Stimulus against Stagnation

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The difficulties of the national economy have become apparent since the beginning of the year. Several opinions of the deputies at the ongoing 5th session of the 13th National Assembly of Vietnam indicated that the Government’s report on the socio-economic situation does not fully reflect a severe stagnation of the economy.

This is the period that the managers and economists are giving their consensus assessment that total demand is declining and Vietnam’s economy needs a stimulus for growth.

Where is the stimulus aimed at?

The current status of economy could be interpreted by the status of Vietnamese businesses. Since 2011, the number of businesses dissolved and suspended on average by month has been increased. Since the beginning of the year, up to 4,645 businesses have been dissolved and suspended. The figures are in the report on the economic situation of Vietnam in May, 2013 by the National Financial Supervisory Commission (NFSC).

According to statistics of the Ministry of Planning and Investment of Vietnam, in May, the number of businesses dissolved and suspended reached 3,590 businesses, increasing the total number of businesses dissolves and suspended up to 23,226 businesses in the first 5 months, which is equivalent to nearly half of businesses dissolved and suspended in the previous years.

However such the figures only reflect tip of the iceberg.

And the number of businesses with shrinking business operations to survive and overcome this tough time is much bigger. The stagnation in manufacturing does exist, illustrated by the fact that the credits are almost unchanged since the beginning of the year. The current lending interest rate is adjusted from 10 percent to 12 percent, which is equivalent to the rate of 2005- 2007. At that time, the credit growth still reached 20-30 percent and the economic growth was at 7-8 percent. However, the current credit is increasing very slowly, hardly reaching the target credit growth of 12 percent of the State Bank of Vietnam (SBV).

Most Vietnamese businesses depend on cash flow and their payable capabilities are very low. Thus, the main causes of the businesses dissolved and suspended come from bad debts and market power. The poor demands come from the tightening of public spending, which causes negative consequences on production.

During the regular session in May by the government, many solutions on business and production supporting have been proposed but the economic growth just reached only 5.03 percent in 2012, leading to an unlikelihood of the target growth of 5.5 percent.

Some members suggested that the government should drastically focus on series of activities: promoting production and business development in order to maintain the recovery of the economic growth and achieving the targeted growth in 2013; focusing the loans on the priority sectors; researching the markets for products; reducing inventory; improving the competitiveness of the product; accelerating the implementation of restructuring public investment; and restructuring the state-owned enterprises (SOE) and credit institutions in order to create the premise for the recovery of economic growth in a long term.

Two main causes dominating the production include come from a decline of capital and market power. In terms of capital, the SBV has drastically cut the interest rate to circulate the capital flows to support producers. The interest rates have fallen sharply since the beginning of the year but many businesses go bankruptcy or wait for bankruptcy. This fact requires the government to propose the measures to stimulate the economy sharply.

Actually, the government’s approval of VND30 trillion for real estate is also a solution for stimulus because 70 percent of this amount aims to low income people. It is too early to assess the efficiency of the policy because the stimulus package has been launched recently, but the spread-out of information has drawn great public attention.

The government’ solutions to stimulate the economy are being discussed. There are many ways to stimulate the total demands, two of which are achieved by credit and stock market but the credit is now totally deadlock while the stock market is not a good alternative option as well at this moment.

Another one is to deal with an increase of the government spending, which is explained by an increase in public investment. The government spending used to be judged inefficient and poses a potential risk of rapidly increasing public debt and inflation. And more importantly, it could not be a smart choice at this moment.

Priority for growth objectives

According to the latest report of the NFSC, the inflation is under control and likely to be less than the target rate of 6.5 percent in 2013. The NFSC proposed the national macro policies which need more priority for economic growth to reach 5.5 percent of growth rate in 2013.

Some of solutions proposed by the NFSC include an increase of public spending on key large-scale projects and the projects about to be soon completed in 2013 and fully completed in 2014 and a focus on the allocating of the reciprocal capital of ODA to speed up disbursement of the funds and contribute to the financial investment for the economy.

An increase of public investment is also reflected by settling VND94 trillion debt of the construction companies, accelerating the government budget project, increasing public investment, focusing on infrastructure and incomplete projects which is about to be completed soon and put to use.

The monetary policy is recommended by continuing the cut in interest rate, adjusting the base credit lending rate to roundly10 percent per year to encourage businesses to borrow money. Besides, the government needs to strive for the target credit growth of 12 percent for 2013 to ensure capital for the economy.

Now, the SBV does not need to force the lending rate to be cut because the market itself has led the commercial banks to cut the rate to circulate their capital. The banks’ main revenue comes from credit so it is obvious that the unchanged credit rate may affect the banks’ revenue. That’s not to mention another aspect that the banks always compete to improve their reputation and market share.

Recently, the establishment of the Vietnam Asset Management Company (VAMC) to handle the national debt is to gain expectation to clean up a huge amount of bad debts. The commercial banks have strived to negotiate with businesses to bring the bad debt ratio down. Although it is just a technical measure, it sets a layout to help businesses access new capital for production.

The bad debts will decrease when the businesses could sell out their products to pay loans for the banks. Then, the market has demands for capital, the loans for production and cash flow will be circulated again.

The large amount of money from the banks has been poured into the government bonds. The funding has been raised by 5 percent from the financing activity, 2 percent from credit and the rest from the government bonds. Therefore, the money, instead lent to the businesses, is turned to the government to use.

But the government cannot abuse this stimulus because this measure is just used for short term but it needs to engage with other measures to promote total supply through expanding production, attracting foreign direct investment, restructuring companies, speeding up equitisation, and creating a new business environment for businesses.

Bao Chau

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