Overview of the business cycle
Definition of business cycle
● Business cycles are marked by the alternation of the phases of expansion and contraction in aggregate economic activity and the co-movement among economic variables in each phase of the cycle
● Business cycles are composed of concerted cyclical upswings and downswings in the broad measures of economic activity—output, employment, income, and sales.
● The alternating phases of the business cycle are expansions and contractions.
● Contractions often lead to recessions, but the entire phase isn't always a recession.
● Recessions often start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle, when the next expansion begins.
● The severity of a recession is measured by the three Ds: depth, diffusion, and duration.
Phases of business cycle
There are four phases of the business cycle - Expansion, Peak, Recession, and Trough - offer valuable insights into the cyclical nature of economic activity
By understanding these phases, businesses, policymakers, and investors can anticipate changes in the economic landscape and adjust their strategies accordingly.
Expansion
During expansion, the economy experiences relatively rapid growth, interest rates tend to be low, and production increases The economic indicators associated with growth, such as employment and wages, corporate profits and output, aggregate demand, and the supply of goods and services, tend to show sustained uptrends through the expansionary stage The flow of money through the economy remains healthy and the cost of money is cheap However, the increase in the money supply may spur inflation during the economic growth phase.
Peak
The peak of a cycle is when growth hits its maximum rate Prices and economic indicators may stabilize for a short period before reversing to the downside Production levels are at their maximum, and employment is typically high However, signs of inflation and resource constraints may start to appear Peak growth typically creates some imbalances in the economy that need to be corrected As a result, businesses may start to reevaluate their budgets and spending when they believe that the economic cycle has reached its peak.
Recession
The recession stage starts as soon as expansion ends and economic activity begins to decline It lasts until the GDP returns to the point that marked the beginning of the expansion stage During a recession, demand begins to decline almost immediately, but producers fail to adjust their output until the market has excess supply Positive economic indicators like prices and wages start to fall at this point.
This often occurs after a series of expansion cycles Decreased production, increased unemployment rates, and decreased consumer spending are all key indicators of recession Monetary and fiscal policies are typically implemented to mitigate the negative effects and stimulate recovery.
Trough
The trough of the cycle is reached when the economy hits a low point, with supply and demand hitting bottom before recovery The low point in the cycle represents a painful moment for the economy, with a widespread negative impact from stagnating spending and income Economic activity bottoms out, and businesses may experience losses Unemployment rates are typically high, and consumer confidence is low.
The low point provides an opportunity for individuals and businesses to reconfigure their finances in anticipation of a recovery.
Conclusion: Understanding these phases is crucial for businesses, policymakers, and investors to navigate economic fluctuations effectively.
Changes in demand
Economists argue that changes in the total demand for goods and services in an economy wield significant ìfnluence over economic activities When there is an increase in demand, firms scale up production to meet heightened consumer needs, leading to more output, more jobs, higher income and amplified profits This surge contributes to an economic boom However, an excessive demand can cause prices to go up, creating inflationary pressures Conversely, when demand drops, businesses produce less, leading to fewer jobs and less income, a tough time called a bust If this lasts a long time, it may cause a severe economic slump, commonly identified as a depression The government should step in to manage these ups and downs by adjusting its spending or taxes to keep the economy stable.
Fluctuations in investment
Much like changes in demand, fluctuations in investments are a key factor driving business cycles Investment levels can shift due to factors, such as interest rates, entrepreneurial interest and profit expectations High interest rates can deter borrowing, while low rates stimulate economic activity Positive profit outlooks encourage investment, while uncertainties can hinder it Other factors, including technological advances, government policies, global economic conditions, and consumer confidence, also shape investment trends Striking a balance between promoting growth and preventing excessive risk-taking is crucial for economic stability Policymakers, businesses, and investors must navigate these factors to anticipate trends and maintain a healthy business cycle.
Macroeconomic policies
Macroeconomic policies, encompassing both monetary and fiscal measures, exert significant influence on the phases of a nation's business cycle In the realm of monetary policies, an expansionary approach seeks to invigorate economic activity This involves actions like lowering interest rates and increasing the money supply to encourage investment and spending
Conversely, a contractionary stance, marked by higher interest rates and a reduced money supply, aims to cool down an overheated economy and prevent inflation On the fiscal front, an expansionary fiscal policy involves lowering taxes and increasing government spending to stimulate demand and economic growth during downturns Conversely, a contractionary fiscal policy, with raised taxes and reduced government spending, is employed to control inflation during economic upswings.Policymakers must carefully consider the specific economic context and potential trade-offs when implementing these policies.
