News Room - Business/Economics

Posted on 05 Jan 2009

What does 2009 hold for economy and businesses?

      

 

Lower growth, higher budget deficit

Vu Thanh Tu Anh, director of Research, Fulbright Economics Teaching Program

 

The recession has seriously affected economies around the globe that multilateral organizations like the World Bank and the International Monetary Fund have adjusted their forecasts for global economy from high to very low growths in 2008 and 2009. A few months earlier, they believed the US, European Union and Japan would post positive growth rates but now they are afraid of negative growth in these economies in 2009.

 

Vietnam’s economy has experienced slow growth. Exports, which play a major role in the country’s economic growth, will fall in 2009. The government has not issued unemployment figures but I think the ratio would be high since many businesses are cutting jobs to deal with the recession. The budget will see a deficit, firstly because export earnings will fall and secondly because the government will help businesses through stimulus packages.

 

The IMF estimates a budgetary deficit of 7 percent of GDP in 2008 and higher this year.

 

People are waiting for the stimulus package. The government’s policies will be successful if businesses actually believe in them. Therefore the government should be transparent with the package.

 

Lower growth, lower inflation, the ideal scenario

Le Duc Thuy, former governor of the State Bank of Vietnam

 

There are three scenarios for the Vietnamese economy in 2009. Firstly, economic growth of 6 percent and inflation of 10 percent. But I think it is a tad too optimistic. Secondly, 5 percent growth and 6 to 8 percent inflation. This will be a good launching pad for a higher growth trajectory in 2010. I think it is an ideal scenario if inflation is less than 10 percent. The government should focus on this. Thirdly, 4 percent growth but inflation above 10 percent.

 

The government’s main goal in 2009 will be to fight the recession rather than the high inflation as it did [in 2008]. It must increase public expenditure to stimulate consumption. I had opposed a proposal by the government to implement a new, higher salary policy. But I changed my mind and urged the government to hike salaries for state officials as soon as early 2009. It will serve as a major stimulus to fight the looming recession.

 

Exports to take a hit, local market in good shape

Ly Quy Trung, chairman of Nam An Group

 

Like in other countries around the world, businesses in Vietnam have suffered due to the global economic downturn since the country has trade links with the world. But I think the impact on the Vietnamese economy has not been as severe as on some others. Our luxury restaurants were affected as people cut back on spending. But our mid-range restaurants like Pho 24 remain in good shape because people need to eat.

 

Investors in real estate and securities have been badly hit by the downturn. We tweaked our investment plans, delaying plans to open more outlets in 2008. It was not that we were affected badly by the recession; we merely wanted to hold on to cash in case of an emergency.

 

The global economy will remain gloomy this year, and will cast a shadow on the Vietnamese economy. But I am optimistic. True, many businesses depending on exports will find it difficult to recover but those depending on the local market will be able to survive and [even] grow.

 

Vietnam’s retail market is one of the top among emerging economies. Korean retailer Lotte Mart has major investment plans for the next 15 years. Other international retailers like Parkson and Metro also plan to expand their business in Vietnam. International retailers realize that Vietnam remains a promising market. In general, businesses providing goods and services for local consumers will be OK in 2009.

 

Exports, a major concern

Kenneth Atkinson, managing partner of Grant Thornton Vietnam

 

Three of the biggest challenges that faced the Vietnamese economy in early 2008 were the high rate of inflation, the growing trade deficit and the real estate price spiral.

 

Through fiscal measures, Vietnam did exceptionally well to reduce the rate of inflation and trade deficit in a relatively short period of time and of course the tightening of liquidity also took a lot of the heat out of the property market.

 

One cannot overlook the record level of foreign direct investment (FDI) but we must of course remember that only about 16-18 percent of the committed FDI manifested itself as actual contributed capital.

 

Most businesses encountered challenges they had not really had to face previously, with the macroeconomic problems within Vietnam and the global financial meltdown. One of the biggest problems for many businesses, and in particular real estate developers, in 2008 was the drying up of credit.

 

The coming 12 months will be more testing in many ways though the resumption of lending and stimulus measures will help some businesses. However the biggest challenge will be the general downturn in business brought about by the worldwide recession, which will have an adverse impact on the majority of businesses in Vietnam.

 

It is very positive that the government is talking of a stimulus package and that this would probably be better directed at assisting small-and medium-sized enterprises, assisting exporters and investing in infrastructure which will help both future development and short-term employment and economic growth.

 

I think 2009 will be a difficult year for Vietnam and for most businesses. As I said earlier we cannot escape what is going on in the rest of the world and most developed countries, on which Vietnam relies for exports, are entering their worst recession for decades.

 

Committed FDI will undoubtedly fall as companies retrench investment plans to survive and focus on core business. Vietnam may be lucky because of the quality of some of the larger investors who committed investment in 2008, and avoid a significant fall in remitted capital but slower remittances from Overseas Vietnamese and a much slower growth in exports will have an impact on the overall balance of payments.

