ECONOMYNEXT – Vietnam’s gross domestic product will grow at 2.4 percent in 2020, one of the fastest rates in the world the International Monetary Fund said, after the country closed borders, aggressively traced Coronavirus patients and used institutional quarantine.
“Vietnam’s growth this year is expected to be 2.4 percent, among the highest in the world, thanks to its decisive steps to contain the health and economic fallout from COVID-19,” Era Dabla-Norris said in a statement.
“The fiscal response has been largely geared towards supporting vulnerable households and firms and has benefited from prudent policies adopted in the past.
“Monetary policy easing and temporary financial relief measures by the SBV have alleviated liquidity pressures, lowered the cost of funding, and facilitated continued flow of credit.”
Vietnam has refused to ‘live with Covid’ unlike some other countries, and controls Coronavirus making its own test kits and aggressively tracing and quarantining contacts with public support solicited with media notices on places frequented by confirmed infected persons.
Unlike the less-successful Korea which uses home quarantine, resulting in a constant stream of deaths, (522 up to Nov 28) Vietnam uses institutional quarantine, regional border restrictions and surgical lockdowns to completely kill outbreaks and bring infections to zero.
Vietnam has had only 35 deaths, no curfews and mild lockdowns (social-isolation) involving a stay at home request, closing bars and gyms.
In the March to May period some big factories were also closed, though orders also dried up at the time.
Vietnam completely killed the first wave from Wuhan in Jan-Feb 2020, the second Wave from mainly European and other Asian nations that allowed community transmission and a third outbreak in Da Nang July – August 2020 after over a 100 days without a single confirmed case.
Vietnam also closed borders with China against the advice of the World Health Organization at the time and started quarantining what the WHO called ‘healthy’ arrivals.
Meanwhile the IMF said Vietnam’s economy would recovery strongly in 2021.
“A strong recovery is expected in 2021,” Dabla-Norris said.
“Growth is projected to strengthen further to 6.5 percent as normalization of domestic and foreign economic activity continues.
“Fiscal and monetary policies are expected to remain supportive, although to a lesser extent than in 2020. Inflation is expected to remain close to the authorities’ target at 4 percent.”
The IMF advocated higher spending to Vietnam’s frugal government which taxes lightly and spends prudently, helping those in deed, giving people space to stand on their own feet with actual activity rather than the heedless Keynesian ‘stimulus’ spending of the state.
The biggest advantage given to the people by the state is to move around freely and engage in real wealth creating economic activity after controlling Covid-19.
“The outlook is subject to substantial uncertainties stemming from possible renewed outbreaks, a protracted global recovery, ongoing trade tensions, and corporate distress, which could translate into firm closures and bankruptcies, labor market and banking system strains,” Dabla-Norris said.
“Given these uncertainties, flexibly adjusting the size and composition of the policy support will be important. Fiscal policy should play a larger role in the policy mix.
“This year, the fiscal deficit is expected to widen due to a decline in revenues and higher cash transfers and capital spending. Fiscal support should be maintained in 2021, with improving efficiency in execution as priority.
“Over the medium-term, the emphasis should be on mobilizing revenue for financing green and productive infrastructure, strengthening social protection systems, and safeguarding debt sustainability.”
The State Bank of Vietnam, after a ‘stimulus’ debacle in 2009 led to a collapse of the dong, bad loans and a string of bankruptcies, has kept the exchange rate steady and confidence of foreign investors.
The SBV has a policy corridor with two way liquidity auctions that allows overnight rates to go up and liquidity to tighten when the currency is defended at around 23,000 dong to the US dollar, maintaining investor confidence and automatically slowing credit growth.
The policy corridor has allowed the SBV to keep gentle pressure on the peg slightly above a currency board or hard peg, and sterilize inflows to build forex reserves.
As the SBV kept the peg, maintaining domestic and international confidence during the Coronavirus crisis, collapsing private credit made rates fall across the yield curve and bond prices to soar (rate to fall).
Other countries also found their currencies strengthening as private credit fell.
The SBV did not print money in the Coronavirus crises but rates across the yield curve including in gilts, allowing the government to deficit spend without printing money, though the monetary authority cut its policy rate going with practices of floating rate central banks.
SBV’s ceiling rate has been progressively been brought down since the last currency crisis over a decade ago, which analysts say increases the vulnerability of the economy to a possible crisis when the US Fed next tightens policy or domestic credit picks up.
Most third world pegs which have long periods of stability collapse due to the ceiling policy rate being progressively brought down due to central bankers who engage in pro-cyclical policy and are notoriously reluctant to tighten in time.
“Monetary policy should remain supportive in the near term,” Dabla-Norris claimed.
“Greater two-way exchange rate flexibility within the current framework would reduce the need to build reserve buffers and facilitate the adjustment to a potentially more challenging external environment.
“The mission welcomes the authorities’ commitment to gradually modernize its policy frameworks. ”
In sharp contrast to Vietnam’s fairly credible peg, Sri Lanka which had a ‘flexible exchange rate’ allowed the rupee to fall towards 200 to the US dollar in March 2020, triggered a panic and a credit downgrades, and sovereign bond yields soared.
In an apparent ‘modernization of policy frameworks’ Sri Lanka abandoned the policy corridor and started injecting cash to target a call money rate in the middle of the corridor, triggering currency crises after only two months of recovery from the previous crisis, critics say.
The ‘flexible exchange rate’ also earned Sri Lanka a downgrade in 2018.
The country is now out of bond markets with the rating at ‘CCC’.
In 2020 Sri Lanka’s economy is expected to contract 4.6 percent, the IMF has said.
The flexible exchange rate has led to over 4 billion dollars of investments in rupee bonds fleeing Sri Lanka over the past five years, which Vietnam bonds are trading at a premium due to confidence coming from the relatively firm peg.
The central bank of Vietnam’s neighbour Cambodia, which is now dollarized has no power to destroy the currency anymore and its people are also getting their life back together after the currency collapsed to 4,000 to the US dollar.
Cambodia also followed similar Coronavirus control policies, though with fewer tourist arrivals and has had zero official deaths.
Vietnam’s currency fell sharply in the 1980s, and the economy imploded creating a second wave of boat people, until the SBV law was reformed twice to stabilize the currency around 15,000 to the dollar, driving a East Asia style growth phase.
Due to the experience as well as the bad experience of the defunct central bank of the former South Vietnam many people still hoard gold. They have made handsome profits as the Fed printed money, weakened the dollar and drove gold price up. (Colombo/Nov29/2020)