With active support from fiscal policy and the adjustment of domestic demand, Vietnam has initially overcome the impact of the global financial crisis. The country’s GDP growth has increased from 3.1 percent in the first quarter to 4.46 percent in the second quarter and 5.76 percent in the third.

Together with China, India and Indonesia, Vietnam is one of few countries with positive GDP growth. The latest statistics on the GDP in the third quarter showed that the economy is on the way to recovery although exports have edged up slowly.

Despite green shoots in Vietnam’s economy, there remain risks, which are different from those which were experienced in 2008.

Closing the trade gap
Tai Hui, head of the Research Department of the Standard Chartered Bank (SCB) says that the rising trade deficit in recent months betrays a disequalibrium between the country’s internal strengths and weaknesses in the global economy.

Sharing the same view, Vu Dinh Anh, vice director of the Market and Price Research Institute under the Ministry of Finance says that the global financial crisis is abating slowly so Vietnamese exports will continue to face difficulties. This year’s exports may fall by 10 percent compared to 2008. “Too much attention should not be paid to the scale of an export growth but focus should be brought to bear on export efficiency. Boosting export growth at any cost under the circumstances of high trade deficit will negatively impact the economic growth,” Anh says.

Tai Hui says that while inflation is being controlled, strong measures to encourage monetary and fiscal policies will give people hope that inflation will self-regulate. In recent months, the value of the Vietnamese dong has increased by 1 percent compared to the US dollar. This is thanks to a strict policy approved in the 2001-2007 period. The Government seems to prefer strong exchange rate to a narrow trade deficit.

Although inflation is being controlled effectively there remain fears of price hikes due to the implementation of a loose monetary policy. The inflation rate dropped by 2 percent in August but increased by 2.4 percent in September compared to the same period last year. SCB forecasts that the inflation rate will rise by 6.6 percent in late 2009.

Burden on monetary policy
Despite inflation being currently maintained at a low level, economic experts still worry that it is putting great pressure on interest and exchange rates in the context of an increasing trade deficit and falling export turnover. This poses risks to the national economy.

In the face of such difficulties, many have said that it is imperative to develop the second stimulus package. However, Dr Tran Dinh Thien, Head of the Central Institute for Economic Management (CIEM) says that with budget deficit equivalling 5 percent of the country’s GDP per year, and ineffective public investment greatly affecting the national economy, the implementation of the second stimulus package is likely to send the deficit soaring next year, even surpassing the current level.

Although this year’s trade deficit is estimated at 6.5 percent of GDP, lower than the projected 8 percent of GDP set by the National Assembly, the stimulus spending for 2010 should be taken into account.

The first stimulus package with an interest rate subsidy of 4 percent is actually intended to rescue not to stimulate the national economy. This stimulus package has helped businesses avoid slow capital circulation because of bad debts.

It is essential to ponder over the use of the second stimulus package as this may drive up the deficit and throw other monetary mechanisms out of balance, creating an unfair business environment and causing a long-term impact on the business community, says Thien.

Regarding monetary policy, Tai Hui expresses his concerns over the efficiency of increasing interest rates to control economic activities. The State Bank of Vietnam (SBV) has focused on the control of the quantity of loans rather than lending costs. Aside from this, an increase in interest rates would run counter to the Government’s interest rate subsidy package implemented since early this year under which borrowers can enjoy a 4 percent subsidy. For that reason, the SBV should put liquidity and inflation under strict control by continuing with their current approach, Tai Hui says.

According to Dr. Hoang Xuan Que, Head of the Banking Department under the National Economics University, the SBV should be more flexible in controlling monetary policy while commercial banks should ensure sufficient capital supply to meet purchase demand for farm products and seafood for export and agricultural production.