Supply in money
Fluctuations in the money supply significantly impact economic activity, affecting interest rates, investment, consumption, and overall output and employment levels Expansionary monetary policies, increasing the money supply through measures like lowering interest rates, aim to stimulate economic growth However, an overly rapid increase can lead to inflation On the contrary, contractionary monetary policies, reducing the money supply, tightening credit, elevate interest rates, and limit spending and investment While effective for controlling inflation, excessive use during economic downturns may worsen recessions or lead to deflationary pressures The business cycle's dynamics are closely tied to changes in the money supply, alongside factors like fiscal policies, technological advancements, consumer confidence, and external shocks The efficacy of monetary policy depends on contextual factors such as financial intermediation, the structure of the financial system, and the credibility of the central bank.
Other external causes
Various factors can significantly impact the trajectory of an economy During times of war and unrest, resources are diverted towards producing war-related goods, leading to a decline in income, employment, and economic activity However, post-war reconstruction efforts, such as rebuilding infrastructure, can stimulate economic growth and recovery The introduction of new technologies, like the modern mobile phone, often results in increased investment, employment opportunities, and higher incomes, providing a boost to the economy Conversely, natural disasters such as floods and droughts can devastate the agricultural sector, causing food shortages, price surges, and reduced demand for capital goods Moreover, uncontrolled population growth can strain an economy if it outpaces economic expansion, leading to diminished savings, reduced investments, and economic slowdowns Recognizing and managing these factors are essential for promoting sustainable economic development and stability.
Employment rate and production/output
As the economy expands, businesses generally see an increase in sales or demand for their products They will produce more goods and services to meet this increase in demand As businesses need to produce more goods and services to meet demand, they need to hire more workers Consequently, the level of unemployment declines.
If there is speculation or rumours about a recession, mass layoffs, rising unemployment, decreasing output, or other indications, businesses and investors begin to fear a recession and act accordingly Businesses assume defensive tactics, reducing their workforces and budgeting for an environment of falling revenues It is because businesses assume defensive measures and investor confidence falls during contractionary periods Many events occur before those in an economy are aware they are in a contraction, but the stock market trails what is going on in the economy.
Fewer people in work means less money coming to the government, and perhaps more going out (in the form of state benefits) Yet unemployment also means less money for people to go out and spend on products/services offered by businesses This means less sales and lower profits, which applies downward pressure to growth and, by extension, company valuations (unwelcome news for shareholders) In an economy with high unemployment, even those with jobs are often less likely to spend money After all, job security seems less certain in such an environment – so people tend to save more in case they come upon hard times Therefore investment could decrease
Inflation
Inflation is the annual rate of increase in the price level Inflation decreases during recessions and increases during expansions (recoveries)
During an expansion: As consumers demand more output (goods and services), businesses produce more output to meet this increased demand, but they will eventually reach their productive capacity (their maximum level of supply) There will be more demand for their output than output available This pulls prices up
During a contraction: As consumers demand less, businesses produce less output Some businesses may lower their prices or offer discounts to increase sales This leads to lower inflation or deflation.
As inflation soared, the value of the currency plummeted causing consumers and businesses to lose confidence and less likely to invest This could potentially lead to recession Moreover, when inflation rises, people tend to save money for daily expenditures rather than use it to invest.
Interest rate
When people/businesses borrow money from a bank, the bank charges them interest The interest rate is the percentage they are charged Example: Tia wanted to borrow $10,000 from her bank to buy a car If the interest rate was 5% per year and she took one year to repay the loan, she would have to pay back the $10,000 borrowed plus $500 in interest Banks also pay interest to people/businesses who save money with them (although the rates tend to be lower than for borrowers) Example: Eddy deposited $100 he received for this birthday in a savings account at his bank, which paid an interest rate of 2% per year After one year, Eddy had $102 in his account – the $100 saved plus $2 in interest
The Central Bank influences the economy by carrying out ‘monetary policy’ It sets the ‘cash rate’, which influences the interest rates offered by commercial banks to their customers Raising or lowering interest rates can stimulate or dampen economic activity if needed, helping to achieve a low and steady inflation rate.
