Briefing Notes for the Launch in Hanoi, April 2007
GDP Growth performance and prospects
- With growth at 8.2 per cent in 2006 from 8.4 per cent in 2005 Viet Nam continued the pattern over recent years pushed on by garment production and services related industries, notably tourism and banking. ESCAP is forecasting growth at 8.3 per cent while the government's target is 8.5 per cent in 2007.
- Strong inflows of foreign direct investment as well as expanding trading ties have supported the growth momentum. This was highlighted by Viet Nam's World Trade Organization membership that came into effect in January. From this the garment industry benefited from the United States' decision to end quotas on Vietnamese garment shipments.
- In early 2007, growth was sustained, the economy expanding by 7.7 per cent in the first quarter from 7.2 per cent for the same period last year, based on General Statistics Office data.
- Industry and construction category, which accounts for about 43 per cent of Viet Nam's economy grew by 9.3 per cent, while processing industries, including the garment sector, expanded by 11.9 per cent.
Inflation and Monetary policy developments
- Price inflation eased in 2006 to 7.5 per cent from 8.3 per cent a year earlier. A further easing in prices is expected in 2007 to 6.2/ 6.8 per cent on lower petroleum prices. The underlying price inflation trend is lower amid fewer concerns over external factors and stable commodity prices.
- Inflation in the first quarter of 2007 was underpinned by higher food prices linked to demand over the Lunar New year period.
- But Viet Nam's accession to the World Trade Organization – effective from January 2007 – is also expected to contribute to containing inflation through lower import tariffs.
Fiscal Policy developments
- Budget deficit in 2006 increased to 5.0 of GDP from 4.9 per cent in 2005, and continuing the trend over recent years and amongst the largest in South East Asian region.
- Officially, a cautious fiscal policy is expected to be maintained over the period 2006-2010. Viet Nam is aiming to achieve a budget deficit ratio at 3.0 per cent and under 5.0 per cent of the GDP.
- Main concerns remain over the need for the government to contain its fiscal deficits and restrain any increase in debt.
- Viet Nam's accession to the World Trade Organization (WTO) marked a major milestone for Viet Nam becoming the 150th member ending a 12 year process since it first applied in 1995.
- 2006 was marked by continued strong trading growth highlighted by a narrowing in the trade deficit due to higher commodity prices including crude oil, coffee, and rubber. Garment and textile exports rose by over 20 per cent for the year with strong gains registered from the footwear and seafood products sectors.
- Overall, export growth rose by 21.9 per cent in 2006, in line with the 22.4 per cent expansion in 2005. As a portion of GDP share it rose to 74.7 per cent from 69.9 per cent in 2005.
- On the import side, petroleum products and machinery and equipment imports were higher exceeding 15 per cent growth over the previous year. Generally import growth climbed to 20.1 per cent in 2006 from 15.7 per cent, while as a proportion of GDP imports rose to 74.1 per cent from 61.3 per cent in 2005.
- Officially, export growth target for 2007 has been set at 17.4/20.0 per cent. But there are expectations of a change in the composition of exports with industrial products rising, while crude oil exports by value are forecast to fall along with coal. Rice exports are also expected to decline, continuing a recent trend. Total rice exports are forecast at 4.5 million tonnes over 2007, down from 4.75 million tonnes in 2006 and 5.0 million tonnes in 2005.
- There is also official caution over excessive gains in garment exports due to concerns over anti-dumping lawsuits. As a result, there is expected to be more emphasis on seafood and farm produce exports.
Capital flows, external debt and exchange rates
- Investment growth forecast to be strong in 2007 due to Viet Nam's accession to the WTO. Foreign direct investment in 2006 surged to US$10.2 billion, above the 2005 level of US$6.2 billion and ahead of an earlier peak in 1996 of US$9.0 billion.
- In the period January through late March 2007, a further US$2.41 billion was added in 189 new projects centered on industry and construction sectors. The major foreign investing countries in Viet Nam are South Korea, followed by Singapore, Thailand, the United States and Japan.
- By 2006 over 200 joint stock companies with a market capitalization of US$14 billion – or 22.4 per cent of GDP – had been listed on the two securities trading houses, on top of the 400 listed bonds worth a total of US$8.0 billion.
- In 2007, the government raised 2.16 trillion dong (US$134 million) worth of five-year bonds at four auctions on the Hanoi Securities Trading Center up until early April. The Finance Ministry plans to raise 22 trillion dong ($1.37 billion) worth of government bonds between March and end 2007 to invest in transport and irrigation projects.
- Viet Nam's current account surplus of 0.3 per cent of GDP or US$164 million for 2006 was below the $218 million last year.
- The Vietnamese dong had gained up to 0.3 per cent against the U.S. dollar in 2007, despite earlier predictions the government may look to a mild depreciation to maintain trading competitiveness.
Key policy issues and responses
- Viet Nam's rapid growth in recent years combined with the surge in capital and direct foreign investment poses challenges to the government to ensure expansion stays on track. Growth has led to a significant reduction in poverty rates.
- The main issues include adequate infrastructure that the government is looking to respond to through major capital raisings for development.
- Also will be the success of the government's equitization/ privatization programmes which are also being anticipated by investors.
- On the financial front, chief concerns will be to contain fiscal deficits as well as restrain any increase in debt and avoid moves to an easier monetary policy that may undermine inflation.