The Vietnamese economy now shows signs of overheating but overheating is not the result of excessive government spending, Mr. Martin Rama, Lead Economist of the WB in Viet Nam, said at a press conference held to launch the WB’s latest six-monthly review of the East Asia and Pacific region’s economies.
The report points out the signs. Inflation accelerated from 6.6 percent (year on year) in December 2006 to 15.7 percent by February 2008. To some extent, this reflects the rapid increase in international prices, especially for food, oil, and construction materials. With the dong loosely pegged to the dollar and a very open economy, changes in world prices are rapidly reflected in domestic prices. Higher domestic oil prices also reflected the removal of government subsidies to local distributors, a sound policy on fiscal grounds.
Why is overheating not the result of excessive government spending? The WB explained that the overall budget deficit for 2007 stood at around 1 percent of GDP. This preliminary figure does not represent a significant departure in relation to previous years. The overall fiscal balance was larger at around 5 percent of GDP, including the issuance of government bonds for education, infrastructure and the re-capitalization of State-owned commercial banks.
The WB report also highlights the country’s good results. Viet Nam’s growth reached 8.5 percent in 2007, making it the third consecutive year above the 8 percent benchmark. Fears that the WTO accession early in 2007 would adversely affect agriculture and retail trade failed to materialize.
The review writes, “The business climate continued to improve, with the investment rate reaching 40.4 percent of GDP. Growth was increasingly driven by the private sector, with 59 thousand new enterprises registering during the year, 26 percent over the year before.”
It continues, “Foreign direct investment commitments almost doubled, to US$20.3 billion, whereas stock market capitalization reached 43 percent of GDP by end 2007, compared to 1.5 percent two years earlier. Non oil exports grew by 27 percent, bringing total exports to 68 percent of GDP by year end. International reserves increased by over $ 10 billion to $21.6 billion, equivalent to 30.2 percent of GDP or 3.3 months worth of imports.”
In the latest report, the WB also remarked Viet Nam’s new policy package issued early this March that contains a mixture of monetary and fiscal measures designed to cool the economy while minimizing the effect on growth. The WB says, the policy’s success “will very much depend on how it is implemented in practice, and how well the authorities are able to adjust policies in light of changing circumstances.”