Monday, 20 May 2019

Vietnam's economic growth is on track but risks for long-term prospect remain

Updated at Wednesday, 10 Oct 2018, 17:12
The Hanoitimes - The inflation target of under 4% in 2018 would be achievable if there is no major change in energy prices in the fourth quarter.
Vietnam's GDP is projected to reach over 6.8% in 2018, however, internal and external risks are going to have significant impacts on the country's long-term prospect, according to the Vietnam Institute for Economic and Policy Research (VEPR). 
Overview of the VEPR's workshop. Source: Ngoc Thuy.
Overview of the VEPR's workshop. Source: Ngoc Thuy.
Vietnam's economy in the third quarter expanded 6.88% year-on-year, leading to the overall growth of 6.98% in the January - September period, the best nine-month performance since 2011, stated Nguyen Duc Thanh, VEPR's director. 

"Vietnam is on track to reach and even exceed the growth target of 6.7% set by the National Assembly for the entire year," Thanh said at the launch of VEPR's quarterly macroeconomic report on October 10. 

In the long term, the Vietnamese economy will receive multi-dimensional impacts from developments of the world economy, Thanh continued. First, despite the potential trade confrontation directly with the US, the trade balance of Vietnam may be indirectly affected via the trade relationship with China. That VND is tightly pegged to the firmer USD causes Vietnamese goods to be less competitive. 

Secondly, capital inflows also face adverse impacts as the Fed continuously raised policy interest rates (one and two more increases are due in 2018 and 2019 respectively). Moreover, the Fed's interest rate hike also exerts pressure on interest rates of the domestic currency to stabilize the exchange rate and prevent inflation.

According to Thanh, the inflation target of under 4% in 2018 would be achievable if there is no major change in the energy price in the fourth quarter. 

Economist Pham The Anh warned that if Vietnam raises the environmental tax protection on fuels by VND1,000 (US$0.043), the inflation rate may increase 1.6 percentage point.

Vietnam recorded a trade surplus of US$5.39 billion in the first nine months of 2018, while the FDI sector accounted for nearly 72% of Vietnam's total export turnover. While the domestic sector still suffered a trade deficit of $5.23 billion in the third quarter this year, the FDI sector continued to be the trade leader of the Vietnamese economy with a trade surplus of $8.01 billion.

"It reflects the fact that Vietnam's economy still depends on the FDI sector. It would be difficult for the country to maintain the current high economic growth if foreign invested companies move to another country with more favorable incentives and business environment," Thanh noted.  

Notably, the newly registered FDI in the third quarter stood at US$2.32 billion, down 14.7% year-on-year and additionally registered capital reached US$1.11 billion, down 31.1%. This was due to the fact that there was no large-scale FDI project during this period compared to the first and second quarter, Thanh continued. 

Thanh expressed concern over the high number of enterprises ceasing operation recorded in the July - September period at 24,501, up 76% year-on-year, taking the total number to 73,103 in the first nine months, up 48.1% year-on-year. 

On this issue, economist Pham Chi Lan stated Vietnam's business environment has not been improved as expected, for which the goal of having one million enterprises by 2020 would be very challenging.  

US - China trade war would cause great impact on Vietnam

The US-China trade war and the devaluation of the Chinese yuan (CNY) have had a great impact on the world economy, including Vietnam, Thanh stressed. 

Currently, the VND has been still being pegged to the greenback. When the CNY depreciates sharply, Vietnam's trade balance will be severely affected by cheap Chinese goods flowing into the domestic market. 

Thanh suggested a policy of devaluation of the VND against the dollar by a moderate level lower than the depreciation of the CNY against the USD. As a country that imports a lot of raw materials from China for processing and export, adjusting the exchange rate in that way makes importers of raw materials from China more profitable besides additional benefits from export. On that basis, Vietnam could simultaneously utilize these two major markets to improve its production and trade balance.

Echoing Thanh's view, economist Pham Chi Lan said there is a growing trend of US-bound product made in China going through Vietnam to evade import tariffs. Meanwhile, as a consequence of the trade war, the CNY's devaluation would cause Vietnam's trade deficit with China to widen, which is already at the highest level among Vietnam's trading partners.

Finance-banking expert Nguyen Tri Hieu said Vietnam's economy would be in trouble if China decides to depreciate the CNY further.  
Ngoc Thuy
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