macro economic stabilization issues in vietnam

8/2/2019 Macro Economic Stabilization Issues in Vietnam

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A C L O S E R L O O K

Macroeconomic StabilizationIssues in Vietnam

AkshayKr

AnujHans

GauravRampall

KunalMoitra

RagurajR.

ShwetaPandey


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Introduction

y VN economic reform = market-oriented reforms + international + economicintegration+ maintaining macroeconomic stability

y Since 2001: fundamental changes in macroeconomic situation due tointeractions of integration, external shocks with domesticstrengths/weaknesses, and policy adjustments

y 2001-2006: a period of expansion (GDP, trade, investment), with low

Inflation

y 2007 (WTO membership) - now: larger volatility (lower growth and highinflation), constant shifts in policy stances until -

2007: growth promotion2008: inflation control

2009: prevention of downturn

2010: recovery, but emerging macro instability

2011: macro stabilization


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Introduction

y VN economy: similar but also different from other EA economies

y Channels of Impacts of global crisis: Trade + K-flows + Tourism +

Financial market + International price movement

y 2010: (X+M)/GDP 160%; FDI sector = 19.9% GDP; 54.0% export value (incl. Crude oilexport); 25.8% total investment.

y Weak macroeconomic fundamentals

High budget deficit: 5% GDP for many years (2009: 6.9% GDP; 2010: 5.7% GDP)

Huge trade deficit and high CA deficit (9.9% GDP 2007; 12.9% GDP 2008; 8.3% GDP

2009; 4.1% GDP 2010)

BOP surplus in 2007-2008, but deficit in 2009-2010 substantially declining foreign reserves

Huge S-I gap: Saving not low


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Vietnam Monetaryand Fiscal PolicyDecisions

y In August, 2011 inflation experienced a 0.93 per centmonth-on-month rise, but still a 23 per cent increasecompared with August, 2010

y Tight monetary policy will likely be maintained for the lastthree months and probably the opening months of 2012,

burdening most enterprises, especially small- and medium-sized ones


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Stagflation Conditions

y With signs of stagflation , another policy assignment inaddressing the economic slowdown needs to be considered

y

Amid a tight monetary policy, it is necessary to effectivelyemploy a tight fiscal policy to cut public investment andgovernment expenditure, resulting in better inflationcontrols


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Monetary and Fiscal Policy

y Open market operations (OMO) and reserve requirementpolicies will still be helpful measures to reduce the moneysupply

y Without support from a tightened fiscal policy it will bedifficult for monetary policy alone to effectively lowerinterest rates

y Pumping excessive liquidity into the banking system couldeventually raise inflation in late 2011 and early 2012, ashappened last year


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IS-LM Model

In the face of such a situation, coordination between fiscal

and monetary policy as an anti-inflation strategy isbecoming more critical than ever in the policy assignmentagainst inflation for the rest of 2011 and for 2012.


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IS-LM Model

y An expansionary stance on fiscal policy, which is being usedconsistently in Vietnam, tends to shift the IS curve to theright, raising interest rate r and output Y (stimulatinggrowth).

y Contracting monetary policy utilised since February 2011tends to shift the LM curve to the left, also lifting interestrate r while decreasing Y (via declining aggregate demand)

y High interest rates in Vietnam at present can be explainedby both policies.


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Vietnam Economic Policies

y In Vietnams economy, it is now crucial to carry out thesesteps:

Implement solid and firm decisions on fiscal policy to weakenaggregate demand by cutting down on government expenditure,especially public investment

Introduce a more flexible monetary policy to lower the role ofreducing aggregate demand and enhance the role of stimulatingaggregate supply

Abolish the interest rate ceiling of 14 per cent to emphasize the roleof market operations in the banking system rather than applyingadministration tools with distorting effects


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Foreign Direct Investment (FDI) Inflows

y The Foreign Investment Law was passed in December 1987

y After reaching a peak in 1996, FDI inflows into Viet Namhad declined since Asian crisis

y However, since the 2nd half of 2004, it has expandedrapidly

y The sudden increase of FDI in these recent years reflectsinvestors confidence in Viet Nams reform and

international integration process and developmentprospect as well as the restructuring of FDI in Asia in somelabour-intensive industries such as outsourcing logistics,electronics, garments and manufacturing from China to

