Vietnam S Socio-Economic Situation

CENTRAL INSTITUTE FOR ECONOMIC MANAGEMENT CENTER OF INFORMATION AND DOCUMENTATION ------VIETNAM’S SOCIO-ECONOMIC SITUATION – HAPPENINGS AND COMMENTS No. 03-2010 I. Overview of socio-economic happenings 1. The economy in the first 5 months of 2010 In general, Vietnamese economy confronted with unfavourable conditions both domestically and internationally. Immanent weaknesses continuted to bare themselves and caused remarkable impacts to economic stabilization and development. Macro-economic balances remain unstable; competitiveness at levels of the national economy, businesses, and products remain low; enterprises faced with many difficulties, such as: capital shortage, and contracted markets; financial-monetary activities showed remarkable implicit risks; income decline continued; and people had to struggle with many difficulties for their living. Human capacity remains limited, there has been a significant shortage of skilled labours; economic infrastructures have failed to meet demand of economic development, etc. However, it is forecasted that socio-economic conditions is likely to achieve positive results and make new advancements, while realizing targets of preventing economic sluggish and maintaining reasonable and sustainable growth. Followings are some noteworthy achievements in Quarter I-2010: First, industrial production witnessed many possitive advancements. Industrial productivity increased higher than the average targeted annual growth rate, and has continuously kept increased for three successive months (14 and 15 percent in March and April, relatively). In general, industrial production in the first five months is estimated at VND 301.8 billion, 13.8 percent increases comparing to the same period last year. Of which, non-state economic sector increased with 12.4 percent; FDI sector increased with 16.7 percent.

CIEM, Center of information and documentation Second, export has kept increasing, total export turnover in the five months reached USD 25.8 billion, 12.6 percent increased to the same period last year. By May, 8 products reached export turnover of more than USD 1 billion, namely: textile, crude oil, foodwares, fishery products, rice, timbers, wooden products, machines and links, computers and parts. Import turnover in the five months is at USD 31.2 billion, 29.8 percent increased to the same period last year; of which, imports of foreign invested companies is at USD 13 billion, 50.5 increased to the same period of the previous year. As export turnover, strong price increases in the world market has made up a reason for an increase in import turnover. Trade deficit in the first five months was at USD 5.37 billion, accounting for 20.8 percent of import turnover. Third, comparing to December 2009, consummer price index (CPI) in May increased by 4.55 percent but the inflation pressure has relatively declined. This is seen as a milestone for governmental management efforts. It is likely that lower CPI increase will be witnessed in some next months resulting from world price decreases of oil and other commodities. Forth, development investment has been promoted. State budget implemented capital in the five months wae VND 45.6 billion, equivalent to 36.5 percent of the annual plan. Credit capital for investment and exports was VND 23.9 billion. Whereas, implemented capital loans for investment was low, estimated at VND 5.5 billion and account for just 20.8 percent of the annual plan. ODA capital: total signed ODA capital under framework of agreements with donors was USD 497 million; of which, loaned captial was USD 454 million, granted capital was USD 43 million. ODA disbursement was USD 844 million, accounting for 35 percent of disbursement plan for 2010. Foreign direct investment (FDI): Total FDI capital was USD 7.5 percent, accounting for 77 percent of the same period last year. Implemented FDI was USD 4.5 billion, 7.1 percent inceased to the same period of previous year.

CIEM, Center of information and documentation Fifth, total state budget revenue in the five months was estimated at VND 176.8 thousand billion, accounting for 38.3 percent of the expected amount for the whole year (the number in the same period last year was 31.8 percent); of which, domestic revenue was VND 113.3 billion, income from crude oil was VND 22 billion, from ex-import was VND 39.5 billion. State budget expenditure reached VND 197 billion, accounting for 33.8 percent of the expectation for the whole year (the number in the same period last year was 28.2 percent), of which, expenditures for development investment was VND 44.4 billion, expenditure for socio-economic administrative activities and nationa security and defense made up VND 125.4 billion, aid payments amounted to VND 26.8 thousand billion. The above results are seen as positive signals for national economy given that the world economy has not fully recovered from crisis. However, it is noteworthy that with GDP growth rate in QI of 5.83 percent, the growth rates for QII, QIII, and QIV must be 6, 6.5, and 7.3 percent, respectively, to ensure planned 6.5 percent growth rate for the whole year. 2. Challenges and disadvantages to Vietnam Economy Despite of positive happenings, Vietnam economy still has to overcome many existing challenges that need urgent solutions, in addition to some arising problems, such as: increasing trend of price; high interest rates; noticeable trade deficit; difficulties faced by people in areas where livelihoods are affected by natural disasters and animal diseases, etc. The most dramatical challenges are as follows: First, electricity shortage in provinces of Binh Duong, Dong Nai, Ba Ria- Vung Tau, Long An, and HCMc, etc., where many industrial zones and production clusters allocated. According to Viet Nam Electricity (EVN), electricity shortage will be strained until June 2010. Second, CPI in May increased higher tan those in the same period of recent previous years, particularly prices of foods, construction materials, and services. Third, interest rate. After the Government end its subsidies, capital accessiblity of enterprises, particularly small and medium enterprises (SME) has

