Vietnam growth seen better than most in Asia: 4.5%, says ADB

But the government needs to strike a balance between stimulating growth and keeping deficits in check.

Vietnam could achieve 4.5 percent growth this year, leaving it in better shape than most Asian economies despite the global downturn, the Asian Development Bank (ADB) said Tuesday.

The Manila -based ADB released its annual Asian Development Outlook which said growth in Asia’s developing economies would fall to 3.4 percent this year, with Southeast Asia as a whole almost stagnant with a 0.7 percent rise.

“When it comes to Vietnam, actually we should not use the word ‘downturn’ or ‘recession.’ It’s just a slowdown,” ADB’s country economist for Vietnam, Bahodir Ganiev, said, projecting the growth to rebound to 6.5 percent in 2010.

The country’s economy expanded by 6.18 percent last year, its lowest level in almost a decade.

Vietnam will cut its economic growth target to 5 percent, the lowest since 1999, from an earlier estimate of 6.5 percent after posting its weakest first-quarter expansion in a decade. The new target will be submitted to Vietnam’s National Assembly for approval, Nguyen Xuan Phuc, chief of the government office, told reporters in Hanoi Tuesday.

The country reported economic growth of 3.1 percent in the first quarter of 2009, compared with 7.4 percent in the same period last year.

Private consumption could slacken further because of slower economic activity, higher unemployment, and lower stock and property prices, ADB said in the Asian Development Outlook.

Average annual inflation is forecast to slow to 4 percent in 2009 before quickening to 5 percent in 2010, since GDP is likely to be below its potential level and world commodity prices are expected to be substantially lower than last year’s average levels.

The fiscal deficit is forecast to widen to 9.8 percent of the GDP this year due largely to an expected decline in government oil revenue, a reduction in base corporate income tax from 28 percent to 25 percent, the slowdown in economic growth, and the fiscal stimulus measures.

Because of the wide fiscal gap, the stock of public and publicly guaranteed debt is estimated at 45.8 percent of GDP this year and 45.1 percent in 2010, compared with 39.7 percent last year.

The current account deficit is expected to be 11.5 percent of GDP this year before narrowing to 9.7 percent in 2010.

In the medium term, GDP growth is likely to pick up to 7-7.5 percent driven by strong FDI inflows, the ADB said.

Caution needed

Ganiev cautioned that the ADB’s estimates should be treated with caution because of “an unusually high level of uncertainty” characterizing both the global and Vietnamese economies.

For Vietnam, uncertainty arises from the external environment and also because “the government is considering, as far as we know, some more fiscal stimulus measures” whose size and impact is not known, he said.

In the short term, the government can bolster sagging growth through expansionary macroeconomic policies. However, expansionary fiscal policy is likely to raise the fiscal deficit and the public debt burden, Ayumi Konishi, ADB country director for Vietnam, said.

Therefore, the government should strike a balance between stimulating growth and keeping the fiscal and current account deficits in check, as it tries to counter the impact of the global financial crisis and the economic slump, he said.

Ganiev also called for efforts to restructure state enterprises. “Restructuring state enterprises is crucial for raising the efficiency of the economy since they employ a substantial proportion of available resources but do not use them very efficiently,” he said.

Their involvement in non-core businesses needs to be curtailed to utilize scare resources more efficiently and to improve productivity, he said.

It is also important to subject them to hard budget constraints and to maintain adequate control over their finances to limit the government’s contingent liabilities, he said.

Konishi said unemployment would increase as factories are reducing the size of their operations or even closing down, and under-employment would increase in rural areas as unemployed people return to their home provinces.

“Special attention needs to be paid to addressing unemployment and underemployment and supporting small-and medium-sized enterprises and the poor,” he said.

Asia’s slower growth

Developing Asia’s economic growth would slow in 2009 to its most sluggish pace since the 1997-1998 Asian financial crisis, the ADB said. It would be just 3.4 percent, down from 6.3 percent last year and 9.5 percent in 2007.

If the global economy experiences a mild recovery next year, the outlook for the region will improve to 6 percent in 2010.

Deteriorating economic prospects will hinder efforts to reduce poverty. With slow growth, more than 60 million people in 2009, and close to 100 million people in 2010, will remain trapped in poverty, living on less than US$1.25 a day, than would have been if growth had continued at its earlier pace.

Economic growth in East Asia will slow to 3.6 percent in 2009, down from 6.6 percent in 2008 and a blistering 10.4 percent in 2007.

While China is expected to expand by 7 percent in 2009 on the back of massive fiscal stimulus measures rolled out by the government, Hong Kong will record minus 2 percent growth, and South Korea minus 3 percent.

Southeast Asia’s growth is projected to dwindle to just 0.7 percent in 2009, down from 4.3 percent in 2008, and the three most export-oriented economies in the region – Malaysia, Singapore and Thailand – will also contract, with the most open of them, Singapore, likely to shrink by 5 percent.

South Asia, though not as open to trade as other regional economies, is also expected to lose steam. India’s growth slowed to 7.1 percent in 2008, well below the torrid 9 percent growth of recent years, and it is expected to fall further to 5 percent in 2009 as the intensifying crisis further dents business and consumer confidence and causes a major reduction in capital inflows.

Growth in Central Asia will drop to 5.7 percent in 2008, down from 12 percent in 2007, and is expected to decelerate further to 3.9 percent in 2009.

Central banks across Asia have lowered interest rates to stimulate demand, and governments are pumping more than $700 billion in spending, tax cuts and cash handouts into their economies to kick-start consumer and business spending.

Asian financial systems have weathered the crisis “quite well” and bank lending is flowing “normally,” the ADB said.

“Nevertheless, the global financial crisis is far from over, and the speed and scale of its resolution remain subject to a great deal of uncertainty,” the ADB said. “The biggest risk to the region’s continuing financial stability is the specter of a deep and protracted downturn.”

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Please click this link to download the full report: Asian Development Outlook: 2009