PRESS ROOM

Viet Nam, East Asia in good economic shape

Date: 11-DEC-2008

HA NOI — Viet Nam and other East Asian economies are in good shape to weather the global economic slowdown, the World Bank said yesterday.

East Asian economies are far better prepared to tackle the latest financial turbulence than they were during their own crisis more than a decade ago, but will still face growing dangers as the global downturn worsens, said the World Bank’s latest six-monthly assessment of the East Asia&Pacific region’s economic health.

The World Bank (WB) applauded East Asian governments for their swift and effective policy interventions to avert the worst impact of the global crisis.

"Thanks to the quick action of policy makers from virtually every East Asian country, banking systems have been able to deal with the crisis so far and in a number of countries, economic stimulus packages are being put in place," said World Bank Vice President for the East Asia and Pacific region Jim Adams.

"These actions are helping East Asia continue to play a key stabilising role and act as a growth pole for the global economy."

Despite the slowdown, East Asia will contribute about a third of total global growth in 2008, according to the WB.

Viet Nam is perceived as reacting well to the crisis with its impressive performance this year, demonstrating the resilience of its economy, said Martin Rama, acting country director of the World Bank, at yesterday’s press meeting ahead of the WB’s regional report release in Ha Noi.

In response to surging inflation, authorities began implementing a stabilisation package announced in March 2008 that reflected a switch in strategy away from emphasising rapid growth. After three years of real GDP growth above 8 per cent, the pace of economic expansion slowed in the first 10 months of 2008, reflecting the impact of the stabilisation package.

The Government’s growth target of 6.5 per cent for 2009, which was released by Prime Minister Nguyen Tan Dung at last week’s Consultative Group meeting in Ha Noi, does not appear to be unrealistic, as many donors have warned, said Rama. Donors committed US$5.014 billion in aid at the meeting to help Viet Nam continue its development process.

Viet Nam has seen an increase in garment and seafood exports and is still getting a relatively fair amount of foreign direct investment (FDI), according to Rama.

The influx of FDI to Viet Nam has remained robust thus far, said the report. FDI approvals for the first 10 months of 2008 reached a record level of $59.3 billion, equivalent to about two-thirds of GDP. But the approvals are expected to slow next year.

The Government is currently preparing a stimulus package to counteract the global downturn. The package is organised around five goals – promoting production and exports, supporting consumption and investment, adjusting the country’s financial and monetary stance, reducing poverty and providing social welfare and strengthening public sector management at all levels.

The government last week approved a $1 billion budget for 2009 to boost production and exports as part of efforts to keep the economy growing amid the global downturn.

Region not spared impact

In the face of weakening export growth and reduced levels of investment and consumption, the real GDP growth in developing East Asia – a region that includes China but excludes Japan – is forecast to slow to 6.7 per cent in 2009, from 8.5 per cent in 2008. The GDP growth forecast for East Asia as a whole (including all developing economies as well as South Korea, Singapore, Hong Kong and Malaysia) will be down to 5.3 per cent in 2009, from 7 per cent this year.

The report notes that the risks to East Asia are substantial in the short term, but highlights that countries will be better positioned to deal with the crisis if they are able to maintain macroeconomic stability, shift exports to faster growing regions, substitute external for domestic demand and continue with structural reforms to strengthen competitiveness.

Adams said that despite the global downturn, the World Bank projects that East Asia will contribute about a third of total global growth in 2008.

While sober in its forecast for 2009, the report states that the countries which have entered this crisis with low debt burdens, surpluses in their fiscal and external current accounts and large external reserves will have the most room to manoeuvre as the crisis unfolds.

"Despite the difficult road ahead, those countries that sustain the sound policies pursued thus far and tackle new challenges decisively will be the ones to emerge in a strengthened position when the global economy begins to recover," said Vikram Nehru – the World Bank’s chief economist for East Asia and the Pacific.

The report warns that the region’s most vulnerable countries are those with more open capital accounts, large non-resident equity holdings and a strong reliance on foreign portfolio investment. Low income countries, such as Laos, Cambodia, Papua New Guinea, East Timor and small island states in the Pacific, on the other hand, have not been affected as much by the financial turbulence because their banking systems are less exposed to global markets. But they too will be impacted by lower commodity export earnings, tourism receipts, and remittances from overseas workers.

Poverty rates are likely to fall further in 2009, declining to 10.68 per cent for developing East Asia as a whole, compared with the 10.36 per cent projected earlier this year. While the number of poor people in the region will continue to decline, an estimated 5.6 million additional people would have emerged from poverty next year if not for the slump.

The multi-lateral lender forecasts 7.5 per cent growth for China next year, its slowest in nearly two decades.

China recently announced a $586 billion stimulus package to boost its economy.

"All in all, (China’s) economic growth prospects have weakened considerably, and real GDP growth is projected to slow to about 7.5 per cent in 2009 from about 9.4 per cent in 2008, despite the recently announced fiscal stimulus package," the report said.

The forecast’s lead author, Ivailo Izvorski, said the region was able to export its way out of the Asian financial crisis ten years ago, but cannot do so this time due to shrinking demand in developed markets.

However, the report noted that China’s leading world foreign exchange reserves – which the World Bank expects to top $2 trillion by the end of this year – will serve as a buffer.

"The large reserves, together with China’s limited exposure to troubled US financial assets and the presence of capital controls, should help cushion the direct impact of the financial crisis," the report said.

Global recession

The developed economies of the US, Euro Zone and Japan are all projected to contract in the coming year.

Nehru warned that with conditions changing quickly, the outlook for the region could easily worsen.

"We are frankly in unknown territory at this stage," Nehru said. "This is not something the world has seen in a very long time."

The international banking crisis that erupted in September 2008, after more than a year of less acute financial turmoil, has substantially reinforced the cyclical downturn that was already under way, the bank said in a report devoted to assessing economic prospects for 2009.

"Following the insolvency of a large number of banks and financial institutions in the United States, Europe and the developing world, financial conditions have become much tighter, capital flows to developing countries have dried up and huge amounts of market capitalisation have evaporated," the bank said.

The WB predicted world economic growth will be 2.5 per cent in 2008 and 0.9 per cent in 2009. It also said developing countries will likely grow 4.5 per cent next year, down from 7.9 per cent in 2007, while growth in high income countries will turn negative.

In response to the crisis, the bank said it was increasing its support for developing countries through new spending commitments of up to $100 million over the next three years. The bank said its private sector arm, the International Finance Corp, would help by providing trade financing, assisting banks recapitalise and aiding infrastructure projects facing financial distress. — VNS

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