If the economy is expanding too quickly The Central Bank is likely to raise the cash rate Commercial banks will raise interest rates, making it more expensive to borrow money, and more attractive to save money People will tend to save more and borrow/spend less
If the economy is growing too slowly The Central Bank is likely to lower the cash rate Commercial banks will lower interest rates, making it cheaper to borrow money People will tend to save less and borrow/spend more.
Investment behaviour
Business cycles have a material impact on firms' capital investment and that firms' investment outcomes perform differently at different stages of the business cycle.
The data shows that during the recovery phase of the economy, the scale of investment by companies is positively correlated with the macro GDP growth rate at the 1% level It indicates that during the recovery phase of the economy, as the economic growth, companies' investment will increase accordingly, and the scale of investment will expand This indicates that in a gradually improving economy, investors are confident in the market and will therefore choose to increase capital investment to expand the size of their firms.
During a period of high economic expansion, capital investment by firms not only does not increase correspondingly but also shrinks This is because the economic environment has stabilised, national income is above the level of full employment, the stimulating effect of increased demand on business investment has been gradually reduced, and firms prefer to seek stability in a volatile economy
The regression results under the recessionary phase indicate that the scale of firms' investment is synchronised with the economic contraction and that during the contractionary phase, firms will reduce their business expansion as the economy declines due to the overall poor macroenvironment and their pessimistic outlook This is demonstrated by the positive correlation between investment level INV and GDP growth at the 1% level. by dividing the economic cycle into different phases, firms will also choose to expand in the economic recovery phase as the economy grows However, during the economic expansion phase, due to the uncertainty of economic fluctuations, companies instead choose to invest more cautiously, and this rapid economic expansion does not give companies much confidence to invest
During the recessionary phase, companies also invest in a gradual slowdown
However the circulation of the economic cycle depends on investment, and the investment decision depends on the entrepreneur's expectations for the future Anticipation is a psychological phenomenon, so it is uncertain When expectations are optimistic, investment increases and the economy enters recovery and prosperity; when expectations are pessimistic, investment is reduced, and the economy falls into recession and depression This interpretation of the business cycle is called the theory of mind
Investors flee to investments "known" to preserve capital, demand for expansionary investments falls, and stock prices drop.
It's important to remember that while stock prices tend to fall during economic contractions, the phase does not cause stock prices to fall—fear of a recession causes them to fall.
Business cycle impacts on investment in Vietnam
Before 1990 - 2007
Economic growth and investment opportunities
During the years 1990 - 2007, Vietnam experienced a period of significant economic growth,Great and very important achievements have been obtained Implementing the innovation policy, with a general economic model of building a socialist-oriented market economy , our country has escaped the socio- economic crisis, creating the necessary premises to move into a new period of development - a period of accelerated industrialization and modernization.
During this period,The annual GDP growth rate reached a stable and high level, the average GDP increase ranged from 4.4% (1986-1990) to 8.4% (2005) This growth has created many investment opportunities in many fields, from manufacturing to services Specifically, in the early years of the renovation process(1986-1990), our country has successfully implement three development target programs on food and consumer goods including total production value Agriculture increases by an average of 3.8 - 4%/year; Industry increased by an average of 7.4%/year, in thereConsumer goods production increases by 13- 14%/year; The value of export turnover increased by 28%/year and especially exported goods production has been restored.And in the following years (from 1990-2007), our country began an important development step of a new period: promoting industrialization and modernization of the country Despite being affected by the regional financial and economic crisis (period 1997 - 1999) and serious natural disasters occurring consecutively, putting our country's economy before fierce challenges, however, Vietnam Nam still maintains a good growth rate About Agriculture, Forestry, and Fishery has slowed down from an increase of 4.5% (1991-1995) to only an increase of 3.8% (2000-2007); industry increased from 7.4% -13.3%; Services increased from 5.2% to 12%.
From a country lacking food, each year having to import from 500,000 to 1 million tons of food, Vietnam has become a major rice exporter in the world In
2005, Vietnam ranked first in the world in pepper exports; ranked second in rice, coffee, and cashew nuts; 4th in rubber; These achievements also show that Vietnam at that time was a country with great potential for economic development because of its stability and rapid economic growth.
