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How long Resolution 11 will be kept in place is the question (29/4)
29/04/2011 - 6 Lượt xem
he Saigon Times Daily: Do you think the new package of measures under Resolution 11 will eventually bear fruit?
- Professor David Dapice: The problem is not if the February measures (Resolution 11) will work, but how long it will be kept in place. Recent growth has been driven by SOE (State-owned enterprise) and real estate investment, both of which rely on rapid credit growth. If a real slowdown emerges, it is likely that there will be fierce pressures to reignite credit growth again and if that happened, then inflation would return. This is one reason why confidence in the dong is not very high. The other reason is that the growth strategy relies more on high investment than efficiency, and it may be difficult to maintain high levels of investment as saving is only moderate.
But when would the economy cool down?
- The typical lag between changes in credit growth and prices is some months, so restraint applied in March should show up in the June-August period.
Growth will slow as a result of such measures (Asian Development Bank has recently cut its forecast for Vietnam’s GDP growth this year to 6.1% from 7% projected in September 2010). Is this good or bad for Vietnam as a whole?
- Vietnam has very large trade and fiscal deficits and will have to change the pattern of its expenditures so that both deficits shrink. Since taxes are already high relative to income per capita, it is likely that most adjustment will take the form of spending restraint. So less growth will have to come from government spending (including investment) and more from other spending.
A logical alternative would be private investment, which is now heavy on real estate projects that rely on dubious assumptions to be profitable - think of large entertainment complexes, very high priced apartments and so on. So banks should subject private loan applications to real analysis and see if they are well founded - that they will be repaid under likely economic conditions.
And if government policy continues to support the formation and expansion of new businesses, this adjustment of spending patterns will happen quickly.
Do you mean that it's not good to have investment in real estate projects. So what’s your advice? What industries should be pushed forward?
- When the Financial Times has a front page story about land in Hanoi going for US$60,000 a square meter - higher than New York or London - it is a safe bet that things are getting overheated. Right now, the dong is overvalued and that raises the price of nontradable activities like real estate and depresses the profitability of non-resource exports and import competing industries. If the dong returns to the real value of (say) 2007, it would depress the nontradable sector and boost investments in things that can be traded - either exports or import competing goods.
I do not know the specific sectors that would benefit, but suspect it would include labor intensive goods, resource processing, and intermediate technology things like motorcycle or car parts. But if Canon wants to buy components for copiers or printers, that is fine too!
What should be done next?
- The desire to reduce inflation and fiscal and trade deficits is wise. The world capital situation is getting tricky – recently even the U.S. (properly) got notice that its debt might be downgraded if it did not reduce its fiscal deficits. The euro is under stress with many weaker economies facing major strains. The situation in Japan after the tsunami and nuclear accident is similarly uncertain. It is a bad time to be a big borrower with low reserves, so if Vietnam can take steps to borrow less and print less money, it is likely to be in a stronger position.
Longer term, it has to improve the efficiency of investments so that it can grow quickly without investing so much.
Can we head to more sustainable growth?
- Vietnam is lucky in that “China plus 1” is still a strategy followed by many foreign companies. With Chinese inflation and rising wages, and a trade surplus, more yuan appreciation is likely. (The first quarter trade deficit of China was a quirk.) This will make it easier for Vietnam to sustain its own growth. It also produces a lot of raw materials, and these are in high demand. Aside from threats to the Mekong River from upstream dams (which could have a very big impact on agriculture in the Mekong Delta) and slow upgrading of education, there is little preventing Vietnam from sustaining a doubling of GDP every decade for a while.
Source: SaigonTimes
