Viet Nam: Viet Nam: Recent Economic DevelopmentsRecent Economic Developments

and Near-Term Prospectsand Near-Term Prospects

Bahodir GanievBahodir GanievCountry EconomistCountry Economist

Viet Nam Resident MissionViet Nam Resident Mission

Launch of the Asian Development Outlook 2009 UpdateLaunch of the Asian Development Outlook 2009 UpdateHa Noi, Viet Nam; 22 September 2009Ha Noi, Viet Nam; 22 September 2009

OutlineOutline

1.1. Recent economic developments Recent economic developments (January-August 2009)(January-August 2009)

2.2. Near-term macroeconomic Near-term macroeconomic outlook (rest of 2009 and 2010)outlook (rest of 2009 and 2010)

3.3. Policy RecommendationsPolicy Recommendations

Part 1Part 1

Recent Economic Recent Economic DevelopmentsDevelopments

Viet Nam is weathering the global economic crisis Viet Nam is weathering the global economic crisis relatively well.relatively well.

Growth of GDP in Selected Countries, 2003-2009Growth of GDP in Selected Countries, 2003-2009(Relative to the same period a year earlier, %)(Relative to the same period a year earlier, %)

-8

-4

0

4

8

12

2003 2004 2005 2006 2007 2008 H1 2009

Indonesia Malaysia Philippines Singapore Viet Nam

Source: IMF and Asian Development Outlook 2009 Update.

Its economic slowdown appears to have bottomed Its economic slowdown appears to have bottomed out in early 2009.out in early 2009.

Viet Nam: Growth of GDP by Sector, 2004-2009Viet Nam: Growth of GDP by Sector, 2004-2009(Relative to the same period a year earlier, %)(Relative to the same period a year earlier, %)

Source: General Statistics Office of Viet Nam.

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 Q1 2009 H1 2009

GDP Agriculture Industry Services

Inflation decelerated sharply but was still higher Inflation decelerated sharply but was still higher than in many other countries.than in many other countries.

Inflation in Selected Countries, 2003-2009Inflation in Selected Countries, 2003-2009(Year-to-date period average, %)(Year-to-date period average, %)

Source: IMF and Asian Development Outlook 2009 Update.

0

4

8

12

16

20

24

28

2003 2004 2005 2006 2007 2008 H1 2009

Indonesia Malaysia Philippines Singapore Viet Nam

The SBV kept monetary policy fairly loose.The SBV kept monetary policy fairly loose.

Growth of Selected Monetary Aggregates, 2007-2009Growth of Selected Monetary Aggregates, 2007-2009(Relative to the same period a year earlier, %)(Relative to the same period a year earlier, %)

0

10

20

30

40

50

60

70

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Reserve money

Banking system's net domestic credit

Total liquidity (M2)

Source: State Bank of Viet Nam and ADB staff estimates.

The Government adopted a number of fiscal The Government adopted a number of fiscal stimulus measures in January-May 2009.stimulus measures in January-May 2009.

Source: Ministry of Finance of Viet Nam and ADB staff estimates.

Fiscal Stimulus Measures, 2009Fiscal Stimulus Measures, 2009(Trillion dongs unless otherwise indicated)(Trillion dongs unless otherwise indicated)

Amount

Potential Direct Impacton the Budget

2009 2010

Measures affecting government revenue

28.0 -28.0 9.2

Measures affecting government expenditure and net lending

117.6 113.5 -24.7

Total 145.6 -141.5 33.9

Billion US dollars 8.6 -8.3 1.8

% of GDP 8.7 -8.5 1.8

In June 2009, the National Assembly raised the In June 2009, the National Assembly raised the ceiling on the 2009 fiscal deficit.ceiling on the 2009 fiscal deficit.

Government’s Budget Plan, 2009Government’s Budget Plan, 2009(% of GDP)(% of GDP)

Original Revised

On-budget revenue and grants 21.5 20.0

On-budget expenditure 25.2 27.2

On-budget fiscal balance (Government’s definition)* -4.8 -7.0

Off-budget expenditure and lending (net) 3.2 8.5

Overall fiscal balance** -6.9 -15.7

* Includes revenue carried over from 2008 (as revenue) and amortization of public debt (as expenditure).

** Excludes carried over 2008 revenue and amortization of public debt but includes net off-budget expenditure and lending.