Since reforming from a centrally planned economy to a market economy model, socialist-oriented, with State management and regulation, Vietnam has become a potential destination of foreign investors due to political stability, abundant human resources and cheap labor costs FDI capital helps boost exports, contributing to Vietnam's trade balance surplus, thereby promoting GDP growth These contributions are increasingly enhanced.In 1991, the amount of registered FDI capital in Vietnam was 2.07 billion USD, of which the amount of realized FDI capital was 428.5 million USD, reaching over 20% of registered capital The export value of goods of the FDI enterprise sector accounted for 27% in 1995 and has tended to increase gradually from 2005 to present In
2005, The FDI sector contributed 15.16% to GDP growth Notably, the event of Vietnam joining the World Trade Organization in 2007 has sharply increased registered FDI capital in Vietnam from 21.35 billion USD in 2007 to 71.73 billion USD In 2008 alone, this shows that expectations are huge This number is still increasing steadily despite a slight decrease in 2009 and 2010, but then continued to increase again and gradually increased to 20.35% in 2019 The results show that, since reform, Vietnam Nam has attracted a lot of foreign investment Firstly, because investors see the growth potential of this country Second is becauseVietnam has opened its doors to foreign investment through favorable policies and continuous improvement of the business environment.
Vietnam's economic cycle from 2007 to 2019
2.1 Vietnam's economy before the financial crisis (2007-2008)
Results of implementation of major targets in 2007 compared to the situation reported to the National Assembly
Report to the National Assembly October
Estimated number at the end of December 2007
- Growth rate of gross domestic product (GDP) (%)
- Growth rate of industrial production value (%)
- Growth rate of agricultural production value (%)
- Trade deficit compared to total export turnover (%)
- Ratio of social investment to GDP
- Attract foreign investment capital according to registered capital
- Consumer price index 6,6 < GDP growth rate 12,63
- The rate of poor households (%) 19 14,7 14,75
Industrial production value is higher than planned; The quality and competitiveness of some industrial products are improved.
Agricultural production has overcome many difficulties and challenges due to natural disasters and continues to develop.
Import-export activities continued to achieve many positive results In general, in
2007 there was10 export products with turnover of over 1 billion USD → 2007 – a successful year for exports
Investment and development have been quite good, especially capital mobilized from abroad and capital from the population Foreign investment capital reached a record high (20.3 billion USD); ODA commitment from donors is the highest ever (5.4 billion USD) Total social investment capital in 2007 was estimated at 462.2 billion VND, equal to 40.5% of GDP.
2.2 Impact of the global financial crisis (2008-2011)
Financial crisis of 2008 was considered a black spot for the US economy in particular and the world in general.The main cause of this crisis stems from the boom of the US financial market, especially the real estate market, in which financial institutions provided unsecured and easy loans to borrowers home buyers with poor ability to pay As home prices fell and the number of borrowers defaulting on their loans increased, the US housing market collapsed, creating a series of financial and consumer problems around the world→ spreading to global financial markets demand, causing economic recession, increased unemployment and decreased asset values.
Although Vietnam's financial market is not deeply integrated and does not depend much on the world financial market, Vietnam's economy depends heavily on other economies - the ratio of Vietnam's exports to GDP is up to
70%.Vietnam's growth in previous years relied heavily on foreign direct investment capital flows.Therefore, the financial crisis of 2008-2009 had a strong impact on the Vietnamese economy on the following sides:
1 Economic growth slows down: Vietnam's GDP growth in 2008 decreased compared to previous years Annual GDP growth decreased from about 8.5% in
2007 to about 6.2% in 2008 This is a sign of the impact of the global financial crisis on the Vietnamese economy.
2 Decline in foreign investment (FDI): Due to the impact of the global financial crisis, the amount of FDI into Vietnam has decreased significantly According to a report by the General Statistics Office of Vietnam, in 2008, the amount of newly registered FDI capital only reached about 64 billion USD, down about 70% compared to 2007.
3 Difficulties in raising capital and finance:Due to the impact of the global financial crisis, raising capital and financing has become more difficult
Businesses have difficulty accessing loans from banks and international financial markets.