CIEM, Center of information and documentation been limited. Moreover, financial institutions remain unhealthy with low transparency and publicity, as well as many invisible risks. Forth, big trade deficit makes some macroeconomic balances are in difficulties. Fifth, unsufficient investment for development and social security, and state budget déficit. Low credit growth rate makes many reasonable demand of enterprises failed to be met; the target of economic rapid and sustainable growth recovery becomes increasingly challenging. Unstable securities and real estate markets. Sixth, effectiveness and competitiveness of enterprises have not been improved. The core role of market regulation mandated to state owned conglomerates and corporations has not fully performed; there are still some wastefulness in capital, assets and land usage by these SOEs. Business associations have not brought there role into fulplay, thus producers have to deal individually with underpricing, and export price reducing. Seventh, cooperation between state management agencies and press media to provide timely, transparent, and accurate to the public has not been paid proper attention. II. Highlights of economic issues and events in the first five month 2010 In short-term, macroeconomic unbalances remains big constraints to economic growth and business environment improvement. In medium and long term, fundamental issues, such as: economic structure, private enterprise development, and policy combination and management, are also likely to stun economic growth of Vietnam. Even though the Government provided action plan with clear targets: prioritizing macroeconomic stablization and economic restructure, applied policy tools are found not strong enought. Highlights of existing matters in the first five months are: 1. Issues related to Government economic management Many experts said economic management activities are just immediate solution. A range of commodities of necessarities were increased price

CIEM, Center of information and documentation concurrently, credits are tightened, both interest and exchange rates, causing adverse impacts to the public and enterprises. The people are worried about reinflation while businesses are dealing with capital shortage and production sluggish. All these make up drammatic pressure on inflation and leading to low growth rate. 2. Inflation and economic structure QuarterII/2010, inflation pressure becoming more burning as it is suffering from negative impacts from arrange of previous problems, such as: aftermaths from financial lossening policies and dual effects of investment and consumption spurring packages disbursed in 2009. Furthermore, domino impacts from price increases of electricity, coal, petroleum, steel, and transportation costs over the last time have further revealed in various industries and sectors of the economy. In addition to the concern of price increase and inflation, economic structure also consists of many problems. First, together with economic recovery, ICOR and state revenue deficit remain increasingly high. ICOR index is currently at 8 in Vietnam, particularly, ICOR in the state sector is above 10, the highest level in the world. High ICOR means increase in public investment which is also a fat land for corruption and wastefulness, causing many constraints to economic development. Second, export structure mostly relies on manufacture, undeveloped supporting industries make the ratio of imports accounts for more than 80 percent of total export revenue. Given unsecured conditions, including declining foreign reserve, the cycle of trade deficit – domestic currency devaluation – inflation – price adjustment pressure – inflation will be noticeable challenge to macroeconomic stabilization. It is said that inflation pressure is returning and require cautious control and management measures. On the other hand, however, overcontrol of the issue can also adversely impact to growth targets. Therefore, to achieve planned target, the Government should make thorough consideration of fast economic development and inflation control in the last months of 2010. 3. Issues related to ex-import CIEM, Center of information and documentation Apart from some advantages, ex-import conditions remain many difficulties, particularly: First, domestic production depends too much on imported inputs, whereas, international prices of many materials and raw materials increased drammatically, significantly affecting input costs of national production and business. Nevertheless, price increases of exports are generally lower than those of imports. For example, price of cotton increases by 25%, fiber increases by 34% while price of the export commidity just increases by 5 -10 percent. This makes enterprises worry that the more they produce the more losses they will burden. Second, capital accessibility becomes more and more difficult, even lending interest rates provided by commercial banks have decreased but still relatively high, at about 13 – 14 percent. Additionally, electricity shortage has forced many businesses ceased their production and are unable to fulfil commodities orders. Third, comparative advantages of Vietnamese exports mostly rely on low- tech products which are raw material intensive. In recent years, there are hardly any changes in commodity structure of Vietnamese exports. The above factors show that challenges to exports are no longer protection barriers provided by imported countries but endogenous weaknesses and limitation of domestic export-oriented production structure, particularly, limited productivity, unfavourable export procedure, high logistic and financial service costs. Therefore, to make a breakthough, enterprises and management agencies need to definitely overcome current endogenous weaknesses. 4. Lack of improvement with growth quality Issues mentioned the most in April and May are ones related to growth quality. The examination report submitted to the 7 meeting section of National Assembly XII also presented concerns that economic growth quality as a target of economic development in 2010 has shown no significant improvements.

