Time to phase out stimulus program: World Bank

With the global economy substantially better now than in 2009, it is almost time to begin gradually phasing out Vietnam’s stimulus package, advised the World Bank (WB) in its latest economic report for East Asia and the Pacific region. In the East Asia and Pacific Economic Update 2010 titled “Emerging stronger from the crisis”, the global lender said that Vietnam navigated the global financial crisis better than anticipated, given its high export ratio, growing GDP and the economy’s overall openness.  Real GDP grew 5.3% last year, led by a surge in construction due largely to the government’s sizeable stimulus program set between late 2008 and mid-2009. In addition, a large budget deficit, rapid credit growth and moral suasion on state owned enterprises resulted in a doubling of total investment in 2009, increasing the investment rate to 42.8% of GDP. The state sector accounted for about a third of the total figure. Regarding the country’s recovery post-crisis, WB economists noted that it has consolidated in recent months, with real GDP growing 6.9% in the last quarter of 2009 year-on-year. Growth of 6% is plausible for the first quarter of 2010. Meanwhile, inflation shows sign of accelerating. Prices rose 6.5% in 2009 as a whole, down from 19.9% in 2008. However, on a monthly basis inflation started accelerating in the last quarter of 2009, the WB warned. The economic report states: “The inflationary pressure is even more visible in asset markets, with the stock market index being on an upward trend for months in a row, and land prices escalating. These developments suggest that the limits of the expansionary policy stance adopted by government since 2008 are being reached”. In the last quarter of 2009, there was a gradual rebalancing of macroeconomic policy to ensure stability. The acceleration of inflation, a spike in the domestic price of gold, and a widening gap between the parallel and official exchange rates, made it obvious that the expansionary stance was not sustainable for much longer. The new policy stance was reflected in a lower target for credit growth in 2010 (25%, as opposed to an actual increase of 37.7% in 2009) and the discontinuation of the short-term interest rate subsidy program. Fiscal adjustment in the order of 2-3 percentage points of GDP, and two smaller devaluations of the Vietnamese dong, in November 2008 and February 2009 also reflected the new policy. According to the WB, the target for Vietnam’s real GDP growth in 2010 is an easily attainable 6.5%. However, keeping the inflation rate below 7%, as requested by the National Assembly, will be more challenging, according to the report.  The WB said that for the region’s middle income countries - such as Vietnam, the Philippines, Indonesia, Malaysia and Thailand – the priority is investment in physical and human capital to encourage the development of production and exports.