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Mindset change needed to face rising inflation

The entire world is facing a possible risk of an economic recession and high inflation. To prepare for any severe onslaught, Vietnam needs to think in terms of its own rising inflation and growth rate and be well prepared for the future.

Risk of slow growth

Many forecasts released recently believe that Vietnam's economy will recover stronger. The GDP growth rate in the first quarter of the year is estimated at 5.03 percent, inflation is well under control so far, and the Consumer Price Index (CPI) in the first four months of the year has increased by 2.1 percent. However, despite optimism about the prospect of recovery, all forecasts warn that Vietnam needs to be cautious with the risk of slow growth against rising inflation.

Asso. Prof. Dr. To Trung Thanh from the National Economics University, said that with the pandemic situation well under control and the economy receiving a boost from the new economic recovery support package, now economic growth can reach a target of 6.5 percent as expected. However, even if the growth rate reaches 6.5 percent, the average growth rate for the period 2020 to 2022 will be only 4 percent, much lower than the average rate. The growth rate of 6.5 percent in 2022 is high when compared to the two years of slow growth in 2020 and 2021 of 2.9 percent and 2.6 percent respectively. Prof. Thanh believes that the actual total output of the economy is still below its potential level and not only is growth slow now but there are signs that it may be seeing a downward slide.

Dr. Can Van Luc, a member of the National Financial and Monetary Policy Advisory Council, said that the key drivers of a strong growth recovery are also in trouble. He believes that there are sectors that are recovering strongly, but there are many sectors that are facing extreme difficulty. The aviation industry, international tourism, services, and retail sectors are all making very slow recovery. It is becoming evident that most of the hospitality and tourism services will be able to only recover 50 percent to 60 percent by the end of this year.

Although recovery will prove to be more difficult, growth is even more challenging as the world's growth slows and inflation rises due to the ongoing and fierce Russia-Ukraine conflict. Though the direct impact of this conflict on Vietnam is not too huge, the indirect and long-term impact is very significant. Because of this conflict the global supply chain has been disrupted and input prices for production have increased. This has caused undue negative impact on most manufacturing industries.

The International Monetary Fund (IMF) forecasts that the Russia-Ukraine conflict will reduce Vietnam's growth by 0.5 percent and increase inflation by 0.8 percent. Dr. Nguyen Dinh Cung, former Director of the Central Institute for Economic Management, said that China's policy for Zero Covid can also slow down export growth and economic recovery. Besides this there is a low aggregate demand, which is also a big challenge, making it very difficult to achieve a higher growth rate this year.

Possible global recession

Besides external challenges, internal challenges are also very evident. Prof. Dr. Hoang Van Cuong, a member of the Finance and Budget Committee of the National Assembly, believes that currently there is a paradox in infrastructure projects with tight investment capital. While the economy needs growth, the money cannot be spent, and the public investment capital has not been fully disbursed. By the end of April, public investment disbursement was only at 18.48% of the plan.

There are still seventeen ministries and central agencies that have not yet received any money and the remaining VND 38,578 bn has not been allocated by ministries and localities, while disbursement of foreign loans has only been around 3 percent. Dr. Can Van Luc said that the Prime Minister has sent two public notices, and the Ministry of Planning and Investment has continuously sent a promotional message, but public investment is still entangled. Therefore, in early May, the Prime Minister decided to set up six working groups under four Deputy Prime Ministers and two Ministers to promote more public investment.

Growth will not be stable if public investment remains slow. An increase of 1 percent in public investment will affect production growth in the construction industry by 1.34 percent and contribute to the GDP growth by 0.06 percent. If all public investment capital can be disbursed in 2022, GDP will increase by 0.42 percent. Public investment also acts as a primer to attract capital from the private sector and from foreign investments.

Although the Socio-Economic Recovery and Development Program is expected to bring the economy back to life, but so far, many policies have not been implemented because decrees and guiding circulars have not yet been issued. Dr. Can Van Luc believes that this year's GDP growth of 5.5 percent to 6 percent is a successful achievement. He said that GDP would increase by 6 percent to 6.5 percent, but in a negative case scenario, growth will only be 4.5 percent to 5 percent in 2022. In 2023, Vietnam's economy is expected to grow, and GDP could increase by 6.5 percentto 7 percent.

The world is entering a possible serious recession and higher inflation, and Vietnam must remain vigilant. If Vietnam does not maintain caution then it could fall into a deep recession with high inflation. We are just beginning to overcome the effects of the pandemic and the economy is at a slow growth rate, the lowest since calculating the GDP. The difficulty of Vietnam is the risk of inflation, budget deficit, increasing public debt, and narrow policies. In this difficult situation in policy and administration, it is necessary to speed up with innovative breakthroughs to meet the unexpected challenges that will inevitably face us in coming next two years.

Accordingly, policies should focus on recovery and sustainable economic development, and work towards aggregate demand in the short-term to push the economy back to a state of normalcy. In this, fiscal policy must take the lead. It is also necessary to increase spending to promote growth, accept overspending and higher public debt, and loosen fiscal policy at 5 percent to 6 percent of GDP in next two to three years. However, caution must always be maintained to avoid risk of macro-economic instability.

Source: Saigon Investment

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