IMF country head warns Vietnam about the impact of a global recession

The fund warns that controlling inflation and flexible fiscal policy are essential to ride out the storm.
By RFA Vietnamese
IMF country head warns Vietnam about the impact of a global recession Container trucks pass through rows of containers at Dinh Vu port, Hai Phong on August 12, 2019.

Vietnam will not be able to escape the negative consequences if the global economy enters a recession next year, according to Francois Painchaud, the International Monetary Fund's representative in Vietnam.

Still, the IMF continues to forecast stronger economic growth in 2023 than this year.

Others agreed with Painchaud’s assessment

 “Inflation in many countries shows no signs of cooling down quickly. The U.S. Central Bank intends to raise interest rates until inflation is under control. Central banks of other countries will follow that direction. As a result, the world economy could quickly enter an increasingly deep recession,” Norway-based economic expert Nguyen Huy Vu told RFA.

“Vietnam depends a lot on the world economy, from foreign direct investment to exports and imports. Therefore, when the world economy declines, Vietnam will be greatly affected," said Vu, who spent a year working for Germany’s Bundesbank.

In July the IMF forecast Vietnam’s economy would grow by 6% this year, rising to 7.2% in 2023.

Associate Professor, Dr. Ngo Tri Long, former director of the Institute for Price Market Research under Vietnam’s Ministry of Finance, said the IMF's assessment was reasonable, although he forecast a bigger rise in 2022 Gross Domestic Product:

“Second quarter growth was recorded as the highest compared to the past,” Long said. “It increased by 6.7%. That shows that the possibility of [growth] exceeding the target set by the National Assembly. Over 7% growth this year is within reach.”

The IMF’s Painchaud said in spite of the risk of the knock-on effect of a global recession in 2023, Vietnam's GDP growth would probably still be the highest among key economies in Asia.

Painchaud said Vietnam needs to closely monitor inflation risks and needs flexible fiscal policy in order to deal with constantly fluctuating economic conditions. The IMF said in July consumer price inflation (CPI) would average 3.8% this year and 3.7% in 2023.

Vietnam’s National Assembly has set an inflation target of below 4%. In the first eight months of the year CPI ranged between 2.6% and 2.8%.

Associate Professor Long said there is a very close link between economic growth and rising prices.  He said the biggest risk to Vietnam would be ineffective growth policies leading the country to fall into a debt trap.

“It means investing in breadth, not investing in depth. Investing in breadth is very risky: high growth without paying attention to efficiency and quality but only paying attention to quantity.” he said.

“The risk lies in the trap of high public debt. If you want to grow, you must increase investment. If it is not enough you must borrow and, if you borrow, you must repay. Finally, if it is not effective, it is impossible to repay the debt. That's the biggest risk."

The World Bank has a more optimistic 2022 economic forecast for Vietnam than the IMF. Last month it said GDP would rise to 7.5% this year from 2.6% in 2021, with inflation this year forecast at 3.8%.

Khuong Huu Loc, Chief Financial Officer of several large U.S. corporations, and an MBA lecturer at a number of U.S. universities, said that this year’s strong GDP compares to last year’s low base.

“For a developing economy, it's quite common to grow 7, 8 or 9%. A mature and large economy like the United States or a European monolith that grows 3% is too good, so it has to be viewed in a relative way,” Loc said.

“Vietnam has become one of the countries with the highest [COVID-19] immunization rates. [People have been] vaccinated with advanced drugs from the U.S. and Europe. Learning to live with COVID will allow Vietnam to expand its economy more firmly.”

The U.S. is Vietnam’s biggest export market, followed by the European Union and China. Loc said the U.S. and Europe are facing the situation of 'stagflation' which means the economy stagnates while prices continue to rise. He said this will be very difficult to solve in the short term.

“Vietnam is currently benefiting because many companies such as Intel are investing an additional 500 million U.S. dollars in Vietnam, and Samsung has left China completely to invest in Vietnam,” Loc said.

“The current supply chain in Vietnam is not affected much. Although oil and gas prices have had some influence, Vietnam is almost self-sufficient in food, while other countries depend on food from Ukraine and Russia. So this [World Bank] growth [forecast] of 7.5 can be trusted.”

However, Loc warned that although inflation in Vietnam is currently 3.8% the country measures inflation incorrectly:

“Vietnam uses rough numbers which can be very misleading. For example, in the United States, when they say pork, chicken, beef... or gasoline [prices], they follow each region proportionately, so it's very accurate,” Loc said. 

“Even so, sometimes they make mistakes and after a few months they have to correct them. Vietnam does not have the ability to closely track each item. For example, beef and pork in Da Nang are [priced] differently than Saigon and different in Can Tho. Inaccuracy means that inflation in Vietnam could be higher than 3.8%.”

Without an accurate measure of inflation, Loc said fiscal flexibility will not work:

“When Vietnam thinks that 3.8% inflation is less than [the target of] 4%, they don't worry. Secondly, Vietnam follows the same economic model as China. And China is now insolvent because the real estate market has blown up prices. Currently, the inflated price of real estate in Vietnam may be a symptom of cancer for the Vietnamese economy," he said.

Loc also warned that Vietnam's public and private debt levels are inaccurate and no one has tried to correct them.



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