CIEM, Center of information and documentation  State revenue deficit and increasing national debts According to the Chairman of National Financial and Fiscal Committee Phung Quoc Hien, “there is no reserve in the state budget”, while investments are crucial factors for maintaining economic growth. Therefore, Vietnam has no other choice but using foreign loans to make investment. However, there is a burning question to policy and plan makers that how does the loaned capital used and where is it invested in with a view to minimizing debt burdens for the next generations, contributing to sustainable development?

Ratio of state debt surplus by year

Source: Fiscal and State budget Committee of National Assembly Even though it is said that “the government debt surplus and national debt increases are still under the allowed level”, there are two major points that needed to make clear. First, the reported debt level is just governmental debt, not the total public debt, because it has not include loans guaranteed by the government and debts of local governments. Second, the ceiling level for safe public debt is just correct as total public debt is curbed under 50 percent of GDP. If the two other types of public debts are counted, especially loans of state conglomerates guaranteed by the government during the last time, the actual public debt of Vietnam must be over the ceiling level. Environmental targets have not been fulfilled According to Governmental Report, among 25 targets approved by the National Assembly, 17 targets have been achieved and exceeded. That means CIEM, Center of information and documentation one third of the planned targets, i.e. 8 targets have not been achieved. Of which, 3 targets are environmental. The government admited that: “pollution handling and environmental protection have processed relatively slow, and remain big challenges to development process” while these are factors to assure sustainable development. Over the last time, the government has decisively mandated to strictly implement the 8 target groups by deploying 4 groups of measures, assigning involved ministers to be in charge of relative targets. Besides, some policies have been provide aiming to encourage businesses and organizations to implement those targets. This work has also granted priorities of funding and efforts by the government. One of efforts to solve environmental issues is that a law on Environment Protection Taxes has been prepared and submitted for discussion at the 7th meeting section of the National Assembly. Environmental protection taxes are considered an economic tool for environmental management, basing on the rule that people causing pollution must pay for it treatments, and deployed with two major targets: (1) generating income and increasing national budget; and (2) changing human behaviours toward environment-friendly way. Depending on certain circumstances and requirements of nations, the tool could be designed to emphasize the first or the second targets. III. Forecasts on Vietnam Economy and Measures for socio-economic development 1. Forecasts on Vietnam Economy Together with positive signals from socio-economic situations in the first five months, national and international forecasts of Vietnamese economic development indicate possitive perspectives of macroeconomic stablization, economic growth and inflation curb. Nevertheless, some other forecasts with different scenario also show that there remain difficultites and challenges for future economic development in short term. The most noteworthy forecasts include: - Forecast provided by European Commerce Chamber (ECC) to Vietnam

CIEM, Center of information and documentation According to ECC, 2010 is a promissing year to Vietnam economy, with forecasted growth rate of more than 6.5 percent. The economy seems to bounce to the right track. However, the most challenging target to Vietnam in the last months of 2010 is not growth rate but inflation curb while providing sustainanle measures for national economic development. - Forecast provided by the World Bank (WB) In a, undating report on Vietnam Economy introduced by WB to Vietnam, WB appraised the government for providing timely measures to cope with economic changes, making important contribution to the economy’s recovery in some first months of 2010. Accordingly, if the condition is maintained, 2010 will witness a relatively sucessful recovery of Vietnam with estimated annual growth rate at 7 percent, and inflation is expected to be constrained at 1 digit level (about 9 percent). Other economic indicators show an increasing trend of economic growth rate. In monetary terms, Vietnam is likely to continue “struggling” with VND devaluation, but interest rates are expected to reduce, and investment porfolio of the people will change toward declining asset accumulation in form of foreign currencies. In the scenario provided by WB, there will be a surplus of USD 2.6 billion with the payment balance, and a deficit of USD 9.1 billion with current account balance (the number in 2009 was USD 8 billion). Major reasons are: more rapid increases in trade and service deficit, a decline of remittance to about USD 6.8 billion. As a compensation for mentioned deficits, surplus of capital balance is USD 11.7 billion. Of which, FPI accounts for USD 1.5 billion with the bounce back of securities market (the number in 2009 was USD 0.1 billion only). Implemented FDI dusbursement in the payment balance is expected to reduce in 2010, at about USD 7.3 billion; medium and long term loans are equivalent to one half of the number in the previous year, amounting to USD 2.4 billion. - Forecast provided by ADB According to a report on Asian development perspective introduced by ADB, given tightened fiscal and monetary policies aiming to limiting fiscal deficit

