Need to prioritize supply-side stimulus policies, "hitting the right acupoints" to accelerate the economy

While monetary easing has completed its mission, stimulus policies to support businesses need to be prioritized. This is the opinion of Mr. Nguyen Duc Hung Linh - founder and consulting director of Think Future Consultancy in a recent report.

Growth 2024-2025: Positive thanks to exports

According to data recently released by the General Department of Customs, the total export value by mid-June 2024 reached 172.8 million USD, up 15.19% over the same period. Previously, goods exports in the first 5 months of 2024 increased by 15.2%. By region, exports to the US alone increased by 22.3%, while in the same period in 2023 they decreased by 11.7%. Exports to the EU, South Korea and Japan all returned to good growth, reaching 16.1%, 10.9% and 3.2%, respectively. Imports recorded faster growth than exports in May but were also considered a positive signal for the upcoming peak export season.

Commenting in the Economic Growth Focus report in June 2024 , Mr. Nguyen Duc Hung Linh - founder and consulting director of Think Future Consultancy, commented that Vietnam's exports are the most important driving force of the economy, and at the same time, are also heavily dependent on the demand of developed economies. The US, EU, South Korea and Japan account for 53% of Vietnam's merchandise export value. The decline in exports to these markets has caused total exports to decrease and slowed economic growth in 2023. Entering 2024, developed economies are regaining positive growth momentum, with growth forecast to reach 1.7% in 2024 and 1.8% in 2025 (compared to 1.6% in 2023). The World Trade Organization (WTO) predicts global merchandise trade will grow by 2.6% and 3.3% in 2024 and 2025, respectively, after falling by 1.2% in 2023.

“Speaking more about the US market, this is the largest export market, accounting for more than a quarter of our country's total export value. In 2021 and 2022, US importers rapidly increased imports of goods to compensate for the disruption caused by Covid-19. In 2023, when concerns about the pandemic passed, importers found it unnecessary to stockpile too many goods, so they proactively reduced imports to release inventory. This is the reason why US imports of goods in 2023 decreased by 160.5 billion USD (-5.1%). Of which, imports of consumer goods such as apparel, footwear, phones and household appliances - Vietnam's main export items - decreased by 80.6 billion USD (-9.6%). In 2024, the trend of US goods imports was more positive with an increase of +1.7% in the first 4 months of the year. This explains why Vietnam's exports to the US will decrease in 2023 and increase again in the first months of 2024."

According to Mr. Nguyen Duc Hung Linh, the forecast for global economic growth and trade in goods in 2024 and 2025 will be more positive, thereby leading to increased demand for Vietnamese goods.

Thanks to positive exports, Vietnam's GDP growth in the first quarter of 2024 increased to 5.66%, compared to the increase of 3.32% in the first quarter of 2023. The number of unemployment benefit applications in the first quarter of 2024 also decreased to 168 thousand, the lowest level in 10 quarters, showing an improvement in the employment sector and business activities of enterprises.

With the economic forecast of developed markets continuing to trend positively and US consumer goods imports increasing again, experts from Think Future Consultancy believe that it is possible to believe that Vietnam's exports in the remaining months of 2024 will continue to grow well as in the first months of the year. Exports in 2025 are also expected to be positive as developed economies are forecast to continue to grow strongly (2024: 1.7% and 2025: 1.8%).

“With this trend, we can be confident that Vietnam's economy will have a brighter outlook in both 2024 and 2025,” Mr. Linh also emphasized.

The monetary easing policy mission has been accomplished.

Since the pandemic broke out, Vietnam has focused all its growth-boosting measures on fiscal and monetary policies. In fact, according to experts from Think Future Consultancy, after a long period of easing, both fiscal and monetary policies have been stretched to their limits.

On the fiscal side, VAT is reduced and public investment is increased. The budget for capital investment in 2024 cannot be increased further, stopping at approximately 700 trillion VND. On the monetary side, interest rates have fallen to a “20-year low” and cannot be reduced further.

