A macroeconomic report released on Wednesday by Vietnam Institute for Economic and Policy Research (VEPR) showed that Vietnam’s economy last year saw its highest growth in 10 years, at 7.08 per cent year-on-year.
Vietnam’s economic growth could reach 6.9 per cent this year, an increase of 0.1 per cent compared to the 2019 socio-economic development plan adopted by the National Assembly, in the context that Vietnam is benefiting from the US-China trade war.
The statement was made by VEPR director Nguyen Duc Thanh at a conference held in Hanoi on Thursday.
However, Thanh noted, the use of foreign exchange reserves to stabilise the value of the Vietnamese dong, as the State Bank of Vietnam (SBV) has done in recent years, is not a long-term solution when Vietnam’s foreign exchange reserves are in fact small in scale.
The pressure of exchange rates and inflation along with the regulation of restricting the use of short-term capital for medium- and long-term loans has caused the interest rate of the dong to increase significantly at the end of last year.
However, the solution of raising interest rates will lead to implications for businesses when pushing up the cost of capital due to the modest size of the corporate bond market, so the burden on bank credit has not been reduced.
Therefore, the proactive reduction of the dong between the depreciation of the yuan against the US dollar is necessary for Vietnam to adapt in the trade war. Such adjustment of exchange rates helps Vietnam take advantage of two large markets to improve production as well as the trade balance, VEPR’s director suggested.
“If there is an appropriate exchange rate policy, Vietnam can benefit from this war, besides receiving many orders shifted from China,” Thanh told Viet Nam News.
In terms of long-term impact when the production supply chain shifts from China to neighbouring countries, Vietnam needs to improve the institutional, business and labour quality environments to grasp this opportunity. The challenge for Vietnam is also not small as infrastructure is not ready to receive waves of production, with no economies of scale like China and India.
Growth came from the solid recovery of the agriculture, forestry, fishery and service sectors, along with the breakthrough of the manufacturing industry. The foreign direct investment (FDI) sector continued to be the main contributor to growth through exports. This sector last year saw an export surplus of $32.81 billion, equal to nearly 14 per cent of GDP.
As regards business activities, while the number of newly established enterprises and new jobs did not differ much from that of 2017, the number of temporarily ceased enterprises last year was unusually high, which yield questions whether that is because of the economic structural shift or the fundamental risk of the economy.
According to the report, Vietnamese inflation in the fourth quarter of last year showed signs of decline thanks to the sudden drop in energy prices. Average inflation (3.54 per cent) reached the National Assembly’s target. In the context of erratic global commodity prices, along with the increase of the environmental protection tax on petroleum to maximum level since January 1, 2019, the SBV still needs to evaluate inflation risks in the future to take appropriate measures.
VEPR forecast Vietnam’s economic growth prospects in the long term will continue to depend on FDI, resulting in the removal of institutional barriers, improved business environment and equitisation of state-owned enterprises.
International trade and investment activities are expected to flourish under new-generation trade deals such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the European-Vietnam Free Trade Agreement.
In addition, the US-China trade war is placing Vietnam in front of a rare opportunity that supply chain production is going to leave China. However, to take advantage of this opportunity, it requires a lot of improvements to the institutional environment, as well as business and domestic labour quality, Thanh told Viet Nam News.
Speaking at the conference, economist Pham The Anh also recommended that the government can continue to respond to risks with a more flexible exchange rate policy. In the context that the price of US dollar can increase even though it is not as strong as last year, the dong exchange rate should go between big currencies of major export markets with Vietnam to reconcile positive and negative impacts.
“The financial system must be reduced based on leverage when credit growth is very strong in risk areas such as real estate, BOT [Build-Operate-Transfer], BT [Build-Transfer] and consumer credit,” Anh added. VIET NAM NEWS/ANN