Outlook for Vietnam’s economy in 2009

The economy faced many severe challenges last year but thanks to measures initiated by the government, it performed well.

Rice being loaded at a port for export. Vietnam ships large quantities of the grain, helping it achieve exports of over US$60 billion last year. (Photo: Lao Dong)

Inflation was halted. GDP growth was fairly good compared to the overall global growth. Exports were worth over US$60 billion. FDI commitments increased to a record of US$60 billion. The financial and credit systems remained rather stable.

The global financial crisis triggered concerns of a possible economic crisis and put all economies under severe pressure, including Vietnam’s.

Faced with such a situation, our country tried to bring inflation under control, but the causes of the inflation and trade deficit remain a problem – mainly low economic and investment efficiency.

The economy grows merely in terms of quantity, not efficiency, as reflected by the three indicators below.

First, in 2001-2008, the average incremental capital output ratio (ICOR) reached nearly 5.

The investment to GDP ratio was 38 percent while economic growth was just 7.6 percent. Compared to China’s growth to investment ratio, ours was around 2 percent lower.

Second, the value-added--output ratio declined sharply in the processing industry. It was only 33 percent on average compared with 47 percent in 2001. In agriculture, despite the scientific and technological progress, this ratio has been unchanged at 55-57 percent for the last several years.

Third is the cost to GDP ratio: In agriculture, VND1 of cost created VND1.28 of GDP, but in industry it is just 1 to 0.51, lower than in 2005.

Along with the low quality of growth, there were also problems in other areas.

In 2009 the global economic scenario will be rather gloomy. Many companies will cut production and lay off workers. Foreign exchange reserves will be hard to sustain and deflation is likely.

In this context, exports, FDI, and portfolio foreign investment will all decline.

The Government is taking measures to ward off a recession while also controlling inflation, and stabilize the economy.

Firstly, economic growth will have to be maintained at more than 6 percent and inflation capped at 9-10 percent.

Secondly, the country should restructure its public investment, with focus on short-term and small projects, particularly those that require large quantities of materials and labor.

Thirdly, it is advisable to lower lending rates, loosen the monetary policy, and keep a balance between credit and deposit mobilization.

Fourthly, it is required to stimulate both investment and consumption to make up for falling exports.

Fifthly, the Government and commercial banks should provide credit to small and medium-sized enterprises. Incentives should be provided to labor-intensive projects, agricultural processing, export outsourcing, and trade villages.

Sixthly, the trade deficit has to reduced. If it is US$19-20 billion as expected, it will put severe pressure on balance of payments.

Seventhly, the Government should create confidence among the people that the economy will be stable, thereby avoiding its dollarization.

In brief, the economy will face many challenges in 2009 and its growth may decline, but we should not be pessimistic, since it is also a time for us to restructure the economy to make it more competitive.

By Dr. Tran Du Lich - Translated by Quang Minh

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