A strange phenomenon and its cause
Statistical data shows that Vietnam’s average GDP growth fell from 7% from 2006 to 2010, to 5.8%, from 2011 to 2014, with growth rates from 2010 to 2013 being 6.42%, 6.24%, 5.25% and 5.42% respectively. It can be seen that growth in 2011, the first year of the current five-year socio-economic development plan, was 0.18 percentage point lower than the final year of the previous five-year period. Growth slowed further in 2012 with the expansion rate was nearly 1 percentage point lower than the year prior. But since 2013, GDP growth has gathered pace with the economy growing at an estimated 5.98% in 2014.
The quantity of investment from Government revenue is generally proportional to GDP growth. But this five-year period sees an unusual development in contrast with what one would expect. Let’s have a closer look at budget figures in this period: the ratio of recurrent spending rose from 55% to 64.8%, while spending on investment and development fell sharply from 25% to 18% of Government spending. Meanwhile the percentage of Government income to GDP also dropped from 24.8% to 21%, creating a perplexing puzzle on the relation between the spending on investment, and development and economic growth.
On the other hand, inflation also fell sharply from 9.19%, 18.58%, 9.21% and 6.6% from 2010 to 2013 to around 4% this year, the lowest in 13 years. Consumers can expect prices to stay stable for the upcoming Lunar New Year, although the plan to increase wages has been delayed. Another question arises: why do prices not increase in proportion with the rise in recurrent spending and the fall in spending on investment and development while economic growth is gradually picking up?
There are several reasons behind the above-mentioned phenomenon. First, it is the initial result of external developments and active economic restructuring measures. After years of overheated growth with property speculation and overlending, the bubble burst, forcing many investors to file for bankruptcy or adjust their business strategies, which have made way for a new phase of growth, slower but more stable.
On the other hand, as large sums of money were locked in unsold property and manufactured goods, the Government introduced many measures to eliminate the bottlenecks and support enterprises through administrative reforms, tax breaks and interest rate cuts. Those measures ate into Government revenue, but a reduction in the tax revenue to GDP ratio helped stimulate total social investment. Despite of this, total tax revenue was still higher than the previous year thanks to higher economic output. Falling oil prices, another external factor, helped bring down fuel costs and average prices of other commodities. Moreover, demand was weak and consumers preferred saving to spending.
High growth and low inflation expected for 2014
The question for now is what should be done to maintain the growth momentum whilst still keeping inflation at low levels in 2015 and the following years.
In order to boost sales of property and manufactured goods, it is necessary to cut prices further so that money can be used to help enterprises seize rare opportunities. Support programmes, especially for fishermen to build steel-hulled ships, must be disbursed at a quicker pace. As a key sector of the economy, the monetary sector should further cut interest rates and boost lending. Over the past two years, inflation has been kept in check so credit growth was slow and Vietnam missed the opportunity to achieve higher growth. Recently, lending has been accelerating after months of sluggish growth—but as 2014 is coming to an end, there is no time to achieve a faster growth rate. Capital is following a twisty road from the people, enterprises and the treasury to banks, who use the money to lend or buy Government bonds. The money is later returned to banks as enterprises and enterprises make deposits. However, if regulation is better, we can utilise hundreds of trillions of idle Vietnamese dong deposited in the State Treasury and save trillions in interest on Government bonds.
Measures are also needed to help credit officers overcome their unwillingness to lend. After many corruption and fraud cases involving the banking sector, many banks are now reluctant to lend, or avoid lending at all. It becomes worse when there are not many feasible projects to fund or it is difficult to verify the credibility of investors. Banks then decline to lend rather than take risks and time for verification.
The main function of the finance sector is collecting revenue to spend. Spending on investment, development and recurrent expenses are currently all necessary. When the economy’s aggregate demand and purchasing power remain weak, recurrent spending will have a significant impact, especially spending on implementing social policies, wage increase, healthcare, education and culture. Despite decreasing, spending on investment will still maintain its guiding role to boost total social investment and attract more foreign investment. Recently, both financial institutions and foreign investors have considered Vietnam an attractive and safe destination for investment. According to a World Bank report released in October, Vietnam jumped from 99 to 78 on the global competitiveness ranking.
I believe that goods trends in GDP and CPI and new experience in economic management will deliver outstanding results in 2015, the final year of the 2011-2015 five-year socio-economic development plan.