However, Vietnam's economic growth in 2023 will not be better thanks to this fiscal or monetary easing.

“A simple reason is that global trade and exports have very little to do with VND interest rates. FDI enterprises, which account for three-quarters of export value, can completely borrow in USD at low interest rates based on existing relationships with foreign banks. Meanwhile, the deep reduction in VND interest rates is putting pressure on important macroeconomic balances, most notably exchange rates and asset bubbles.

Specifically, with the exchange rate, since the beginning of the year, the VND has depreciated by approximately 5% against the USD. Since 2022, the exchange rate has been under constant pressure due to the decrease in VND interest rates while the USD has increased. With the asset bubble, during the Covid period of 2021-2022, a wave of stock price increases and then real estate prices occurred widely. This bubble deflated at the end of 2022 when the operating interest rate increased in September and October 2022. During those two months, the SBV increased the operating interest rate twice by 1% each time to protect the exchange rate. However, when the interest rate was reduced again in early 2023, another wave of real estate price increases broke out. In addition to real estate, gold prices also surged. The gap between domestic SJC gold prices and world gold prices began to widen because people turned to investing and even speculating in gold.

According to Mr. Linh, in 2024, a situation of "hundreds of mulberry trees falling on one silkworm's head" appeared when the State Bank had to simultaneously stabilize the exchange rate and "stabilize" the gold price in a very narrow policy space.

While growth in 2024 and 2025 will certainly be positive thanks to exports, not monetary easing, Mr. Linh believes that monetary easing can be considered to have completed its mission at this point.

It should be noted that lending interest rates, a decisive factor in supporting growth, do not necessarily increase along with deposit interest rates. Looking back at the pandemic period, commercial banks have reduced lending interest rates more slowly than deposit interest rates, and as a result, the banking industry's profits have increased sharply. Therefore, according to Mr. Linh, this will be the time when commercial banks need to share more effectively with businesses by increasing lending interest rates more slowly. In fact, in May, the Government also issued a directive to continue reducing lending interest rates by another 1-2% in 2024.

Therefore, monetary policy and interest rate orientation in 2024 need to be very flexible in the direction of gradually increasing VND mobilization interest rates to support exchange rate stability, reduce speculation forming asset bubbles while trying to maintain, reduce or slowly increase lending interest rates. This is the way that Mr. Linh believes that Vietnam will certainly have both growth and macroeconomic stability in 2024 and 2025.

Need to prioritize supply stimulation policy

Monetary easing and interest rate cuts can theoretically bring growth. However, Mr. Linh said that putting the burden on monetary policy needs to be reconsidered.

The reason is that in the context of Vietnam, the impact on growth from interest rate cuts is actually quite limited. Although interest rates have fallen very low, credit and investment from the private sector are still growing very slowly. Supply-side stimulus policies, that is, supporting businesses, therefore need to be prioritized.

To support businesses, regulatory policies need to aim at improving the business environment, providing selective protection, and sharing resources from state-owned enterprises to the private sector. Only then can the private sector accelerate capital accumulation and improve competitiveness.

On the state-owned enterprise side, we need to set clear KPI targets and responsibilities for business leaders. The recent leadership changes in some large state-owned corporations have brought about clear results. This will be an important lesson to continue improving the efficiency of the state-owned enterprise sector, which will continue to hold the most important resources of the country.

“A correct view of growth drivers will help Vietnam’s economic management policy “hit the right notes”, helping to accelerate the economy while still ensuring macroeconomic stability, the most important factor for sustainable growth. Changing the view of growth drivers”, the consulting director of Think Future Consultancy emphasized the need to change the view of growth drivers.

Source: https://baodautu.vn/can-uu-tien-chinh-sach-kich-cung-diem-dung-huyet-de-tang-toc-nen-kinh-te-d218242.html