Vietnam s s Economy in 2009

AmCham in Ho Chi Minh-City New World Hotel, May 14 2009 Vietnam s s Economy in 2009 Le Dang Doanh Member of the Board, Senior Research Fellow Institute of Development Studies (IDS) ledangdoanh@gmail.com

Content Vietnam s s economy in 2008 prior the global crisis. Impacts of global crisis on Vietnam s s economy and the stimulus package of the Vietnamese Government. Reforms. Prospects.

Growth in agricultural production in 1986-2008:major stabilizing factor T!c!" t"ng tr##ng GDP (%) (TCTK 2009)

Three Periods and three different Policies in 2008 The Government prepared the plan for 2008 with high expectation: growth rate 9-9.5 percent, over-fulfillment of the Five-Years Plan in three years, surpassing the level of low-income economy in 2008. Until March 2008:Credit supply increased by 53 percent. State-owned conglomerates diversified their investment into various fields outside their main profile: financial investment, securities, real estate, hotels etc. High inflation, volatile exchange rate, high trade deficit. From March to October: Draconic but efficient measures tightening monetary policy: high interest rate, high compulsory reserve requirement, compulsory purchasing of SBV-bonds. High burden for SMEs and farmers, huge challenges for commercial banks; disputed temporary stop of rice export. October until now: Reducing interest rate from 14 to 7 %, easing reserve requirement. Stimulus package, easing monetary supply.

Credit growth, base rate, oil prices, and inflation 160 70% Brent Crude Oil Price (US$ per barrel) - Left-hand Axis 140 Y-o-y Inflation (%) - Right-hand Axis Y-o-y Credit Growth (%) - Right-hand Axis 60% 120 Base Rate (%) - Right-hand Axis 50% Crude Oil Price (US$ a barrel) 100 80 60 40 40% 30% 20% Credit Growth & Inflation (%) 20 10% 0 0% Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Source: GSO for inflation, SBV for credit growth and base rate, and Global Financial Data for oil prices, from Nguyen Xuan Thanh, (2009) Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Inflation in regional economies Inflation: Vietnam Inflation in the International context 30 30 25 25 25 20 17.5 20 2007 2008 ADB 15 15 Citigroup 2009 2007 2008 10 8.3 10 2009 5 5 0 0 China Hongkong India Indonesia S.Korea Source: Malaysia ADB Singapore Update 2008, Taipei Thailand Citigroup Vietnam September, Asia ASEAN 2008 Indonesia Malaysia Singapore Thái Lan Châu Á ASEAN

Exchange rate fluctuation

Nominal and Real Exchange Rate of VND 130 NEER REER 120 110 100 90 80 70 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Trade Balance

Reform of state-owned Enterprises (SOEs( SOEs) So far 3800 Small and medium sized SOEs have been equitized,, sharing ~ 17 percent of total SOEs- asset. The remaining 1824 SOEs are bigger like commercial banks or organized in state-owned corporations or conglomerates and are very difficult to equitized.. The equitization process has been slowing down significantly. State-owned conglomerates don t t have a clear legal framework, operate mainly as monopolies or have predominant market share and enjoy good connections with the Government.

Export expansion: Share of main VN export destination in total 25.0 35 20.0 United States 20.8 30 25 15.0 20 10.0 9.4 15 5.0 7.1 11 21 31 22 China 6.9 10 4 23 22 5 0.0 0 2001 2002 2003 2004 2005 2006 2007 Growth rate EU U.S. Japan ASEAN China

Export and import are declining 100.0 80.0 60.0 40.0 20.0 0.0 1.07 2.07 3.07 4.07 5.07 6.07 7.07 8.07 9.07 10.07 11.07 12.07 1.08 2.08 3.08 4.08 5.08 6.08 7.08 8.08 9.08 10.08 11.08 12.08 1.09 2.09 3.09-20.0-40.0-60.0 Import export -80.0 Import and export y.o.y growth rate (3- month moving average) Source: GSO, 2009

FDI by sector 2005-2008 Real estate increased from 11 to 48 %. Manufacture drops from 62% to 25% 26% 11% 1% 2005 62% Real estate related projects Oil and Gas Manufacture 2008 2007 Service 21.2 24.3 25% 3% 48% 37.0 17.5 24%

New Issues on FDI Sharp increase on internationally non-tradable goods like real estate, golf courses with limited employment or qualified workers. Overly high demand on arable land, creating problems with landless farmers, food security. High investment on environmental sensitive industries like cement, steel mills by low spill-over effect. The Vedan- pollution caused angry public reaction. No clear regional and industrial planning: too many oil refineries, still mills in many provinces while FDI in agriculture remain modest. Huge shortage on highly qualified, trained labor forces.

