As external factors – like weaker consumption in the U.S. and EU markets and stagnant recovery in China – are unfavorable, Vietnam will have to make the most of the domestic market in the second half of the year to achieve the growth target of 6.5%.
Focus on domestic market
The World Bank has recently revised down its forecast on Vietnam’s GDP growth in 2023 to 6% from the previous projection of 6.3%. Such a revision hints at a less upbeat outlook for the economy in the second half of the year.
Regarding the external factors, the interest rates and inflation in some key markets for Vietnam such as the U.S. and the EU remain high, eroding the demand for commodities and services, and thus affecting Vietnam’s exports to these markets. China as another major market for Vietnam is also struggling, with the economic growth seen to be lower than expected.
Therefore, in the second half of the year, the momentum for Vietnam’s growth will stem from domestic factors, with three key activities being public investment, support for enterprises to revive business, and stimulation of consumption.
The Government has introduced various policies to step up the key activities mentioned above, but it still looks difficult to translate such policies into tangible growth results, especially monetary and fiscal policies to support businesses and consumers.
Monetary policy yet to pay off
In the second half of 2023, monetary and fiscal policies will start to gradually have impacts on the economy, especially the policy on lowering interest rates to support enterprises and the policy to cut the value-added tax to incentivize consumers.
Regarding the monetary policy, between March and May, the State Bank of Vietnam (SBV) revised down interest rates three times, including the rates for transactions between the central bank and commercial banks, and the rates between banks and the general public. By the end of the second quarter, deposit rates for tenors up to six months will have been capped at 5%.
Though the lower interest rates have been in place since March and further cut down the road, such policies have not brought about effect in the economy in the year’s first half.
For borrowers, interest rates are still high, affecting the capital demands of businesses as well as consumers. In addition, on the one hand, enterprises still struggle in their business performance, and on the other hand, consumers have tightened their purse string due to shrinking income, resulting in lower-than-expected credit growth.
Commercial banks, meanwhile, are more cautious in lending due to concerns over bad debt and the capital adequacy ratio. Therefore, though the SBV has cut policy rates, money circulation has been largely confined within the banking sector, with little being pumped into the economy.
VAT reduction: time is not right
If the interest rate policy is meant to support the supply side, the VAT rate cut is expected to stimulate the demand side, with the softer rate of 8% expected to apply from Juy 1, 2023. In 2022, the VAT reduction strongly bolstered domestic consumption, when the total retail of goods and services rose by 19.8% year on year while the VAT revenue also rose 10%. This VAT policy is therefore reintroduced for the second half of this year, with the expectation it would pay off like in 2022.
However, the business landscape has changed. In 2022, the VAT reduction policy was introduced when signs of recession had not become visible, and the people’s income was on the rise alongside the robust business performance as well as the high-flying stock market. For this year, the gloomy economic outlook may impede consumption. Therefore, any VAT cut may not stimulate consumption as strongly as expected.
Therefore, the economic growth target of 6.5% this year as assigned by the National Assembly to the Government will be a daunting challenge, especially for the second half of this year. With the GDP growth rate recorded at 3.32% in the first quarter and expected at below 5% in the second quarter, the burden will be carried over to the second half, and the GDP growth rate should be topping 8-9% if the annual target is to be attained. This will be a hard nut to crack given the current economic situation.