4 Strengthen financial control and management measures:The Vietnamese government has implemented financial control and management measures to stabilize the economy amid the crisis This includes strengthening banking supervision, controlling inflation, and adjusting financial policy.
5 Strengthening international economic cooperation:In a difficult context,
Vietnam has strengthened international economic cooperation, especially with regional partners such as China, ASEAN and other Asian countries, to strengthen export and investment markets private.
6 The stock market declines: The reaction of Vietnam's credit market is quite negative Credit sources are scarce, although the State Bank "injected" VND 33,000 billion back into circulation in March 2008, but in the process of restructuring credits and meeting the requirements to participate in mandatory bill purchases, commercial banks (NHTM) rejects most business credit requests
In addition,High inflation causes deposit interest rates to sometimes peak at over 20%/year With such input, businesses that need capital must accept very high interest rates to survive Many production and business units accept the use of
7 Price fluctuations and rising fuel prices: putting global economies on red alert about the energy crisis SoGasoline prices in Vietnam increased sharply (30%) in early 2008, and then gradually decrease at the end of the year Besides, due to speculation, food prices also increased rapidly this year, causing"fever" food prices
→ 2008 was a challenging year for Vietnam's development investment and financial investment, when the economy faced negative effects from the global financial crisis However, the government has taken measures to stabilize the economy and strengthen international cooperation to overcome difficulties The Vietnamese government has taken many measures to promote investment during this period Firstly, is the economic innovation policy, The government has opened up shop to foreign investment, removing barriers and restrictions for domestic business and investment This has created more favorable conditions for investors and businesses.Secondly, the government has promoted attracting foreign investment through provide incentives and facilities for foreign investors, including tax reduction, simplifying administrative procedures and providing residential land at preferential prices Thirdly, the infrastructure has been upgraded including roads, railways, seaports and power generation facilities This development has created more favorable conditions for investment projects as well as expanding the supply chain Fourthly, Vietnam also have taken measures to improve the business environmentsuch as simplifying administrative procedures, reducing risks, creating fair conditions for businesses to operate and gradually perfecting the Investment Law and Foreign Investment Law Finally, that is Establish a policy to attract FDI capital by creating special economic zones (KEKs) For example, localities that have reached a relatively high level of development such as Hanoi, Da Nang, Ho Chi Minh, Priority should be given to attracting FDI into high-tech industries such as electronics, information, biotechnology, and modern services to minimize overcrowding in the process of rapid urbanization and increase in immigrant workers, putting pressure on resources for infrastructure and social issues.Besides, the government has also invested and trainedhuman resources to meet the needs of businesses and investment projects,especially in high-tech and engineering fields In general, these policies of the Vietnamese government are very feasible in promoting investment and minimizing social problems such as unemployment, discouragement, etc.
2.3 Situation of development investment and financial investment in Vietnam from 2009 to 2011:
1 Development investment: a GDP and FDI growth:
- Vietnam's GDP grew at about 5-7% per year during this period, although the growth rate decreased compared to the previous period.
- Data from the General Statistics Office of Vietnam shows that FDI into Vietnam increased from about 7 billion USD in 2009 to about 8.5 billion USD in 2011. b Government's Invest:
- The government increases investment in infrastructure projects, such as highways, seaports, and energy projects.
- For example, the expressway construction project connecting major cities such as Hanoi and Ho Chi Minh City received special attention North- South Expressway Construction and Expansion Project (also known as Trung Luong - My Thuan Expressway).
- Vietnam's stock market went through a period of great volatility, with the VN-Index falling from its peak in 2009 and 2010 due to the impact of the global financial crisis.
- However, there was a slight recovery in 2011, mainly thanks to economic stimulus measures and improving global conditions. b Public debt and loans:
- Vietnam's public debt increased significantly during this period, with economic stimulus measures and public investment spending.
- Data from the World Bank shows that Vietnam's public debt increased from about 41% of GDP in 2009 to about 48% in 2011. c Monetary and banking policy:
- The State Bank of Vietnam continues to implement monetary policy measures to stabilize inflation levels and control credit growth.
- These measures include adjusting interest rates, strengthening banking supervision, and promoting a financial system that does not rely on foreign funding.