Source: Ministry of Finance of Viet Nam and ADB staff estimates.

The shortage of foreign exchange in the formal The shortage of foreign exchange in the formal market persisted.market persisted.

Exchange Rates, 2008-2009Exchange Rates, 2008-2009(Dongs per US dollar)(Dongs per US dollar)

Source: State Bank of Viet Nam and ADB staff computations and observations.

15

16

17

18

19

20

1/1/

2008

3/1/

2008

5/1/

2008

7/1/

2008

9/1/

2008

11/1

/200

8

1/1/

2009

3/1/

2009

5/1/

2009

7/1/

2009

Reference rate of the State Bank of Viet Nam

Upper bound of the trading band

Lower bound of the trading band

Black market exchange rate

Both exports and imports declined, and the trade Both exports and imports declined, and the trade deficit narrowed further in the first half of 2009.deficit narrowed further in the first half of 2009.

Selected Trade Indicators, 2006-2009Selected Trade Indicators, 2006-2009

* Based on the balance-of-payments definition.

Source: State Bank of Viet Nam and ADB staff estimates.

-40

-20

0

20

40

60

80

H1 2007 H2 2007 H1 2008 H2 2008 H1 2009

-20

-10

0

10

20

30

40

Year-on-year growth ofexports (%, left scale)

Year-on-year growth ofimports (%, left scale)

Trade balance (US$billion, right scale)*

The current account balance turned into surplus, The current account balance turned into surplus, but the overall balance of payments recorded a but the overall balance of payments recorded a deficit.deficit.

* Excludes the Government's foreign exchange deposits at the State Bank of Viet Nam and the foreign exchange counterpart of swap operations.

Source: State Bank of Viet Nam and ADB staff estimates.

Current Account Balance and Gross Official Reserves, 2006-2009Current Account Balance and Gross Official Reserves, 2006-2009

-30

-20

-10

0

10

20

30

2006 2007 H1 2008 2008 H1 2009

Current accountbalance (% of GDP)

Gross official reserves(US$ billion)*

Part 2Part 2

Near-Term Near-Term Macroeconomic OutlookMacroeconomic Outlook

The forecast of growth for 2009 is revised up and The forecast of growth for 2009 is revised up and the forecast of growth for 2010 is maintained...the forecast of growth for 2010 is maintained...

Source: General Statistics Office of Viet Nam and ADB staff projections.

Viet Nam: Growth of GDP, 2006-2010Viet Nam: Growth of GDP, 2006-2010(%)(%)

8.28.5

6.2

4.5

6.5

4.7

6.5

0

2

4

6

8

10

2006 2007 2008 2009 2010

ADO 2009 forecast

ADO 2009 Updateforecast

……with growth expected to accelerate considerably with growth expected to accelerate considerably in the second half of 2009 and in 2010...in the second half of 2009 and in 2010...

Source: General Statistics Office of Viet Nam and ADB staff projections.

Viet Nam: Growth of GDP, 2006-2010Viet Nam: Growth of GDP, 2006-2010(Relative to the same period a year earlier, %)(Relative to the same period a year earlier, %)

0

2

4

6

8

10

2006 2007 2008 H1 2009 H2 2009 2010

……and to outpace growth in most other Asian and to outpace growth in most other Asian countries.countries.

Source: Asian Development Outlook 2009 Update.

Growth of GDP in Selected Countries, 2007-2010Growth of GDP in Selected Countries, 2007-2010(%)(%)

2007 2008 2009 2010

Indonesia 6.3 6.1 4.3 5.4

Malaysia 6.2 4.6 -3.1 4.2

Philippines 7.1 3.8 1.6 3.3

Singapore 7.8 1.1 -5.0 3.5

Thailand 4.9 2.2 -3.2 3.0

Viet Nam 8.5 6.2 4.7 6.5

Southeast Asia 6.4 4.1 0.1 4.3

Developing Asia 9.5 6.1 3.9 6.4

Inflation is now forecast to be higher than Inflation is now forecast to be higher than predicted in ADO 2009…predicted in ADO 2009…

Viet Nam: Period-Average Inflation, 2006-2010Viet Nam: Period-Average Inflation, 2006-2010(%)(%)

Source: General Statistics Office of Viet Nam and ADB staff projections.