CIEM, Center of information and documentation at 8.3 percent of GDP and assuring credit increase at 25 percent, Vietnam economy is expected to growth at 6.5 percent in 2010 and 6.8 percent in 2011. Average annual inflation rates are forecasted at 10 percent and 8 percent in 2010 and 2011, respectively. However, ADB also judged economic stimulating policies provided by Vietnam are also likely to raise vulnerable risks at macro level, particularly pressures on VND devaluation and inflation. Therefore, ADB recommended Vietnam Government to tighten monetary policies and enhance economic growth quality to ensure sustainanle economic development. - Forecast made by the Economic and Social Committee in Asia and Pacific (ESCAP) of the United Nations In addition to possitive forecast on Vietnam economic condition, there some statements showing a concern of difficulties challenging Vietnam economy. Once again, the question of caculating growth and risk balance is put forward as ESCAP provides a lower forecast for Vietnam economic growth rate, 5.8 percent, comparing to the one planned by the Government and other international organizations, 6.5 percent, in 2010. According to ESCAP, Vietnam economy is recovering in a V-shape, with some potential macro risks, an example is the risk of inflation return. This requires Vietnam to pay more attention “turning recovery signals to sustainable development results”. This is not only an issue of Vietnam but other Asian economies also, ESCAP said. 2. Measures for socio-economic development Over the past time, the government, related ministries, departments, and industries have provided many measures to ensure macroeconomic stablization, inflation curbing, and to maintain sustainble economic growth rate. Those measures have partly resulted to possitive achievements. - Resolution No. 18/NQ-CP provided by the Government The Government issued the Resolution No. 18/NQ-CP dated 6/4/2010 focusing on 6 groups of measures to ensure macroeconomic stablization, low inflation, and economic growth rate at 6.5 percent in 2010. The six groups of measures include: focusing on inflation curbing; export promotion and limiting

CIEM, Center of information and documentation import, and improving payment balance; ensuring resources for implementing socio-economic development targets; ensuring the stability and safety of financial – banking system; further creating favourable and encouraging environment for business and production, and promoting propaganda activities by providing timely and clear information to the public, building general consensus in the society - The measures groups for inflation curbing provided by the Ministry of Finance Major content of the six measure groups provided by the Ministry of Finance includes: prioritizing inflation control; export promotion and limiting import, and improving payment balance; ensuring resources for implementing socio-economic development targets; ensuring the stability and safety of financial – banking system; further creating favourable and encouraging environment for business and production, and promoting propaganda activities by providing timely and clear information to the public, building general consensus in the society. Among those measures, prioritizing inflation control is seen as the most crucial. - The solution groups for supporting SMEs On 28/05/2010, the Government passed Resolution No. 22/NQ-CP on major supports for SMEs development. With this Resolution, the role of SMEs, once again, is emphasized and asserted it importance in socio-economic development. Accordingly, 6 major measures have been introduced: to provide guidance for making plans and programs on SMEs development supports; to enhance SMEs accessibility to credits and to mobilize financial resources supporting SMEs; to remove difficulties regarding site-clearance for prodution; to promote administrative reforms facilitating SMEs business and production; to enhance business competitiveness; and to build up as well as strengthen assisting system for SMEs development. Furthermore, it is necessary to be flexible in macroeconomic control and management of foreign exchange, interest rates, taxes and duties, and pricing. For instance, it is unadvisable to heading for average annual inflation of 8.5

CIEM, Center of information and documentation percent, and growth rate of 6.5 percent at any expenses, without reasonable preferential credit policies. Meanwhile, policies should be provided and implemented in a transparent, timely, synchronous, and consitent basis. Therefore, to fulfil planned socio-economic development targets in 2010, it is required to fulfil synchronous macroeconomic policied with emphases put on issues as followed: First, to continue cautious but flexible monetary and financial policies to prevent the retunr of high inflation. To try increasing income revenue through accelerating production of all indutries and economic sectors; meanwhile, decisively promote savings, fight against wastefulness and losses to increase effectiveness of state buget balances. Second, to deploy measures provided in Decision No. 18/NQ-CP, and Resolution No. 22/NQ-CP to encourage initiativeness and creativeness, management capacity enhancement, science, technology, and human resource development; to extand enterprises linkages; and to encrease business performance and market competitiveness; Third, to focus on investment effectiveness by reviewing and rearranging priorities of investment porfolio, particularly investment projects using capital from state budget and governmental bonds; thereby, making proper plan of capital allocation for focused and urgent projects in 2010. Forth, to strengthen and accelerate trade promotional activities, often supervise and collect information the demand and the supply of essential commodities in the world markets, which are of comparative advantages of Vietnam; particularly, it is necessary to make shortcut to markets that are picking up after economic regression, increasing national export turnover. To strictly control import structure; to promote development of supporting industries; and to implement effectively technical barriers to import of luxurious goods as a way to control trade deficit. Fifth, to urgently provide and implement plans on credit policies for rural and agricultural development, ensuring equal rights and opportunities for every

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