IMF head of country warns Vietnam of impact of global recession

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According to Francois Painchaud, the representative of the International Monetary Fund in Vietnam, Vietnam will not be able to escape the negative consequences if the world economy goes into recession next year.

Nevertheless, the IMF continues to forecast stronger economic growth for 2023 than this year.

Others agreed with Painchaud .’s assessment

“Inflation in many countries shows no signs of cooling off rapidly. The US Central Bank plans to raise interest rates until inflation is under control. Central banks of other countries will follow that direction. As a result, the global economy could quickly plunge into an ever-deepening recession,” Norway-based economic expert Nguyen Huy Vu told RFA.

“Vietnam is highly dependent on the global economy, from foreign direct investment to exports and imports. That is why Vietnam will be badly hit if the global economy deteriorates,” said Vu, who spent a year working for the German Bundesbank.

In July, the IMF forecast that the Vietnamese economy would grow by 6% this year, to 7.2% in 2023.

Associate professor, Dr. Ngo Tri Long, former director of the Institute for Price Market Research under Vietnam’s Ministry of Finance, said the IMF’s assessment was fair, although he predicted a bigger 2022 increase in gross domestic product:

“Growth in the second quarter was the highest compared to the past,” Long said. “It was up 6.7%. This shows that the possibility of [growth] exceeds the target set by the National Assembly. More than 7% growth this year is within reach.”

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The IMF’s Painchaud said that, despite the risk of the knock-on effect of a global recession in 2023, Vietnam’s GDP growth will likely still be the highest of the major economies in Asia.

Painchaud said Vietnam needs to keep a close eye on inflation risks and flexible fiscal policies to cope with continuously fluctuating economic conditions. The IMF said in July that consumer price inflation (CPI) would average 3.8% this year and 3.7% in 2023.

The National Assembly of Vietnam has set an inflation target of less than 4%. In the first eight months of the year, the CPI varied between 2.6% and 2.8%.

Associate professor Long said there is a very close link between economic growth and rising prices. He said the biggest risk to Vietnam would be an ineffective growth policy, which would plunge the country into a debt trap.

“It means investing in breadth, not investing in depth. Investing broadly is very risky: high growth without attention to efficiency and quality, but only to quantity.” he said.

“The risk is in the trap of the high government debt. If you want to grow, you have to invest more. If it is not enough, you must borrow and if you borrow, you must repay. Finally, if it is ineffective, it will be impossible to repay the debt. That’s the biggest risk.”

The World Bank has a more optimistic 2022 economic forecast for Vietnam than the IMF. Last month, it said GDP this year would rise to 7.5% from 2.6% in 2021, while inflation was forecast to hit 3.8% this year.

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Khuong Huu Loc, chief financial officer of several major US companies, and an MBA lecturer at a number of US universities, said this year’s strong GDP is comparable to last year’s low base.

“For a developing economy, it’s very common to grow 7, 8 or 9%. A mature and large economy like the United States or a European monolith growing 3% is too good, so it has to be looked at in a relative way,” said Loc.

“Vietnam has become one of the countries with the highest [COVID-19] vaccination rates. [People have been] vaccinated with advanced drugs from the US and Europe. By learning to live with COVID, Vietnam can expand its economy more firmly.”

The US is Vietnam’s largest export market, followed by the European Union and China. Loc said the US and Europe are facing a “stagflation” situation, meaning the economy is stagnating as prices continue to rise. He said this will be very difficult to solve in the short term.

“Vietnam is currently benefiting as many companies like Intel are investing an additional $500 million in Vietnam, and Samsung has completely left China to invest in Vietnam,” said Loc.

“The current supply chain in Vietnam is not affected much. While oil and gas prices have had some impact, Vietnam is nearly self-sufficient in food, while other countries rely on food from Ukraine and Russia. So this [World Bank] grow [forecast] of 7.5 can be trusted.”

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However, Loc warned that while inflation in Vietnam is currently at 3.8%, the country is misinterpreting inflation:

“Vietnam uses raw numbers that can be very misleading. For example, in the United States, when they say pork, chicken, beef… or gasoline [prices]they track each region proportionally, so it’s very accurate,” said Loc.

“Yet they sometimes make mistakes and have to correct them after a few months. Vietnam does not have the ability to accurately track every item. For example, beef and pork in Da Nang are [priced] different from Saigon and different in Can Tho. Inaccuracy means that inflation in Vietnam could be higher than 3.8%.”

Without an accurate measure of inflation, Loc said fiscal flexibility won’t work:

“If Vietnam thinks inflation of 3.8% is less than… [the target of] 4%, they don’t worry. Second, Vietnam follows the same economic model as China. And China is now insolvent because the real estate market has inflated prices. Currently, the high price of real estate in Vietnam may be a symptom of cancer for the Vietnamese economy,” he said.

Loc also warned that Vietnam’s public and private debt levels are imprecise and no one has attempted to correct them.