→ During the period from 2009 to 2011, Vietnam witnessed a significant increase in development investment and financial investment, although it also encountered many challenges from global market fluctuations The government has taken measures to encourage investment and stabilize the economy amid difficult circumstances.
1 Recovery and development after the crisis (2012-2019)
1 Development investment: a GDP and FDI growth:
GDP growth: From 2012 to 2019, Vietnam's GDP increased from about 155 billion USD to about 262 billion USD.
FDI growth: FDI into Vietnam has increased from about 10 billion USD in 2012 to about 16 billion USD in 2019.
[Source: General Statistics Office of Vietnam] b Government's Invest:
Value of public investment projects: The total value of public investment projects has increased from about 10 billion USD in 2012 to about 17 billion USD in 2019.
[Source: Ministry of Planning and Investment]
VN-Index: The VN-Index has increased from about 400 points in 2012 to about
[Source: Ho Chi Minh City Stock Exchange]
Stock market capitalization: Vietnam's stock market capitalization increased to nearly 200 billion USD in 2019.
[Source: CNBC] b Public debt and monetary policy:
Public debt: Vietnam's public debt has increased from about 50% of GDP in 2012 to about 55% in 2019.
[Source: National Information Center on Public Debt]
Base interest rate: The State Bank's base interest rate decreased from about 8% in
[Source: State Bank of Vietnam]
→ Big changes in Vietnam's investment: a Diversify investment resources:
Investment from different countries: In addition to traditional investors from countries such as Japan, Korea, and the US, Vietnam also attracts investment from emerging countries such as Singapore and European countries.
Industry diversification: Vietnam has focused on attracting investment in emerging and potential industries such as information technology, clean energy, and automobile manufacturing.
[Source: General Statistics Office of Vietnam, Vietnam Investment Review]
From 2019 - present
3.1 2020 witnessed a new contraction due to Covid-19
Vietnam attracted USD 143 billion in cumulative FDI over the past 10 years (2010-2019 inclusive) Of this, 59 percent went into manufacturing – especially in the electronics, textiles, footwear, and automobile parts industries – as many companies shifted supply chains to Vietnam.
However, 2020 is a year of great difficulties and challenges for the world economy in general, including Vietnam The world economy is forecasted to be the most serious recession in history, the growth of major economies is deeply declined due to the negative influence of the COVID-19 pandemic In March
2020, the government started enacting fiscal and monetary policies to counter the effects of the pandemic.
Covid-19 surge in the world and Vietnam has had certain impacts on foreign investment flows into our country recently However, foreign investors still maintain good business operations and strongly believe in Vietnam's investment environment Many foreign investors remain interested and expect to invest in Vietnam Foreseeing the trend, the Ministry of Planning and Investment has been actively organized teleconferences on investment promotion such as
"Vietnam - a rising star" within the framework of a series of activities focusing on ASEAN by Standard Chartered Bank, of which the first event was the
ASEAN Standard Chartered Business Forum 2020, held online with the participation of Prime Minister Nguyen Xuan Phuc and 4,700 delegates from around the world, and Vietnam - Singapore Online Investment Promotion
Although investors’ travel has been supported with thousands of experts entering into Vietnam, a large number of experts have not entered Vietnam yet, causing difficulties for business activities as well as new investment decisions and project expansion The number of new projects, capital adjustment and capital contribution and share purchase by foreign investors decreased compared to the same period the year before Total foreign direct investment (FDI) in Vietnam as of 20 December 2020, including newly registered capital, adjusted registered capital and value of capital contribution and share purchase of foreign investors reached 28.5 billion USD, down 25% compared to 2019 In which, there are 2,523 newly licensed projects with the registered capital of 14.6 billion USD, down 35% in the number of projects and 12.5% in the registered capital compared to 2019.
The above results, though decreased compared to the same period, remain better than those of many other countries, showing the attractiveness of Vietnam in the eyes of international investors in the context of the strong decline in global investment due to the Covid-19 effects
Although GDP growth in 2020 reached the lowest rate in the period 2011-2020 (at 2.91%), in the context of the Covid-19 pandemic, this was a success for our country in the group of highest growth rates in the world With China and
Myanmar, Viet Nam is one of three countries in Asia which has positive growth rate this year.
