one dong worth of production. These internal problems have lived in the economy for years. The country and its businesses need to solve these problems and weaknesses at their roots as the top job for 2010.

Inflation the big issue of the New Year

Tran Du Lich, economist

T h e government's interest subsidy program, which began in the first quarter of 2009, will result in high inflation. Credit in dong grew fast last year: a 39 percent increase year-on-year. The central bank increased interest rates in November 2009 to slow credit growth.

As Vietnam is already a big importer, higher imports could mean high inflation. The government should not give more financial support, like interest rate subsidies, or it will risk stimulating high inflation and creating pressure on local businesses that need to fight price hikes.

Only 20 percent of local businesses were able to access the subsidies this year while the rest, mostly small and medium-sized enterprises, had to fend for themselves against the downturn. This means that local businesses overcame the crisis without financial support from the government. What they need from the government is well-managed and stable macroeconomics.

Budget deficit

Vu Thanh Tu Anh, director of research at the Fulbright Economics Teaching Program in Ho Chi Minh City

Vietnam's economy will ride the wave of the global recovery, led by the US, the European Union and Japan. There have been clear signs that the US economy is recovering from a slumping 2009.

Consumption, unemployment, housing and inventory indices are faring better The EU has recovered more quickly than expected and inflation remains low in the region while Japan saw positive GDP growth in the third quarter of 2009 The International Monetary Fund, or IMF, said world GDP growth would hit 3 percent this year and 4-4.5 percent in 2014 and 2015. It said the global consumer price index would reach 4 percent in 2010. However, what will it be when governments withdraw their stimulus packages?

Vietnam has actually been on a V-shaped economic recovery. The national growth in gross industrial production was high in 2009, but unsustainable in its fundamentals. The non-state sector and the exploration industry increased their contributions to the growths in gross industrial production and GDP last year. The foreign sector held a majority of the growth brought about by private firms.

Vietnam's economy also faces the risks of its state budget deficit, which accounted for 10 percent of GDP in 2009. The country's stimulus packages were very large compared to its GDP. It will be risky for the economy if the 2010 deficit is higher than 2009. Another risk is the pressure for the dong to be devalued this year a devaluating dong will fuel high inflation in 2010.

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