Occurred Strikes in Vietnam 1995-2008 900 s_ v ình công 800 700 600 500 400 300 200 100 0 762 551 390 142 152 124 60 59 59 62 67 70 90 99 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 N_m

Industrial Structure by Ownership in 2005 State Non- State Foreig n Total Hanoi region 29.3% 28.2% 42.5% 100% HCMC region 24.5% 22.8% 52.7% 100% C e n t r a l Vietnam 44.3% 36.4% 19.3% 100% Other regions 54.1% 37.1% 8.9% 100%

Vietnamese Government Budget Deficit (% of GDP) 2004 2005 2006 2007 2008 Official Budget Balance 0.9-1.2-0.3-3.4-2.1 Revenue and Grants 26.7 25.9 27.1 25.5 25.9 Of Which: Oil Revenue 7.9 8.7 9.7 7.9 7.9 Expenditure 25.8 27.0 27.5 28.9 28.0

Budget Constraints In 2009 Vietnam s s budget revenues face serious drops: Revenue from crude oil sale declined by - 45% in the first 4 months. Tax holidays and tax incentives contributed to further loss of budget revenues. High expectation on Government s s expenditures for assistance. The Government asks the National Assembly (NA) to increase the budget deficit from -5% GDP to 8% of GDP in the next five years with a regressive decline to -5%. The NA express concern about efficiency of budget spending and wish to accept a -7% GDP beudget deficit for 2009.

Comparison of selected macroeconomic indicators China Malaysia Thailand ViÖt Nam GDP Growth rate 2007 (%) 11,9 6,3 4,9 8,5 GDP Growth rate 2008 (%) 9,1 5,1 3,4 6,2 Stimulus package (billion USD) 586 1,9 8,7 6 Size of Stimulus Package (%GDP) 16,7 1,0 3,5 6,8 State Budget Balance (%GDP) +0,2-5,4-1,4-5 Budget Expenditure (%GDP) 20,4 26,1 19,3 27,6 Balance of Current Account (%GDP) Foreign Reserve billion USD) 10,5 1995 10,6 100-1,0 103-13,7 23 Inflation (CPI, %) 6,2 5,7 7,2 23.1 Lending Interest rate (%) 6,7 6,0 7,2 16,1 Import(% GDP) 41 110 56 117

Corruption Perception Index (CPI) from TI

Performance in 2008 GDP-Growth-rate: ~ 6.23 %, target was 8.5% (Agr.:3.8%, Industries &Construction: 6.3%, Services:7.2%) ( SOE: 2.05%, Domestic Private: 8.37%, FDI: 10.78%). GDP:88billion USD. GDP/capita: 1030 USD according to current prices, but according to stable prices it is equivalent to 900 US$ only and Vietnam did not surpass the level of a low-income economy. Inflation: ~23%, CPI in the last three months were negative due to global decline of commodities prices and tight monetary policy. Investment: 43,1% % of GDP, +22.2% compared to 2007; FDI-Commitment: ~ USD 64 billion; Disbursement: ~ USD 11.5 billion. Export of merchandises: ~ 62.9 billion USD ( growth rate: 29.5%); Export of services: 7.096 USD billion. Import of merchandises: ~ 80.4 billion USD ( growth rate: 28.3%), import of services: 7.915 USD billion. Trade deficit: ~ 17.5 billion USD or ~ 27.8% of export. VN-index of the Securities Market dropped from 1200 in 2007 to 280. Equitization of SOEs slowing down. Real Estate market stagnated.

