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Economy rebounds, but major challenges loom

In Uncategorized on March 24, 2010 at 4:47 am

Despite the global crisis, last year can be seen as a successful year for Vietnam, with its GDP growing by 5.32 percent, the highest rate in Southeast Asia. However, there remain many big challenges the country faces in 2010.

Besides the impressive GDP growth, last year saw the country’s overall CPI kept at 6.8 percent, the lowest rate since 2004, and unemployment rate stand at 3 percent, the lowest in the world.

Owning to strengthened control over budget spending, the deficit was restrained at 6.9 percent of GDP, slightly lower than the 7-percent target and far lower than the projections by international financial analysts.

Customers at an Eastern Asia Commercial Bank branch in Ho Chi Minh City. The negotiable interest rate mechanism should be applied again to replace the ceiling interest rates on loans and deposits, to help stabilize the foreign exchange market, says Le Xuan Nghia, Deputy chairman of the National Financial Supervisory Committee. (Photo: Viet Bao)

As a result of the Government’s effective social welfare policies, the number of poor households fell to 12 percent from 14 percent in 2008.

The banking system was relatively stable, with an ROE of 13-14 percent. Average bad debt rate at banks was less than 2 percent.

Last year also saw many financial companies and financial leasing companies improve themselves in term of profitability and bad debt ratios. The insurance market and stock exchange have rebounded in terms of capital, liquidity and profit.

The above performances, resulting from the Government’s opportune policies on economic stimulus and macroeconomic stabilization, and great efforts by businesses, investors and consumers, have created favorable conditions for better economic achievements in 2010.

The revival in consumer demand the world over is also a good sign for Vietnam’s exporters.

This year, free trade agreements (FTA) between Vietnam and China, Japan, and possibly Russia, will be implemented, benefiting Vietnamese importers, exporters and producers, contributing to boost growth and generating jobs.

Trade deficit, exchange rate

It is a big challenge for the country to achieve a GDP growth of 6 percent this year. In 2009, the country’s GDP grew by 5.32 percent, of which 1.2 percent contributed by a 30 percent reduction of trade deficit (from US$17 billion in 2008 to $12.2 billion in 2009).  But in 2010, the situation has been reversed: trade deficit is forecast to rise by 20 percent and will make the growth rate reduce by 1 percent.

In other words, if the country wants to reach a GDP growth of 6.5 percent this year, it must see total consumer spending and domestic investment increase by 7.5 percent. To overcome this big challenge, it is necessary to apply flexible policies to boost public investment, credit and consumer spending.

Another problem is how to improve the foreign exchange market’s liquidity and to stabilize exchange rates.
Last year, the weak liquidity of the foreign exchange market mainly arose from the fact that the Government’s interest subsidy was offered only to loans in dong, which narrowed the gap between the interest rates on dong and foreign currencies, leading to difficulties in mobilizing and lending foreign currencies.

When the Government increased the official VND-USD exchange rate by 5.5 percent, boosted the prime rate by 1 percent and stopped offering interest subsidy for short-term loans, the liquidity of the foreign exchange was improved.

However, the difference between the State’s official exchange rates and those on the open market remained relatively high.

Therefore, if the exchange rates are not regulated flexibly based on market developments and if the negotiable interest rate mechanism is not applied again to replace the ceiling interest rates on loans and deposits, the instability of the foreign exchange market is likely to remain a big problem in 2010.        

Particularly, the US Federal Reverse is likely to increase its base interest rate in April. If this is the case, the value of US dollar will strengthen against other foreign currencies and liquidity in Vietnam will be weakened, affecting not only the financial market but also the efficiency of the national economy as a whole.

By Dr. Le Xuan Nghia, deputy chairman of the National Financial Supervision Committee

Source: SGGP Bookmark & Share

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