Vietnam


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FDI Inflows

FOREIGN DIRECT INVESTMENT; NET INFLOWS (BOP; US

DOLLAR) IN VIETNAM


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Where has FDI been invested

43%

20%

10%

8%

5%

14%

RealizationofFDI bySector(%ofthe Totalin2010)

manufacturingindustry

oil and gas

hotel and tourism

offices and apartments

building urban areasand industrial zones

Balance


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FOREIGN DIRECT INVESTMENT; NET INFLOWS

(%OF GDP)

2010 GDP (US$) $107 billionapprox


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Foreign direct investment;net outflows (% of GDP)

2010 GDP (US$) $107 billionapprox


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Portfolio Investment Flows

y The development and outlook of Viet Nams economy andsecurities market has been appealing to many foreigninvestors.

y Foreign portfolio investment (FPI) inflows, together withthe presence of a number of foreign investment funds,

became a real new phenomenon in 2006.

y

Foreign portfolio investors have shown a keen interest toinvest in Viet Nams equity market due to their appetite forhigher risk higher return assets and prevailing liquidity inthe global economy.


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Portfolio investment; equity(DRS; US dollar)

Portfolio equity includes net inflows from equity securities other than those recorded as directinvestment and including shares, stocks, depository receipts (American or global), and directpurchases of shares in local stock markets by foreign investors. Data are in current U.S. dollars.


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Capital Inflows and Macroeconomic Stability

y In the last five years, there were high trade deficits butmuch less the CA deficit as in the mid-1990s

y

In the mid-1990s, trade andCA deficits were largely fundedby FDI. But since 2005, remittances and portfolio inflows

have played an increasing role in financing trade deficit

y Also, as a result of huge capital inflows, foreign exchangereserves have recently accumulated rapidly, increasingfrom USD 3.0 billion in 2000 to USD 23.0 million in 2010


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Current account balance (% of GDP)


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Vietnam Balance of Trade


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y July 13, 2000: Bilateral Trade Agreement betweenthe USA and Vietnam

y Implementation of the BTA: Helped in acceding tothe World Trade Organization (WTO) in 2007

y

International Agreements: The Association ofSoutheast Asian Nations (ASEAN) Free Trade Area(AFTA), Trans-Pacific Partnership (TPP)


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yAs a result of these reforms, exports expandedsignificantly, growing by as much as 20%-30% in

some years. Exports accounted for about 70% ofGDP in 2010. Imports have also grown rapidly,and Vietnam has maintained a structural tradedeficit.

y Trade Deficit: narrowed by more than 7% in twoyears from 14.2% of GDP in 2008 to 6.9% in2010.


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Balance of Trade: 2001-2011


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GDP Growth Rate: 2001-2011


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Inflation Rate: 2001-2011


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Vietnam Tourism

y Tourism is a vital component of economic growthglobally and for the Social Republic of Vietnam

y By 2010 Tourism has contributed 12.4 percent ofVietnams Gross Domestic Product (GDP)

y

Real GDP growth for the travel and tourism economyis expected to be average 7.3 per annum over thecoming 10 years


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Tourism spend by countries


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Leading Market Segments


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As Vietnam continues to make investments to attract inbound

visitor arrivals and revenues in the months and yearsahead, there is a significant opportunity for travel andtourism to continue supporting the national economy as a

growing contributor to the Gross Domestic Product.

Opportunities Ahead


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International Price Movement

Soaring food prices impact three groups

The Poor

Governments of Low Income countries

The Aid agencies juggling increased demands for food


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International Price Movement

One tonne of wheat climbed from$105 in January 2000 to $481 inMarch 2008

The domestic gold price is farhigher than international prices

Oil prices have risen faster thanfood prices

Short-term supply shock includesPoor Harvest in Australia

The price of maize is likely to be

higher by 40% in 2016-17, withwheat prices up by 20%, and riceby 14%.

Current State


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Thank You!

macro economic stabilization issues in vietnam

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