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Source: www.asiaecon.org |

SLOWING EXPORTS THREATEN VIETNAM'S ECONOMIC GROWTH IN 2009


Vietnam's economic growth is highly dependent on exports revenue, which made up 72% of the country's GDP in 2008. However, export growth has slowed significantly in the last 4 months as contracting global economies slashed demand, particularly in Vietnam's major export markets; Japan, Europe and the U.S.


Vietnam’s economic growth is highly dependent on exports revenue, which made up 72% of the country’s GDP in 2008. However, export growth has slowed significantly in the last 4 months as contracting global economies slashed demand, particularly in Vietnam’s major export markets; Japan, Europe and the U.S.  Weaker external demand will pose significant risks to Vietnam’s economy this year, prompting the government to stimulate domestic demand and bolster domestic growth. Increased government efforts will be necessary in order to efficiently stabilize the economy and ensure long-term growth for Vietnam’s economy as it faces the difficulties of 2009 and prepares to recover in 2010.

Vietnam expects export growth to slow to 13% this year, after a rise of 29.5% in 2008. Slowing export growth has significantly impacted Vietnam’s trade-account deficit, which has widened from $14.1 billion in 2007 to $17 billion in 2008, and is now expected to reach $19.2 billion in 2009. Meanwhile, overall economic growth for 2009 is expected to reach between 5% and 6%, according to the IMF’s latest predictions,  reflecting a much lower rate than the 6.2% experienced in 2008 and the 8.5% in 2007.

In an effort to spur exports, Vietnam’s central bank devalued the national currency by 3% in December. As a result, the dong weakened as much as 1.1% to 17,490 a dollar, the lowest since at least 1993.  In early 2008, the dong rose due to increased foreign investments, but experienced a drop during mid-year due to fear of a possible currency crisis fueled by high inflation. Even though the dong seemed to stabilize during the end of 2008, a small currency devaluation was deemed necessary by the government in order to spur growth, alleviate economic pressures, and balance debt repaying ability.

The dong devaluation was not only necessary but also somewhat inevitable, as it will potentially stabilize the overvalued currency amongst other regional currencies while also addressing the government’s balance of payments and the country’s growing foreign debt. The devaluation however, might not be enough to promote substantial economic growth as it might not increase diversity,  competitiveness,  and export growth in the near future.

Robert Robertson, the Chief economist at Dragon Capital Vietnam,  has criticized the effectiveness of the currency movement. Robertson argued that Vietnam’s economy still remains relatively weak in the global scheme and that it lacks pull factor, remaining therefore a small, price- taking economy. This, combined with a trade that relies mostly on commodities exports, will result in limited change in Vietnam’s export sector.

Vietnam has been deeply affected by recessions in countries such as the the U.S., Japan and Russia, which are destinations for most of the country’s exports. Decreased foreign demand from these countries, combined with lowered commodity prices, have severely hurt Vietnam’s economy. For instance,  crude oil exports, the country’s largest source of foreign exchange earnings, will fall 13.7% in 2009, while its actual value could plunge 56%. More government efforts will be needed to effectively promote competitiveness and spur economic growth in the export sector and the Vietnamese economy as a whole.

Financial policies and improved trade agreements will successfully spur export growth,  while the strengthening of Vietnam’s banking and corporate sectors along with the continuance of economic reforms, will provide sustainable long-term economic growth in the future.

Targeted financial policies, such as tax reduction and exemptions, will assist enterprises by relieving the pressures of lowered demand. For instance, Vietnam’s finance ministry has recently eliminated Vietnam’s export tax for rice, effectively boosting the rice export. The elimination or reduction of taxes on other exported commodities would generate growth and competitiveness in the sector. Policies aimed at curbing import surplus will also bolster domestic demand.

The promotion of trade agreements with potential growing markets such as Latin America and Africa, will importantly improve export growth. Moreover, bilateral and multilateral agreements with trading nations involving free trade areas and reduction of import taxes will prove to be key in Vietnam’s export sector expansion.

Vietnam’s banking sector remains weak and will suffer significant pressure as the economy slows during the upcoming months. Banks would benefit from strengthened oversight, and higher levels of technology, data quality and communication. An improved banking sector would sustain growth and enhance the country’s economic stability.

Lastly, the continuation of reforms aimed at opening Vietnam’s socialist market, will be key to export and overall economic growth, as it will ensure the country’s global integration. Not only will enhanced global integration bring about competition, but it will also promote investor confidence. Moreover, it will assure Vietnam’s ability to recover in 2010 when the global economy picks up, as well as strengthening the country’s ability to sustain long-term growth.

As the global financial crisis impacts Vietnam’s highly export dependent economy in 2009, the government must place significant efforts to boost the export sector and ensure the country’s sustainable long-term growth. Currency devaluation although necessary, will not be sufficient to bolster significant export growth. The government must also ensure targeted financial policies to aid export businesses, expand international trade cooperations, strengthen its banking system and continue its reforms to increase Vietnam’s global integration, all of which will result in increased competitiveness and export sector growth. A boost in export growth would benefit the overall economy, and balance the country’s trade deficit. Vietnam would therefore, be able to survive the 2009 financial crisis and ensure long term growth in 2010 and forward.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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