Special Report: Global Financial Crisis

By Han Qiao, Huang Haimin

    HANOI, Nov. 17 (Xinhua) -- The Vietnamese economy will face slower growth next year, but there will not be a dramatic slowdown, a Hanoi-based World Bank (WB) economist told Xinhua on Monday.

    The 6.5 percent economic growth target, recently approved at the National Assembly of Vietnam, is "reasonable" under the current circumstance, said Martin Rama, WB leading economist in Vietnam. "But we need to follow closely how global financial crisis develops in the coming months," he added.

    Vietnam, a major growth driver in the regional economy, has registered an average GDP growth of 7.5 percent in the past 10 years. In the first three quarters this year, the Vietnamese economy grew at 6.52 percent year-on-year.

    Speaking of the impact of the current global financial crisis on Vietnam, Rama said the shocks on Vietnam's financial sector maynot be very damaging, as the country's financial sector is not so sophisticated and not exposed to a lot of financial products.

    "What we expect from the global financial crisis is on the export and capital inflow," the economist said.

    Rama said that Vietnam's approved foreign direct investment (FDI) increased fourfold year-on-year in the first three quarters this year, but it was partly due to the speed-up in approval process, as some of these projects were submitted a long time ago.

    Rama believed the actual disbursement rate, or the percentage of implementation over approval, is what really matters to the economy.

    "With the global credit crisis, a lot of the foreign investors in Vietnam are more cautious now. It needs to be seen whether they will slow down, cancel or continue with the project in the next year."

    The impact of slower economic growth may hurt Vietnamese people's earnings next year, but it will not translate into a big reduction in the unemployment rate, said Rama.

    The economist has found that the Vietnamese labor market is quite flexible. With a large informal sector and a large number of household businesses, the economy provides huge opportunities for people to get engaged in secondary activities for other source of income, he said.

    When the economist adjustments occur, people can spend more hours in their household businesses or another job. Therefore, the adjustment in economy does not go through employment, instead, it goes through prices, or people's earnings, he said.

    The inflation problem that has haunted the Vietnamese economy may ease next year, said Rama.

    The year-on-year inflation remains as high as about 26 percent in Vietnam now, but if you look at figures for the last two months, the inflation growth is basically zero, he said. "From that perspective, we can say the inflation is decelerating and the government target of reducing inflation below 15 percent by the end of next year is reasonable."

    However, Rama cautioned that food prices, which account for about 40 percent of CPI in Vietnam, should be closely monitored in the coming months.

    To stimulate the growth for next year, Rama said priority should be given to expanding investment, particularly on infrastructure, urban development and transportation.

    With an overheated economy, the Vietnamese government has adopted restrictive fiscal policy this year and achieved remarkable slowdown in investment.

    In face of the global economic downturn, Rama said the Vietnamese government is now facing a choice whether to continue with the restrictive policy, or do more in the investment front as China is doing now.

    "I believe now there is room to push forward more investment," he said. But he warned investment supporting speculation in the real estate sector should be avoided.

    Commenting on the government's recent move to lower the interest rates, Rama held that the Vietnamese government is right in shifting the priority from stabilization to sustaining growth.

    To cool the overheated economy, the Vietnamese government has taken dramatic measures in reducing credit this year. Last March, the credit supply grew at about 5 to 6 percent one month, as compared with now credit supply going up at 1 percent one month.

    "Now Vietnam can afford providing more liquidity to the economy to make sure banks don't run short of money, neither exporters run short of working capital," said Rama.

    "But it is still important to ensure financial stability to avoid any turbulence in the banking sector," he said.

    There is one uncertainty about the Vietnamese banking sector that concerns Rama, although he said it is probably "not large". In last December and January this year, when the real estate industry was hot in Vietnam, some investors borrowed from banks and invested in the real estate sector. Then throughout this year, they are hurt by falling housing prices and climbing interest rates.

    Many of them are going under the one-year loan program and soon coming to the point to renew or repay the loans, said Rama. It needs to be seen whether the financial sector is under control in Vietnam.

    Rama said the housing loan issue only affects some banks, not all banks in Vietnam. He agreed with the assessment of the State Bank of Vietnam that the overall financial situation is quite stable.