 

My major concern relates to exports, which are already showing declines on a monthly basis, and Vietnam's ability to maintain any level of export growth. An overall decline in exports would have a significant impact on the economy, on employment and possibly on social stability.

 

The government should do all it can to help maintain export growth and to maintain a reasonable level of economic growth, without measures that will again fuel inflation.

 

Attention should be paid to measures that will help maintain current employment levels which could in part be done by offering incentives for maintaining staff levels through training subsidies, which will have a long term beneficial effect on the level of skilled labor when the upturn comes in 2010 or 2011.

 

2009 could be tough year

Adam McCarty, chief economist of Mekong Economics

 

Vietnam has risen from abject poverty to almost middle-income economy status due to 15 years of high growth rates. World Trade Organization accession changed global expectations about Vietnam. But 2009 could be a very tough year as global demand collapses. Inflation, exchange rates and the trade deficit will remain relatively stable well into 2009. All of them, however, will remain uncomfortably high due to unresolved banking sector bad debts, lagged production effect of credit crunch, impact of unwinding anti-inflationary administrative controls and measures, budget deficit pressures and the global economy slowing down more than predicted earlier.

 

The government has introduced stimulus packages which, I think, should not focus on capital-intensive industries like coal, steel, cement, fertilizer but on infrastructure like electricity, roads, water, rural livelihood, and health and education. The focus should be broad-based stimulus, not “pet industry” projects.

 

Easier to borrow from banks

Truong Dinh Tuyen, former trade minister

 

I think it is unlikely that the country can achieve 6 percent growth in 2009 as demand and prices are declining on the international market. Following the financial crisis of 1997, Vietnam’s economy grew at 4.78 percent in 1998 and 5.78 percent in 1999. Exports grew just 0.4 and 11 percent in that period. Therefore, the economy will be in bad shape this year.

 

However, the year will be good for businesses to borrow from banks since they have lowered interest rates. Businesses will not have to worry about the cost of capital, only the market. Furthermore, the government is trying to help businesses by introducing a stimulus package and has asked public banks to lend to businesses, sometimes without collateral.

 

Exporting will be tough, so businesses should focus on the domestic market. Unfortunately, they have yet to pay much attention to the domestic market, which is attractive to foreign businesses.

 

Customers prefer cheap goods during a recession. Businesses will be unable to compete even in the domestic market if their prices are not competitive. I think cheap products worth US$450 million will enter the Vietnamese market from China where enterprises are sitting on stocks.

 

60 percent pessimistic

Truong Trong Nghia, advisor to YKVN Law Firm

 

How will the Vietnamese economy fare in 2009? It is difficult to answer this question because no one knows how the global economy will fare. But the recovery of the Vietnamese economy will not depend completely on global recovery. I mean it will recover earlier than others if the government can find solutions. I am not optimistic but not very pessimistic either – I am 60 percent pessimistic about the economy in 2009 as I have doubts about the government and the measures it will adopt. The economy faced difficulties last year because of its internal weakness as well as the impact of the global economic downturn. The economy clearly exposed the shortcomings in governance. Businesses were still struggling with red tape at state agencies, wasting their money and time. The public and businesses have complained about this but there has not been much improvement.

 

The country saw high inflation in the early months of 2008 because state-owned corporations sank public money in ineffective projects. The government realized this and cracked down on such investments but I saw things get better only gradually.

 

I am afraid the government’s US$6- billion stimulus package will again see corporations making ineffective investments.

 

I think the economic slowdown offers both difficulties and opportunities. Now is the best time for the authorities to assess their governance and correct it and prepare for recovery that experts forecast for late 2009 or early 2010.

 

The government should focus on improving administration rather than the stimulus package. I believe it will be wasteful if the government has no specific strategies to direct the money toward the right businesses and industries. In fact, administrative reform will also help businesses overcome their difficulties.

 

Optimism and faith

Tran Du Lich, deputy head of the National Assembly representative group from Ho Chi Minh City

 

There are two things about Vietnam that experts around the world recognize – optimism and faith. Vietnamese businesses are very flexible and smart. These are the strengths that need to be made use of.

 

I feel positive about the economy at this point... The economy has already gone through the eye of the storm, which is the hardest part, so there is nothing we need to be pessimistic about.

 

I hope that with the efforts of governments around the world, the global economy in 2009 will see a downturn but not a recession, and it will recover by the end of the year.

 

Exports, tourism and investment will be hit hard this year. It is hard to say how difficult the situation will be, but it is certain that global demand will fall. If the government implements the stimulus package soon, Vietnam will be able to regain its [export] markets right in the first half of the year. However, the package may bring back inflation in the third quarter.

 

It should be noted that the government will not use the stimulus package to grant loans to anyone, but the package will be used to subsidize interest payments on loans to businesses. As a result, the benefits [from the package] will not accrue to the government but to commercial banks and businesses.

 

Vietnam should take advantage of this period of slower growth to restructure its economy and increase its competitiveness. The global financial storm requires us to check the stability of our house.