7.58.3

23.0

4.05.0

6.8

8.5

0

5

10

15

20

25

2006 2007 2008 2009 2010

ADO 2009 forecast

ADO 2009 Updateforecast

……remaining higher than inflation in most other remaining higher than inflation in most other countries in the region.countries in the region.

Source: Asian Development Outlook 2009 Update.

Inflation in Selected Countries, 2007-2010Inflation in Selected Countries, 2007-2010(Period average, %)(Period average, %)

2007 2008 2009 2010

Indonesia 6.4 9.8 5.0 6.0

Malaysia 2.0 5.4 1.1 2.6

Philippines 2.8 9.3 3.2 4.5

Singapore 2.1 6.5 0.0 2.0

Thailand 2.2 5.5 -0.5 2.0

Viet Nam 8.3 23.0 6.8 8.5

Southeast Asia 4.0 8.6 2.5 4.1

Developing Asia 4.4 6.9 1.5 3.4

The fiscal deficit is projected to widen in 2009 The fiscal deficit is projected to widen in 2009 and narrow in 2010.and narrow in 2010.

Viet Nam: Overall Fiscal Balance, 2005-2010Viet Nam: Overall Fiscal Balance, 2005-2010(% of GDP)(% of GDP)

Source: Ministry of Finance of Viet Nam and ADB staff estimates and projections

-12

-10

-8

-6

-4

-2

0

2005 2006 2007 2008 2009 2010

Public and publicly guaranteed debt will remain Public and publicly guaranteed debt will remain manageable.manageable.

Public and Publicly Guaranteed Debt, 2005-2010Public and Publicly Guaranteed Debt, 2005-2010(% of GDP)(% of GDP)

Source: IMF and ADB staff estimates and projections

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010

The current account deficit is expected to narrow The current account deficit is expected to narrow in 2009 but widen in 2010.in 2009 but widen in 2010.

Growth of Merchandise TradeGrowth of Merchandise Trade and Current Account Balance, 2006-2010 and Current Account Balance, 2006-2010

Source: State Bank of Viet Nam and ADB staff projections

-20

-10

0

10

20

30

40

2006 2007 2008 2009 2010

Growth of exports (%)

Growth of imports (%)

Current accountbalance (% of GDP)

Risks to the OutlookRisks to the Outlook

Slower globaleconomic recovery

Slower growthin Viet Nam

Spike in world commodity prices

Higher inflationin Viet Nam

Buildup of inflation and devaluation expectationsand a significant declinein demand for dong-denominated assets

Higher inflation, larger current account deficit and slower growth

Part 3Part 3

Policy Policy RecommendationsRecommendations

RecommendationsRecommendations Strike a balance between stimulating growth in the Strike a balance between stimulating growth in the

short term through demand-side measures and short term through demand-side measures and safeguarding macroeconomic stability over the safeguarding macroeconomic stability over the medium termmedium term

Avoid taking additional fiscal stimulus measures Avoid taking additional fiscal stimulus measures before thoroughly assessing the medium-term before thoroughly assessing the medium-term impacts of the measures that have already been impacts of the measures that have already been adoptedadopted

Strengthen macroeconomic management Strengthen macroeconomic management (especially coordination of macroeconomic policies, (especially coordination of macroeconomic policies, forecasting, data disclosure, and policy coordination)forecasting, data disclosure, and policy coordination)

Adopt, and start publishing data on, an appropriate Adopt, and start publishing data on, an appropriate indicator of core inflationindicator of core inflation

Recommendations Recommendations (continued)(continued)

Eliminate the shortage of foreign exchange in the Eliminate the shortage of foreign exchange in the formal market (through a combination of tighter formal market (through a combination of tighter monetary policy, increased sales of foreign monetary policy, increased sales of foreign exchange, and greater flexibility of the SBV’s exchange, and greater flexibility of the SBV’s reference exchange rate)reference exchange rate)

Ensure that banks are prepared for a possible Ensure that banks are prepared for a possible increase in non-performing loans after interest increase in non-performing loans after interest rate subsidization endsrate subsidization ends

Intensify efforts to raise the efficiency of the Intensify efforts to raise the efficiency of the economy and to ease supply-side constraints on economy and to ease supply-side constraints on growth (notably by accelerating economic growth (notably by accelerating economic reforms)reforms)

Speed up the implementation of ODA-financed Speed up the implementation of ODA-financed projectsprojects

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