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 Export-driven Economy
120.00 130.00

After two decades of development steamed by the economic 100.00 125.00

1990 = 100
$ billions
reform (doi moi) in 1986, Vietnam has successfully pushed back the 80.00 120.00
poverty, generated profound social changes, and bricked the path 60.00 115.00
for future economic growth. 40.00 110.00
Yet, "Vietnam's achievements up to now have been driven 20.00 105.00
mainly by one-time liberalization effects and external forces - 100.00
associated with global integration rather than internal

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strengths ", says Kenichi Ohno.
Now, there comes a time to look back, package lessons, and step GDP (USD) Exports GDP growth Export growth
forward.

Investment-driven growth with more capital's contribution Feeding the growth with more export-inflow capital
2 3
Vietnam's GDP Growth and Contributions Vietnam's Trade
= More Capital Effect = Widen Gap/Deficit
100% 10% 80
9% 60
80%
8% 40
60%

GDP growth
GDP shares

7% 20

$ billions
40% 6% -
5%
20% (20)
4%
(40)
0% 3%
2% (60)
-20% 1% (80)
-40% 0% (100)

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Capital (%) Labor (%) Exports Import Trade Balance

TFP (%) GDP growth rate (%)
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 FDI Inflows
Y = G + C + I + NX 80% 70
120
70% 60
100
60%
 60%
80 50
50%

% of GDP
60 40

$USD
USD Billions
40%
40
30
30%
20
20
20%
-
10% 10
(20)
0% -
(40)

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FDI (registered) FDI (realized)
Government Consumption Investment Net Export
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) Real GDP per capita (PPP-USD) Real GDP per capita (PPP-USD)
with the old world with the Asia's tigers with the new world
50,000 50,000 15,000

40,000 40,000
10,000
30,000 30,000

20,000 20,000
5,000
10,000 10,000

- - -

1990 1992 1994 1996 1998 2000 2002 2004 2006 1990 1992 1994 1996 1998 2000 2002 2004 2006 199019911992199319941995199619971998199920002001200220032004200520062007

Vietnam US UK Vietnam Taiwan Singapore Vietnam Thailand Russia

Germany France Korea Japan Hong Kong Indonesia India China

Applying the Rule of 70: the number of years it takes Scenario 1: growth of 12% annually (brown line)
for the level of real GDP per person to double is approximately Scenario 2: growth of 7% annually (red line)
70 divided by the annual percentage growth rate.

- After decades lagging behind, GDP per capita (PPP-USD)

Years for Level to Double

80.0
70.0 2% growth poor economic growth and low Catch-up points
doubles in living standard, Vietnam's
60.0 35 years 90,000 With 7% growth rate,
government with the Reform Vietnam
50.0 80,000 Vietnam could reach to
targeted the "modernization" the today-level of the
40.0 70,000 Vietnam (12%
7% growth society by 2020. rich after 40 years
30.0 doubles in 60,000 growth)
- If Vietnam could keep the
20.0 10 years 50,000
growth speed at 7% per year, US
10.0 40,000
then 30 years later it'll be able to
- 30,000 Thailand
reach to a today-level of America.
 - 30,000 Thailand
reach to a today-level of America.
0 5 10 15 20,000
However, the U.S. with 2%
Growth rate (% per year) 10,000 Japan
growth rate will make the dream
impossible to come true within -
Singapore
100 years.

Sources of Economic Growth: population growth and labor productivity

7
Productivity as Real GDP per hour of labor Population growth increases aggregate hours and real GDP. But to increase real GDP per
person, labor must become more productive.
103 2,000
1,800
103 Labor productivity is the quantity of real GDP produced by an hour of labor; calculated by dividing
1,600
Index 1995 = 100

real GDP by aggregate labor hours.

102 1,400
- When labor productivity grows, real GDP per person grows and brings a rising standard of

$ dollar
1,200
living.
102 1,000
- The growth of labor productivity depends on 3 factors:
800
101 + physical capital growth
600
+ human capital growth
101 400
+ technological advances
200
100 -
Source: CFA Level II, Vol 1, 2009
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
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 - Changing in employment-to- Aggregate
years, which help to lift the living's standard up to the status of a lower middle- population ratio hours Population
growth growth
income nation by World Bank classification. Yet, to compare with the rate of - Change in average hours per
America's $2,000US/per hour and China's $250US/per hour in 2008, Vietnam worker Real
GDP
with $50US/per hour needs to speed up its technology focus. - Physical capital growth
growth
"Future growth must be fuelled by skill and technology... " - Human capital growth Labor Real GDP per
+ Education and training productivity person
+ Job experience growth growth
- Technological advances

Balance of Payments and Depreciation of Currency - VND

7 Vietnam's fast-growing economy had a fast-growing demand for imports, Balance of payments = current account + financial account + official reserves account = 0
however, demand for exports did not grow at the same rate. The widen trade - To be sustained, a current account deficit must be financed by a financial account surplus
- Capital flows are motivated by expected returns
deficit (about 20% of GDP in 2008) would put a downward pressure on the - Current economic growth affects the current account
current account, which lead to a depreciation of the nation's currency. - Future economic growth affects the financial account
Theorically, the pile up of registered-FDI could help to offset the trend by
appreciation pressures from the financial account surplus. However, the Depreciation or Appreciation of the currency depends on:
global recession, the nation's high inflation (low real interest rate), the level of + Trade balance (export - import)
+ Real interest rates
indebtedness, and others forced the currency to be devalued.
+ Economic growth & inflation
By 2008, VND has been depreciated some 80% of its value compared to + Monetary or Fiscal Policy
1998. + Country risks
 Balance of Payments and Currency Depreciation 40% 20,000
35% 18,000
-15 -
2,000 30% 16,000
-10 4,000 14,000
25%

% of GDP

VN Dong
USD billions
-5 6,000 12,000

VN Dong
20%
8,000 10,000
0 10,000 15%
8,000
12,000 10%
5 6,000
14,000
5% 4,000
10 16,000
18,000 0% 2,000
15 20,000 -5% -
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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