From stabilising the macro economy to restoring market confidence

From stabilising the macro economy to restoring market confidence

The work of restructuring the economy should be rooted in maintaining the trust and consensus of the entire society. (Photo: VNA)

NDO – After four years of stabilising and restructuring the economy, Vietnam has recorded remarkable achievements, while still facing major challenges. The obtained results thus far are encouraging, but still lower than expected. The work of restructuring the economy should be rooted in maintaining the trust and consensus of the entire society.

In this article, Dr Nguyen Dinh Cung, Director of the Central Institute for Economic Management will review some of the positive outcomes of the macroeconomic stability process, and highlight the restoration of confidence in the market and investors, a pivotal factor for economic growth.

Macroeconomic stability

The most obvious achievement in the past four years has been the maintenance of macroeconomic stability. From August, 2011 to the present, the consumer price index (CPI) has continuously declined. Since April, 2012, inflation has been kept at a sustainable level. In the first nine months of 2014, the CPI only increased by 2.5% year-on-year.

The results were reached thanks to the Government’s consistency in prioritising macroeconomic stability as a foundation for the process of economic restructuring. Inflation was kept at low levels and the currency market was stablised. The exchange rate has remained mostly unchanged since February, 2011.

The stability of the exchange rate is a crucial factor for a developing country depending on imports and foreign capital. Trade balance and services have seen much improvement.

In 2010, Vietnam’s trade deficit accounted for 8.21% of the GDP. In 2011, the trade deficit fell to 4.13% of the GDP, and in 2012, Vietnam began to see a trade surplus of 3.5% of GDP, rising to 4.09% of GDP in 2013. The Vietnamese exporters have begun to recover their competitiveness. The export growth rate of domestic enterprises rose from -1.1% in 2012, to 3% in 2013 and witnessed an increase of 15.2% year-on year in the first 9 months of 2014.

Deposit interest rates and lending rates in the market dropped from 25% in mid-2011 to about 9% at present. The commercial banks switched from serious liquidity shortages to to surplus liquidity. However, the difference between lending and deposit rates is still high.

VN-Index fell sharply in 2011 from 525 points in January, 2011 to 335 points in early January, 2012. In 2012, the downward trend was halted, but the market did not show obvious signs of an upward trend until 2013. The strong recovery of the stock market has showed that investors’ confidence has returned.

The improved trade balance and services, the stable exchange rate, and low inflation have encouraged people to switch from keeping foreign currencies to VND. The foreign exchange reserves thereby increased rapidly, now reaching over US$35 billion, four times higher than the early 2011 figure. The high foreign exchange reserves helped increase the ability of the State Bank to intervene in the market.

The total social investment capital of each economic sector began to grow. Investors’ confidence has been gradually restored. In September, 2014, ratings agency Moody’s upgraded Vietnam’s credit rating from B2 to B1, citing strengthening macroeconomic stability and an easing in banking sector risks.

Results of a smaller survey of 400 businesses in the manufacturing and processing sectors conducted by HSBC show that from September, 2013, Vietnam’s Purchasing Managers’ Index (PMI) rose more than 50 points and has been maintained at over 50. Vietnam’s consumer confidence index jumped to 102 in the third quarter of 2014, four points higher than the previous quarter. This is the first time since the third quarter of 2010 the index has reached over 100.

Restoring growth and reinforcing confidence

The quarterly growth rate since the first quarter of 2011 remained moderate and came in below its potential. The situation lasted until the third quarter of 2013 when economic growth started to rise steadily. In particular, the economy continued to grow by 1% in the third quarter compared to the previous quarter.

International organisations have forecast that Vietnam’s economy will continue to grow from now to 2016. The World Bank (WB) and International Monetary Fund (IMF) both forecast that Vietnam’s economy will achieve a growth rate of 5.5% in 2014 and 5.6% in 2015, 0.1 and 0.2 percentage points higher than forecasted in last October. Meanwhile, the Asian Development Bank (ADB) seemed to be more optimistic, predicting that the Vietnamese economy would expand by 5.6% in 2014.

Although many international organisations forecast an improvement in the growth rate of Vietnam, these forecasts are quite moderate, reflecting the caution of these organisations before challenges that Vietnam must overcome in the next period.

Economic growth is recovering, the balance of trade has moved positively toward a surplus, inflation has been curbed at a low level, foreign exchange reserves increased nearly fourfold, interest rates fell sharply, and the exchange rate remained stable: It can be said that the major result obtained is market confidence.

The Government’s determination in maintaining macroeconomic stability and structural change has been recognised by the market and people. In addition, a series of institutional reforms are promoting rapid transformation to a market economy in the country, contributing to ensuring the economic freedoms of citizens and businesses. The determination has also helped reduce risk and compliance costs; increase the level of legal security; expand opportunities and encourage creativity of enterprises; and improve overall competitiveness.

Macroeconomic stability, institutional reform, and free trade agreements are the most significant factors for strengthening market confidence. Many firms, investors, and market research organisations share the opinion that investment flows show signs of redirecting to Vietnam. The recent recovery of the stock market shows signs that investors’ assessments of Vietnam’s economic prospects are improving.

Market confidence is very difficult to build but very easy to lose. The work of restructuring the economy should start with maintaining the trust and consensus of the entire society. The current restructuring requires strong institutional reforms in order to overcome problems left by the old-style economic model, requiring the profound consensus of the political system, as well as the support of people from all walks of life.

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