Limited scope to stimulate economy

Australian freelance economist Raymond Mallon, who has more than 20 years of experience in studying Vietnam’s economy, told VIR’s Thanh Tung how the QE3 could impact on Vietnam’s economy and what the government should do in its marcoeconomic monitoring.

Vietnam’s export turnover earned from the US last year was $22 billion. So, how will this QE3 impact Vietnam’s exports to the US market and what will be other positive impacts on the Vietnamese economy?

Because the US is a very important market for Vietnam, any measures that stimulate growth in US domestic consumption and import demand should also help stimulate business opportunities for Vietnam. However, the practical impacts of the QE3 on the US economy will take time to feed into the US economy and international markets.

Any impacts in Vietnam will take time to be realised, and it will be difficult to isolate possible impacts of QE3 from other major global developments, such as the economic uncertainty in the European Union, the US and Japan, and economic developments in China, and fluctuating commodity prices.  

How negatively can this QE3 impact Vietnam’s economy?

The key risk relates to whether the US takes the steps needed to address the US fiscal deficit. A sluggish US economy will not be good for global growth or economic growth in Vietnam. While it is theoretically possible that the additional supply of US dollars could contribute to a depreciation of the USD which could dampen US demand for imports, and that the stimulus could fuel global inflation, I don’t see these as significant risks relative to other global developments.

Do you see any impact from this QE3 on Vietnam’s financial market and the government’s fiscal and monetary monitoring?

In this present period of global uncertainty, it is even more important that the authorities regularly monitor the impact of all global developments on Vietnam’s financial markets. It is difficult to assess, with any certainty, the likely impact of current global uncertainty on Vietnam’s markets.

The authorities need to be ready to respond quickly to any emerging imbalances if they are to achieve longer-term objectives of stable and sustainable economic development. Thus, Vietnamese authorities need to both monitor and publish data on key monetary and financial aggregates on a regular and systematic basis to help stimulate informed dialogue between the government, policy experts, and interest groups to help identify responses to economic developments that are in the national interest.

Vietnam’s economy remains in big difficulties. Do you think that Vietnam will need a stimulus package as the US does?

Unfortunately, the Vietnamese authorities have limited scope for directly stimulating economic activity via fiscal and/or monetary policy. While the fiscal deficit has been substantially reduced compared with 2009 and 2010, it is still quite high as a per cent of gross domestic product and there are pressing needs to use limited resources to tackle longer term challenges of education, environment, public transport, and other infrastructure. While there may be some scope for further easing of interest rates in coming months, the government needs to concentrate its efforts on strengthening and improving prudential supervision over the banking system. The government cannot afford to risk undermining recent progress in reducing macroeconomic imbalances.

While it is important to address current short-term concerns, it is also important to recognise some recent positive economic developments. Despite a difficult global environment, Vietnam’s overall export growth has remained strong and external imbalances have been reduced.

Despite a slump in demand for upmarket housing and luxury goods, overall domestic demand has continued to grow. Recent growth in production and exports of electronics and mobile phones has been particularly impressive. Growth in these sectors has important potential to generate higher productivity and higher income employment.

As the government addresses pressing short-term economic needs, it should not loose sight of the country’s medium-term development challenges. Skills shortages and infrastructure weaknesses remain important bottlenecks to stronger growth in higher value added production.

A strong high level commitment to increasing private sector investment in providing public infrastructure and services could help ameliorate these bottlenecks, act as an economic stimulus, and allow the government to focus more of its limited resources on public services such as basic education, health, environment and other social services.

Accelerated efforts to restructure the state sector, improve state sector accountability and corporate governance, and improve the efficiency of public investments can help stimulate stronger growth. The government can also stimulate growth by reducing remaining barriers to efficient public and private investment, the development of strong financial and capital market institutions, and the development of competitive markets to increase productivity and competitiveness.

In May this year Vietnam’s government began its bailout package worth VND29 trillion (nearly $1.4 billion) to lift local enterprises from difficulties largely via tax relief. How has this package impacted the government’s efforts to tame inflation this year?

Policy makers from all round the world are now struggling to find the right balance between macroeconomic stability and stimulating growth. The Vietnamese government needs to take a pragmatic approach to ensure that its initial success in containing inflation is sustained as this is essential for long-term equitable growth, while also ensuring that economic tightening does not lead to excessive slowing of growth in income and employment.

Clearly, some firms, especially those in property, construction, construction materials, and luxury and durable goods, are struggling to survive because of high interest rates. Some have gone out of business. Increased liquidity and lower interest rates may provide some immediate relief for struggling firms, but it is important that any relief is not at the cost of macroeconomic stability and sustained growth.