Saturday, 23 Mar 2019

Vietnam economy walks a tight rope in face of rising challenges

Updated at Thursday, 12 Jul 2018, 07:57
The Hanoitimes - As a trade war between the US and China is looming large, small and open economies such as Vietnam may be on the receiving end of both opportunities and challenges, according to a recent report released by the Vietnam Institute for Economic and Policy Research (VEPR).
Vietnam's economy in the second quarter saw a positive growth rate of 6.79% year-on-year, the highest of a second quarter in 10 years, however, a number of factors potentially causing concern for the remaining months of the year have appeared, said VEPR Director Nguyen Duc Thanh.
Overview of the workshop. Source: Nguyen Tung.
Panel of economists at the launch of the quarterly report. Source: Nguyen Tung.
Positive picture in the first six months

"Such high growth rate sets the pace for Vietnam to achieve the growth rate of 6.8% for 2018", Thanh said at the launch of VEPR's quarterly macroeconomic report on July 11.

According to the report, the agriculture, forestry and fishery, and service sectors continued to grow sharply in the first half of the year, growing at a seven-year high of 3.93% year-on-year for the former and 6.9% for the latter - the highest since 2012. 

Additionally, the industry and construction sector also grew at a high rate of 9.07% in the first half of the year, significantly higher than the rates recorded in the previous years (7.12% in 2016 and 5.81% in 2017), while the manufacturing continued to be the driving force for the sector and the whole economy, posting a high growth rate of 13.02%, Thanh said.

Although trade growth slowed in the March - June period, trade balance recorded a surplus for the fourth quarter in a row and reached US$1.4 billion in the second quarter. 

Meanwhile, inflation surged in the second quarter, reaching 4.67% year-on-year at the end of June, due to rising food and fuel prices. Core inflation remained at 1.37%, but reflected the State Bank of Vietnam (SBV)'s prudent monetary policy, he added. 

Thanh said the inflation rate may break the 4% curb this year, but should not exceed 5%. "Once the rate surpasses 5%, it may jump to 6% or 7% in no time, creating a major change in the price structure of the economy and getting out of control."

However, the increase in inflation rate should not be overestimated, as it was mainly driven by seasonal characteristics and not from an increase in money supply, Thanh assured.

Finance - banking expert Nguyen Tri Hieu said it would be ideal to keep inflation rate under 4% for an economic growth rate of 6.7 - 6.8%. However, due to growing global uncertainties, a high GDP growth rate may likely lead to a higher-than-4% inflation rate, "which is acceptable to a certain extent," Hieu added. 

According to Hieu, in this difficult period of the world economy, Vietnam should prioritize economic growth, job creation and living standard improvement over a contractionary monetary policy. 

US - China trade war puts Vietnamese economy at risk

Nevertheless, Vietnamese economy with a high trade to GDP ratio of 190% makes it more vulnerable to a potential global recession caused by an ongoing trade war between the US and China, Thanh said.

Consequently, taking into account Fed's decision to hike interest rates and Chinese yuan (CNY)'s depreciation, Thanh suggested a devaluation of the VND at a lower rate than the CNY against the USD is "the best option". 

As the country mainly imports material inputs from China for processing and export, such devaluation would place Vietnamese importers at an advantage over the Chinese market and exporters.

In this scenario, Vietnam can take advantage of both China and the US to improve production and trade balance, he said. 

Moreover, Vietnam could face a wave of Chinese goods flooding its domestic market, due to the US - China trade war, so plan is needed to prevent negative impacts on domestic enterprises. 

Echoing Thanh's view, Hieu warned CNY's depreciation would cause Vietnam's trade deficit with China to widen, which is already at the highest level among Vietnam's trading partners, second only to South Korea. 

"If the trade war continues to escalate and China retaliates the US by depreciating the CNY further, Vietnam will be in real trouble," Hieu added. 
Nguyen Tung
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