Global Warming, Pollution and Nontraditional Security Issues Vietnam is extremely vulnerable to global warming and rising sea level. Pollution, environmental damages are serious at urban and rural regions. Air pollution, ground water, solid waste processing need urgent investment and efficient measures. Nontraditional Security issues like human trafficking, drug smuggling, swine (A/H1N1) flu etc. are emerging and Vietnam needs to be better prepared.

Targets in 2009 GDP-Growth rate: ~ 6.5% (IMF: 4.8%, WB:5.5%, ADB: 6%, BMI: 2.6%, EIU 0.3% (!). Growth rate is expected to reach ~ 4-5 percent on annual basis. Inflation: < 15 %, could be likely ~8%. Investment: 39% of GDP Export: + 13 %, could be likely -5 or 8% due to price drop and declining export contracts. (IMF:-15.5% on annual basis). Import is expected to decline by -20-24%. Unemployment should be a serious social-economic issue. Stimulus Package of the Government implemented.

Trade balance (export-import) in million USD of agrarian products compared to total trade 10000 5000 0-5000 -10000-15000 2001 2002 2003 2004 2005 2006 2007 Cán cân th ng m_i hàng hóa chung Cán cân th ng m_i nông lâm s_n -20000 (TCTK 2008)

Agriculture: Stabilizing Factor in the stormy time Agriculture in Vietnam still shares 21 percent of the GDP, provides 50 percent of total employment, contributing to more than 20.4 percent of total export. Agriculture ensures food security for the whole population and by that way contributes to economic-social stability. Lower commodities prices and efforts of the Government (timely purchasing of rice, construction of silos etc) encourage the farmers. The profit margin for the farmer is better than 2008. Agriculture in 2009 is expected to grow at ~ 4 percent, rice export should reach 5 million ton. Coffee, black pepper, seafood generally face price drops but still have access to international market. Agriculture in various regions could serve as a flexible sack to absorb some labor forces and ease the pressure of unemployment from industries and services.

Some Improvement in the Second Quarter

Encouraging Signs in the first 4 months After severe declines in the first Quarter there are multiple encouraging signs for a gradual, difficult recovery of the economy in April: higher industrial output (5.4% compared to the same period in 2008), increasing retail trade turnover, construction and real estate market warming up, growing Vn-Index etc. FDI-implemented capital reached USD 2.2 billion, a -30% drop to 2008. Saving deposit increased 9.88% to the same period of 2008, credit supply increased sharply by 4.86% compared to March 2009, total money supply increased by 11.4 compared with 5.53% in 2008.

Exchange Rate of VND versus USD in March

Exchange Rate Fluctuation SBV has allowed a widening band from 3 to 5% on exchange rate regime but keep a stable official exchange rate for VND to USD. Commercial banks ask for an additional fee of 1% by lending in USD. Exchange rate at the free market reached 18.200 VND/USD. There are two opposite opinions: devaluation by 30% could boost the declining export. Other opinion is worry about external debts services, burden for businesses. The low value-added garment, footwear and consumer electronic with small vertical intra-industrial trade doesn t t provide a high benefit from a devaluation. SNV is likely to keep the exchange rate stable within the band.

Macroeconomic Indicators The Government may ask the NA for various changes in macroeconomic indicators in the May-Session 2009: GDP growth rate from 6.5% to 5%, export etc. Trade deficit was high but reduced due to rapid decline of import. Balance of current account of international payment remains volatile due to reduced FDI and ODAdisbursement, remittance and declining tourism. Current- account deficit should decline from 13.7% in 2008 to 8% of GDP in 2009.Vietnam should likely sustain a balance for current-account for international payment thanks to FDI, remittance, ODA and tourism.. Inflation should be likely under control due to cautious monetary policy and low world commodities prices.

Transparency and Openness Monetary and financial data are hardly accessible, e.g. foreign reserve, international credit of FDI, total saving deposit etc are not available. Inconsistency of data creates obstacle for analysis. Information on land, urban regional planning is secret and hardly available. Economic Anomaly: Despite dramatic downturn of Securities Market and Real Estate, NPL of the commercial banks is < 4 percent only. The health of some small newly established commercial banks is highly questionable as these banks invested heavily on Securities and Real estate Market in 2007 and 2008. No official information is available. Merger& Acquisition of some small banks are in the discussion. Data on unemployment is hardly accurate and reliable, there is no unemployment registration system. Unemployment should reach 2 million in 2009.