According to data released by the General Statistics Office (GSO), Vietnam recorded a 2.58% GDP growth rate - making it one of the very few countries with a 2021 growth rate lower than 2020 This is unsurprising, as the nation went through an extended lockdown in the second half of last year, causing serious economic ramifications However, when considering both 2020 and
2021, Vietnam has been one of the only economies to record two consecutive years of growth since the start of this pandemic.
Vietnam has become the destination of multiple supply chain and manufacturing relocations, due to strong economic fundamentals and a favorable investment environment when compared with neighboring markets According to the Foreign Investment Agency (FIA), the country still recorded a total new, adjusted capital and share purchases by foreign investors reached 31.15 billion USD as of December 20 2021, up 9.2% annually.
The figure included 15.2 billion USD poured over 1,738 new projects, 9 billion USD invested in 985 current projects and 6.9 billion USD worth of share purchases The FIA said the total FDI pledges rose but the number of projects fell sharply as a result of Vietnam’s selective policy which dismissed small projects with little added value.
Manufacturing was the most attractive sector to foreign investors, receiving 18.1 billion USD, accounting for 58.2% of the total capital pledges, followed by electricity generation with 5.7 billion USD.
Since 2019, Vietnam has continued to rise as an emerging manufacturing hub in the region, capturing the bulk of new manufacturing investments Relocations from China, or from other parts of Southeast Asia, have driven growing FDI in recent years This trend has been a key driver for strong economic performance during the COVID period
For instance, while the pandemic resulted in a slowdown of trade with the U.S which represents the largest exports market for the country, Vietnam exports have continued to grow and since 2019, Vietnam has significantly increased its market share within U.S imports.
Looking ahead, Vietnam is projected to grow at a noticeably higher pace in
2022 This optimism, in part, is due to the high vaccination rate which has allowed the nation to restore most of its economic activities in late 2021 As we enter the "living with COVID" endemic phase and short of the country tightening restrictions, Vietnam is well placed to realize its growth potential with businesses resuming operations and borders reopening progressively.
Việt Nam has emerged as a stronger, more resilient economy over the past years It recovered strongly from the low "base" two years ago to shine a light in a world of challenges and uncertainties The country’s gross domestic product grew at 8.02 per cent in 2022, the fastest pace over the past 25 years, backed by retail sales (reflecting final consumption), investment (especially FDI disbursement), and impressively increased exports
In late 2021 and early 2022, Việt Nam had high hopes that public investment would be the driving force for post-pandemic recovery That's not to mention a two-year Socio-economic Recovery and Development Programme from 2022-
2023 with support money amounting up to VNĐ350 trillion (US$15.4 billion), approved by the National Assembly from the beginning of 2022.
Investment disbursement and programme implementation were, however, slow despite a little improvement in the fourth quarter of 2022 By the end of
November, less than 60 per cent of the public investment plan had been implemented About VNĐ60 trillion from the economic recovery and development package was actually spent Private investment was also stagnating; except for foreign direct investment (FDI) disbursement which was quite good, reaching nearly $19.7 billion, an increase of 15.1 per cent compared to 2021 Building public confidence, promoting public investment disbursement and the Recovery and Development Programme will have great implications for growth in 2023 and beyond.
What we should do?
On the Government’s part
Counter-Cyclical Fiscal Policy: Governments can adjust taxation and government spending to counteract fluctuations in the business cycle During economic downturns, governments can increase spending on infrastructure projects, unemployment benefits, and other social programs to stimulate demand and create jobs Conversely, during periods of economic expansion, governments can reduce spending and increase taxes to prevent overheating and inflation.
● Automatic Stabilizers: Implement policies that automatically adjust government spending and taxation in response to changes in economic conditions Examples include progressive income taxes, which generate more revenue during periods of economic growth, and unemployment benefits, which increase during recessions. Monetary Policy:
● Interest Rate Adjustments: Central banks can use interest rates to influence borrowing and spending behavior in the economy
During downturns, central banks can lower interest rates to stimulate borrowing and investment Conversely, during periods of inflation or overheating, central banks can raise interest rates to cool down the economy.
● Quantitative Easing (QE): Central banks can engage in quantitative easing, which involves purchasing financial assets such as government bonds to inject liquidity into the financial system and lower long-term interest rates.
● Strengthening Financial Institutions: Implement regulations to ensure the stability of financial institutions and prevent systemic risks that could amplify economic downturns.
