Visualizing Vietnam Economics 2009

VIETNAM ECONOMY

Keeping once-booming export-driven economy

VISUALIZING 2009

1

Export-driven economy...

… not Consumption-spending state ???

A Year After The Global Recession A Year Before The Congress's Target

130.00

100.00

125.00

80.00

120.00

60.00

115.00

40.00

110.00

20.00

105.00

GDP (USD)

Exports

GDP growth

Export growth

Investment-driven growth with more capital's contribution

Feeding the growth with more export-inflow capital

2

3

Capital (%) TFP (%)

1990 1991 1992 1993

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

-40%

Exports

Labor (%) GDP growth rate (%)

Import

2009 2010

0% -20%

2005 2006 2007 2008

20%

2001 2002 2003 2004

40%

1998 1999 2000

60%

80 60 40 20 (20) (40) (60) (80) (100) 1995 1996 1997

GDP shares

80%

1994

10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

100%

Vietnam's Trade = Widen Gap/Deficit

GDP growth

Vietnam's GDP Growth and Contributions = More Capital Effect

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

100.00 1990

-

$ billions

$ billions

After two decades of development steamed by the economic reform (doi moi) in 1986, Vietnam has successfully pushed back the poverty, generated profound social changes, and bricked the path for future economic growth. Yet, "Vietnam's achievements up to now have been driven mainly by one-time liberalization effects and external forces associated with global integration rather than internal strengths ", says Kenichi Ohno. Now, there comes a time to look back, package lessons, and step forward.

1990 = 100

Export-driven Economy 120.00

Trade Balance

Source: Vietnam's General Statistics Office | www.gso.gov.vn

Source: GSO; ASEAN Economic Bulletin Vol. 26 | Kenichi Ohno

Growth pattern of high investment and spending

Funding the trade deficit with foreign capital

4

5

GDP Contributors Y = G + C + I + NX 120 100

FDI Inflows 80%

70

70%

60

60%

60%

40 20 -

20 10

0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-

2010

2009

2008

2007

2006

2005

2003

2002

2001

2000

1999

1998

1997

1996

1995

2004

Investment

30

30%

10%

(40)

Consumption

40

40%

20%

(20)

Government

50

50%

$USD

USD Billions

60

% of GDP

80

Net Export

FDI (registered)

FDI (realized)

FDI-registered as % of GDP

FDI-realized as % of GDP

Improving standard of living by economic growth 6 Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009. Real GDP per capita (PPP-USD) with the new world

Real GDP per capita (PPP-USD) with the Asia's tigers

Real GDP per capita (PPP-USD) with the old world 50,000

50,000

40,000

40,000

30,000

30,000

20,000

20,000

10,000

10,000

-

-

15,000

10,000

1990

1992

1994

1996

Vietnam Germany

1998

2000

2002

US France

2004

2006

UK

5,000

1990

1992

1994

1996

Vietnam Korea

Applying the Rule of 70: the number of years it takes for the level of real GDP per person to double is approximately

1998

2000

2002

Taiwan Japan

2004

2006

199019911992199319941995199619971998199920002001200220032004200520062007 Vietnam Indonesia

Singapore Hong Kong

Thailand India

Russia China

Scenario 1: growth of 12% annually (brown line) Scenario 2: growth of 7% annually (red line)

Years for Level to Double

70 divided by the annual percentage growth rate. 80.0 70.0 60.0

2% growth doubles in 35 years

50.0 40.0 30.0 20.0 10.0 -

7% growth doubles in 10 years

- After decades lagging behind, poor economic growth and low living standard, Vietnam's government with the Reform targeted the "modernization" society by 2020. - If Vietnam could keep the growth speed at 7% per year, then 30 years later it'll be able to reach to a today-level of America.

GDP per capita (PPP-USD) Catch-up points 90,000 80,000 70,000 60,000 50,000

With 7% growth rate, Vietnam could reach to the today-level of the rich after 40 years

Vietnam Vietnam (12% growth) US

40,000 30,000

Thailand

0

5

10

15

Growth rate (% per year)

reach to a today-level of America. However, the U.S. with 2% growth rate will make the dream impossible to come true within 100 years.

30,000

Thailand

20,000 10,000

Japan

Singapore

Sources of Economic Growth: population growth and labor productivity 7

Productivity as Real GDP per hour of labor 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 -

103 102 102 101 101 100

Population growth increases aggregate hours and real GDP. But to increase real GDP per person, labor must become more productive.

$ dollar

Index 1995 = 100

103

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 VN labor productivity

US labor productivity

China labor productivity

VN productivity index

US productivity index

China productivity index

Labor productivity is the quantity of real GDP produced by an hour of labor; calculated by dividing real GDP by aggregate labor hours. - When labor productivity grows, real GDP per person grows and brings a rising standard of living. - The growth of labor productivity depends on 3 factors: + physical capital growth + human capital growth + technological advances Source: CFA Level II, Vol 1, 2009

The Sources of Economic Growth | CFA Level II, Vol 1, 2009 - Working-age population growth

Vietnam's labor productivity has been improving significantly in the last 5 years, which help to lift the living's standard up to the status of a lower middleincome nation by World Bank classification. Yet, to compare with the rate of America's $2,000US/per hour and China's $250US/per hour in 2008, Vietnam with $50US/per hour needs to speed up its technology focus. "Future growth must be fuelled by skill and technology... "

- Changing in employment-topopulation ratio - Change in average hours per worker

Aggregate hours growth

Real GDP growth

- Physical capital growth - Human capital growth + Education and training + Job experience

Population growth

Labor productivity growth

Real GDP per person growth

- Technological advances

Balance of Payments and Depreciation of Currency - VND 7

Vietnam's fast-growing economy had a fast-growing demand for imports, however, demand for exports did not grow at the same rate. The widen trade deficit (about 20% of GDP in 2008) would put a downward pressure on the current account, which lead to a depreciation of the nation's currency. Theorically, the pile up of registered-FDI could help to offset the trend by appreciation pressures from the financial account surplus. However, the global recession, the nation's high inflation (low real interest rate), the level of indebtedness, and others forced the currency to be devalued. By 2008, VND has been depreciated some 80% of its value compared to 1998.

Balance of payments = current account + financial account + official reserves account = 0 - To be sustained, a current account deficit must be financed by a financial account surplus - Capital flows are motivated by expected returns - Current economic growth affects the current account - Future economic growth affects the financial account Depreciation or Appreciation of the currency depends on: + Trade balance (export - import) + Real interest rates + Economic growth & inflation + Monetary or Fiscal Policy + Country risks

5 10 15

30% 25% 20% 15% 10% 5% 0% -5% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

35%

% of GDP

-5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

USD billions

-10

20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 -

40% 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000

VN Dong

-15

Capital Account

Official Reserve Account

CPI_Inflation (%)

Trade Deficit as % of GDP

Current Account

Exchange rate (USD/VND)

Debt as % of GDP

Exchange rate (USD/VND)

Disclosure: All of the views and numbers expressed in this research reflect my personal opinions and calculations in the purpose of learning. Data and information gathered from the cited sources, mainly GSO.com, believe to be reliable but not been verified. Robin B. Thieu @ 2009

VN Dong

Balance of Payments and Currency Depreciation