VINACHEM

Given the gross domestic product (GDP) growth rate of 6.88% in the third quarter of 2018, the Vietnam Institute for Economic and Policy Research (VEPR) forecast the country’s full-year growth target of 6.5%-6.7% is attainable, and the rate is more likely to surpass 6.8%, underpinned by the foreign direct investment (FDI) sector’s strong performance.

VEPR and Germany’s Konrad Adenauer Stiftung held a workshop in the capital city of Hanoi on Wednesday, October 10 to release the “2018 Quarterly Report (III) – Independent Assessment of Vietnam’s Macroeconomic Policies,” with the attendance of many senior economic experts.

Addressing the event, VEPR President Nguyen Duc Thanh briefed the participants on the global economy and Vietnam’s macroeconomic report for the third quarter of this year.

According to the report, the International Monetary Fund expects global economic growth at some 3.9% this year.

The United States economy continues to grow impressively. The high growth rate of the U.S. economy, however, will cause the U.S. Federal Reserve (the Fed) to continue raising interest rates, reducing capital inflows to developing countries, especially those with weak fundamentals or political risks.

China’s economy is slowing down in part, due to its trade tension with the United States, but it is less likely to fall into a crisis. Room for China’s monetary policy is still sufficient to support China in a fight against external shocks.

The report noted that it is highly possible that the economic growth of developing countries will be negatively affected by the surge in crude oil price, together with currency depreciation, as well as trade tension among the large economies.

Under these circumstances, prices of goods may soar worldwide, especially in developing countries. Inevitably, interest rates will then be raised to cope with the situation, resulting in a downward spiral in the financial markets.

The report pointed out that the Vietnamese economy will suffer multidimensional impacts, due to the world economy’s developments.

First, the trade balance of Vietnam may be indirectly affected by the trade relationship with China, which itself is mired in the direct trade confrontation with the United States. The fact that the Vietnamese dong is tightly pegged to the U.S. dollar makes Vietnamese goods less competitive.

Secondly, capital inflows also face adverse effects, as the Fed continuously raises policy interest rates. Furthermore, the Fed’s interest rate hike also exerts pressure on the interest rates of the domestic currency to stabilize the exchange rate and prevent inflation.

However, VEPR President Thanh noted that the GDP growth rate during the three months up to September was higher than expected at 6.88%, compared with the 6.73% figure of the second quarter.

He said this situation dispels the notion of gradually declining quarterly growth in 2018. The rate for the January-September period was up to 6.98%, the highest rate for the nine-month period since 2011.

With the positive growth of the third quarter, VEPR therefore forecast the legislative National Assembly’s full-year growth target of 6.5%-6.7% was attainable, and the national economy could grow by 6.84% at best this year.

The nine-month Industrial Production Index grew by 10.6% from a year earlier, of which the driving force of this growth – the processing and manufacturing industry – rose by a sharp 12.9%. However, the added value of the industry was mainly from the FDI sector. This indicates the increasing dependence of Vietnam’s economic growth on the FDI sector, according to the report.

The contribution of the FDI sector will be affected by the interest rate hike of the Fed and the escalating trade war between neighboring China and the United States, stated Le Dang Doanh, former head of the Central Institute for Economic Management.

Thanh of VEPR projected that curbing this year’s consumer price index at less than 4% can be achieved if there is no major energy price shock in the final quarter.

However, if world fuel prices remain high and Vietnam maximizes its environmental protection tax bracket for gasoline from the current VND3,000 to VND4,000, scheduled for early next year, this VND1,000 change alone could raise the 2019 inflation by 1.6 percentage points, based on the institute’s preliminary calculations.

Therefore, the State Bank of Vietnam should be more cautious in regulating the money supply and credit in the coming period, according to the VEPR.

Besides this, Vietnam should make every effort to increase its resilience to emerging risks from the global environment. This includes further reducing the State budget deficit, raising the trade surplus, enhancing the business climate, streamlining administrative procedures, reorganizing the State apparatus and fighting corruption.

The number of new firms in the third quarter rose by a mere 2.8% from a year ago to some 96,000, while the number of businesses suspending their operations rocketed 48.1% year-on-year to some 73,000.

Given these figures, veteran economist Pham Chi Lan commented that the business climate in Vietnam has seen little improvement in recent times, where many cumbersome administrative procedures are major obstacles to Vietnam’s economic development.

Vietnamese businesses still face a number of challenges in grasping opportunities at the advent of the Fourth Industrial Revolution and enjoying the benefits of its free trade agreements, such as the European Union-Vietnam Free Trade Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, she added.

At the workshop, economic experts also touched upon major issues pertaining to market economy status for Vietnam in 2018, investments in training a highly qualified workforce and radical legal reforms to facilitate businesses’ operations in the coming period.

- SGT -