● Monitoring Systemic Risk: Continuously monitor the financial system for signs of systemic risk and take preemptive measures to address vulnerabilities.
● Training and Education Programs: Invest in education and training programs to improve the skills of the workforce and enhance their employability.
● Flexible Labor Market Policies: Implement policies that encourage flexibility in the labor market, such as unemployment insurance, job retraining programs, and labor market flexibility measures. International Cooperation:
● Coordination of Policies: Coordinate fiscal and monetary policies with other countries to ensure global economic stability and prevent imbalances that could exacerbate the business cycle.
● Trade Policies: Pursue open and fair trade policies that promote global economic growth and reduce the risk of external shocks. Research and Forecasting:
● Economic Research: Invest in economic research and forecasting to better understand the drivers of the business cycle and identify early warning signs of economic downturns.
● Policy Evaluation: Evaluate the effectiveness of past policies in mitigating the impact of the business cycle and adjust policies accordingly.
The business cycle in Vietnam, like in any other country, typically consists of four phases: expansion, peak, contraction, and trough Each phase of the business cycle has different impacts on investments, and investors need to adapt their strategies accordingly.
1 Expansion Phase: During this phase, the economy is growing, and businesses are thriving Consumer spending is high, and businesses are expanding Investors tend to see increased returns on their investments during this phase In such times, it's wise for investors to focus on growth-oriented investments, such as stocks of companies in sectors that benefit from economic expansion, like consumer goods, technology, and infrastructure.
2 Peak Phase: At the peak of the business cycle, economic growth starts to slow down Inflation may rise, and interest rates could increase This phase often signals that the economy is reaching its maximum capacity As an investor, it's prudent to start reducing exposure to high-risk assets and consider reallocating investments to defensive sectors, such as utilities, healthcare, and consumer staples.
3 Recession Phase: Also known as a recession, this phase is characterized by declining economic activity, rising unemployment, and reduced consumer spending Stock markets typically experience downturns during this period Investors should focus on preserving capital and consider reallocating assets to safe-haven investments like government bonds, gold, and defensive stocks that are less affected by economic downturns.
4 Trough Phase: The trough marks the end of the recession and the beginning of the recovery Economic indicators start to show signs of improvement, and investor confidence begins to return This is an opportune time for investors to start gradually increasing exposure to riskier assets as the economy begins to recover Sectors that tend to perform well during the early stages of recovery include cyclical sectors like industrials, materials, and financials.
1 Diversification: Investors diversified their portfolios across different asset classes, such as stocks, bonds, real estate, and commodities, to mitigate risks associated with economic fluctuations.
2 Sector Rotation: They engaged in sector rotation strategies, reallocating investments to sectors that were expected to outperform during specific phases of the business cycle For example, during periods of economic expansion, investors favored sectors like technology, consumer discretionary, and industrials.
3 Active Management: Many investors actively managed their portfolios, adjusting asset allocations and investment strategies based on changing economic conditions and market trends.
4 Hedging Strategies: Some investors utilized hedging strategies, such as purchasing options or futures contracts, to protect their portfolios against potential downside risks during economic downturns.
1 Globalization and Emerging Markets: With increased globalization, investors have diversified their portfolios globally, including exposure to emerging markets like Vietnam They recognize the growth potential of these markets and seek investment opportunities beyond traditional developed economies.
2 Technology and Information Access: Advances in technology and improved access to information have empowered investors to make more informed decisions They can analyze economic data, monitor market trends, and execute trades more efficiently, enabling them to react quickly to changes in the business cycle.
3 Passive Investing: The popularity of passive investing through index funds and exchange-traded funds (ETFs) has grown significantly These investment vehicles provide diversified exposure to various asset classes and sectors, often at lower costs compared to actively managed funds.
4 Risk Management: Investors focus more on risk management and capital preservation, especially after the global financial crisis of 2007-2008 They employ sophisticated risk management techniques and stress-testing methodologies to assess the resilience of their portfolios against adverse economic scenarios.
5 Environmental, Social, and Governance (ESG) Investing: There's a growing emphasis on ESG factors among investors, integrating environmental, social, and governance criteria into investment decision-making ESG investing aims to generate sustainable long-term returns while considering the broader impact of investments on society and the environment.