FDI: Still an Attractive Location Foreign investors still remain confident on medium and long term potential of Vietnam s s economy. JBIC- studies confirm Vietnam as a high priority for Japanese investors. Committed FDI in first four months declined -17%, but in April declined by -87%, disbursement declined -32%. An unknown number of FDEs has closed or suspended their operations. Numerous foreign-invested entrepreneurs, mainly small South Korean one, disappear without to pay insurance, salaries, taxes. Delay of implementation of committed FDI, no clear roadmap of progress. Thousand hectares of cleared land remain unused caused angry reaction of the related farmers. Inefficient use of land for golf courses, environmental damages called public awareness.

High Pressure on domestic SMEs and informal sector 7000 SMEs have been bankrupt, but it could be likely 20 percent of total SMEs. 30% face tremendous difficulties or could be clinically dead.. They face declining demand, shortage of contracts, credit and liquidity constraints. From 1500 handicraft villages with 11 million employees are at least 5 million unemployed, including furniture, silk producers etc. The situation of 2.2 million household businesses is not clear but the press reported from a decline of turnover by 30-40% in the first three months. Most of the informal sector don t t provide insurance for employees.

Expectation of SMEs in 2009? Likely to develop well Some growth but down from 2008 Tremendous difficulties but hope to overcome Temporary suspension of business 197 (13%) 259 (17%) 470 (31%) 147 (10%) Likely to go bankrupt 421 (29%)

Risk on employment and social impacts Declining demand from international market leaded to reduced production and employment. MOLISA announced that unemployment should reach 400.000 peoples based on reports of 40/64 provinces. 10.000 workers should return home from abroad. Unemployment could reach 2 million in 2009. The social safety system in Vietnam is under development, unemployment insurance shall be in force from January 2010 only. Farmers in Vietnam face multiple risks. The Government of Vietnam is providing preferential credit for unemployed peoples for retraining and seeking employment.

Policy responses Subsidized loans: 223,000 billions VND have been disbursed (around $US12 billion): Not clear where the money gone: for roll-over loans? Employment? Tax cut for small and medium enterprises. Who benefits from this support? Implications: Fiscal deficit (8-10% of GDP this year) Limited scope of deficit financing Risks of re-merging inflation Floating government bonds on USD: not successful Trade-off in managing more flexible exchange rate Policy dilemma: where to use more effectively stimulus packages: long-term vs. short-term measures

Some other Issues Fuel price increase frequently, higher fuel price to regional fuel prices (China, Singapore). From March 1 2009 electricity price has increased by 8.93 percent. If included the peak hours prices, the de-facto price increase is 32% and is unacceptable for business. Unpredictable changes without consultation with the business communities. Inspection of state-owned conglomerates temporarily suspended.

Some Positive Development Social-economic stability could be sustained. Preparations for the next Party Congress intensified and some election syndromes emerged until 2011. Vietnam is officially recognized as market economy by Australia and New Zealand. Japan resumed ODA after the PCI-case. Vietnam-Japan agreed on strategic partnership. Vietnam could developed economic cooperation and foreign direct investment to the Middle East. Increasing efforts of the Government to reform administrative regulations: Project 30. The Law on the right to get access to information is under preparation.

Strong Expectation on Reform Domestic and foreign invested enterprises expect the Government to implement effective reforms on public administration (taxation, customs, land access, construction, environmental authorization etc.). World Bank Doing Business Ranking of Vietnam is low. Monopolies and SOEs reforms are urgent. So far Vietnam equitized 15 percent of total capital of SOEs. State-owned conglomerates continue to enjoy access to projects, mineral reserves, credits. Banking and Securities Market need to learn lessons from the global crisis and prepare for the post-crisis aera.

Prospects Different scenarios: V-shape curve with rapid recovery. Some signs of contending of the economic slow-down are all ready started. U-shape curve: Vietnam s s economic recovery not ahead of the world economy due to high dependence on FDI and export and slow reform. An W-shape development could be not totally excluded. L-shape curve: should be excluded if slow reform, insufficient restructuring of the economy, revitalizing of inflation.