ASSIGNMENT INTERMEDIATE MACROECONOMICS TOPIC ECONOMIC SLOWDOWN IN VIET NAM 2009

VIETNAM NATIONAL UNIVERSITY, HANOI UNIVERSITY OF ECONOMICS AND BUSINESS  ASSIGNMENT INTERMEDIATE MACROECONOMICS TOPIC: ECONOMIC SLOWDOWN IN VIET NAM 2009 Full name: VU THI TUYET DINH Student ID: 19051049 Class no: QH2019-E KTQT CLC4 Lecturer: PHAN THE CONG Ha Noi – 2021 TABLE OF CONTENTS LIST OF TABLES ii LIST OF FIGURES iii INTRODUCTION PART 1: THE GLOBAL FINANCIAL CRISIS OVERVIEW 1.1 Economic crisis and Financial crisis 1.2 The context and cause of global financial crisis 1.2.1 Housing prices increased, then fell, because of subprime mortgage crisis 1.2.2 Banks went into crisis 1.2.3 The stock market plummeted, erasing wealth 1.3 The impact of global financial crisis on world economy PART 2: ECONOMIC SLOWDOWN IN VIET NAM 2009 2.1 Causes of the economic crisis in Vietnam in 2009 2.1.1 Objective reasons 2.1.2 Subjective reasons 2.2 Impacts of the global financial crisis 2.2.1 Economic growth rate 2.2.2 Import – Export operation 2.2.3 Foreign direct investment 2.2.4 Goods and Services market 2.2.5 Labor market 2.2.6 Stock Markets face difficulties, the investors meet disadvantages 2.2.7 Real estate market PART 3: THE POLICIES OF THE GOVERNMENT 10 3.1 Expansion Fiscal Policy 10 3.2 Loose monetary policy 11 3.3 Evaluate the effectiveness of policies: Vietnam's economy gradually recovered 12 3.4 The challenges for Vietnam's economy 12 3.5 Recommendation 13 CONCLUSION 15 REFERENCES 16 i LIST OF TABLES Table 2.1 Basic Quarterly Macroeconomic data Table 2.2 Recent export and import performance Table 3.1 GDP growth rates in Southeast Asia 12 ii LIST OF FIGURES Figure 1.1 AD – AS model Figure 1.2 GDP Growth Figure 1.3 Unemployment rate in some countries Figure 1.4 Credit growth in some countries Figure 2.1 Industrial production Figure 3.1 IS* - LM* model 10 iii INTRODUCTION Finance is an extremely important sector of a country's national economy A country's financial situation serves as the foundation for determining its level of development The development of the global financial system, while bringing great opportunities to each country and people, also carries the risk of a crisis Changes in financial markets, as well as countries' levels of trade openness, and each country's internal conditions, can all contribute to the risk of a crisis Back in time to 12 years ago, when the entire world was witnessing the severe consequences of the ongoing global financial crisis To date, the crisis's contagious effects have been felt on all continents and in the majority of nations To respond to the complex development of the global crisis and to lessen the severity of the economic recession, governments around the world have used economic stimulus packages to rescue their economies on a continuous basis Countries' central banks have adopted a loose monetary policy, drastically lowering interest rates to levels not seen in many years and employing unconventional monetary tools to improve banking system liquidity Fiscal stimulus packages were also announced and aggressively introduced in many counties The global crisis has resulted in a decrease in investment inflows, as well as lower global commodity prices and trade Vietnam, as a small open, FDI-dependent, and export-dependent economy, has not been spared from this external shock In late 2008, the negative shock was transmitted to the Vietnamese economy Monthly exports fell sequentially in the final months of 2008 and early 2009 Industrial production fell by 15.6% in the fourth quarter of 2008, compared to 17.4% in 2007 Foreign direct investments have significantly decreased Consumer sentiment deteriorated, and the stock market index continued to fall Finally, GDP growth in 2008 was only 6.28%, a significant decrease from the over 8% achieved in 2007 The situation deteriorated further in early 2009, when GDP growth in the first quarter was only 3.1%, and 3.9% in the first half of 2009 As the situation worsened, the Vietnamese government, like most other Asian governments, acted quickly, relaxing both monetary and fiscal policies The government, in particular, reverses the course of monetary tightening and fiscal austerity policy implemented in 2008 when the economy overheated and implements a large fiscal stimulus package (amounting to 8.3% of GDP) GDP growth increased to 7.7% in the fourth quarter of 2009, up from 3.1% in the first quarter, 4.4% in the second quarter, and 5.2% in the third quarter However, some uncertainty remains as the trade deficit continues to rise and there are signs of inflation returning In comparison to other Asian countries that have managed to accumulate large amounts of foreign reserves while maintaining a healthy government budget, Vietnam was already in serious trouble, with high inflation and twin deficits Pursuing such an expansionary policy puts the economy under extraordinary strain, and it is unclear how long the current extraordinary stance of monetary and fiscal policies can be maintained Because the author is aware of the significance and urgency of the aforementioned problem, as well as the actual situation in Vietnam, he has written an essay on the topic "" The purpose of this essay is to examine the impact of the global financial crisis on the Vietnamese economy, discuss the main measures taken by the Vietnamese government in response to the global financial crisis, and then propose some solutions to be ready to respond to future crises PART 1: THE GLOBAL FINANCIAL CRISIS OVERVIEW 1.1 Economic crisis and Financial crisis Economic crisis can be defined as the wild fluctuations, outside the acceptable limits of change, in the prices or supplies in any markets of goods or services, or factors of production The term "economic crisis" refers to a circumstance in which a country's economy faces a sharp drop in aggregate output, or GDP, as well as rising unemployment There are many early causes of an economic crisis, such as a sudden weakening of the exchange rate of a currency (commonly called the currency crisis) or a sudden collapse of the financial sector in a country (called the financial crisis) Financial crises typically involve problems in the banking and financial sector For example, banks, financial institutions, money markets and capital markets are part of the banking and finance sector During a financial crisis, asset prices plummet, businesses and consumers become insolvent, and financial institutions experience liquidity shortages Other situations that can be referred to as financial crises include the bursting of speculative financial bubbles, stock market crashes, sovereign defaults, or currency crises A financial crisis can be limited to banks or spread across an economy, the economy of a region, or economies around the world The last global financial crisis occurred in 2007/8 which commonly called the Global Financial Crisis or 2008 Financial Crisis 1.2 The context and cause of global financial crisis First, a quick primer on mortgages Basically, someone looking to buy a home will often borrow hundreds of thousands of dollars from a bank in exchange for a piece of paper known as a mortgage Every month, the homeowner must repay a portion of the principle, plus interest, to whomever holds the piece of paper If they stop paying, it's known as a default, and whoever has that piece of paper gets the house If you had terrible credit or didn't have a consistent work in the past, it was difficult to secure a mortgage Lenders used to be wary of taking the chance of you defaulting on your loan, but that began to change in the 2000s 1.2.1 Housing prices increased, then fell, because of subprime mortgage crisis During the housing boom of the early to mid-2000s, many mortgage lenders began to broaden their definition of credit-worthy, extending mortgages to buyers with poor credit histories who did not meet the previous criteria of a suitable borrower Banks pounced on these high-risk loans and began purchasing them as “mortgage-backed securities” (mortgage-backed investments), a product that grew in popularity but was widely misunderstood by the general public Because of the high demand for this new investment product, risky lending practices became more prevalent, resulting in a surge in the housing market While individuals with fixed-rate mortgages were unaffected, millions of new borrowers had adjustable-rate mortgages, which meant that their monthly interest payments were initially lower and more manageable, but quickly escalated as interest rates rose Many people went into default on their loans because they couldn't make payments or sell their properties for a profit As a result, more inventory entered the housing market, and prices continued to fall Finally, the housing market bottomed out in December 2008 1.2.2 Banks went into crisis As home prices collapsed and mortgage-backed securities no longer appeared to be the solid-gold investment they had appeared to be, banks stopped lending to one another for fear of becoming caught with subprime mortgages as collateral The Fed attempted to restore confidence in August 2007 by dramatically lowering interest rates, but this proved insufficient In November 2007, the US Treasury established a superfund to buy distressed subprime mortgage portfolios and provide liquidity to banks and hedge funds in an attempt to calm the panic In December 2007, the Fed established the Term Auction Facility (TAF), which provided banks with subprime mortgages with short-term funding Once again, it was too little, too late Bear Stearns and Lehman Brothers both went bankrupt, and mortgage giants Fannie Mae and Freddie Mac were on the edge of collapse 1.2.3 The stock market plummeted, erasing wealth In September 2008, as foreclosures continued to rise, the stock market plummeted and fell, losing more than half of its value Americans suffered significant losses as a result of the double whammy of a failing housing market and a sinking stock market Between 2007 and 2011, one-quarter of all American families lost at least 75% of their wealth, and more than half lost at least 25%  To sum up: From a theoretical perspective, during the global financial crisis of 2008, a negative demand shock in the United States economy was caused by several factors that included falling house prices, the subprime mortgage crisis, and lost household wealth, which led to a drop in consumer spending So aggregate demand falls: AD shifts to the left, and the economy moves along the line from E0 to E1 As a result, output Y decreases, leading to a decrease in the price of P, which slows down economic growth, thereby increasing unemployment (Figure 1.1) Finally, the US economy entered a devastating recession Figure 1.1: AD – AS model 1.3 The impact of global financial crisis on world economy The financial crisis of 2008 began with the collapse of the US subprime loan industry, which quickly expanded to financial institutions and the whole economy, resulting in significant consequences Investors and depositors have become fearful of the financial system, and banks have found it more difficult to raise capital as a result of the chain break Since then, bank deposit and lending rates have been pushed upward, having an impact on enterprise production, business, and investment activities Furthermore, limiting people's use exacerbates the problem The financial crisis has now spread to the manufacturing sector, resulting in a global economic downturn According to statistical data, the global economy experienced GDP growth of approximately 5% in 2007 and earlier, but fell sharply to 3.1% in 2008 and continued to decline in 2009 According to the World Bank's most recent report, the global economy was in recession in 2009, with a -2.2% contraction, and the economy will gradually recover in 2010, with a growth rate of 2.7% - 3% Figure 1.2: GDP Growth (percent change) Source: IMF staff estimates The unemployment rate is one of the indicators that many countries are watching during this crisis This percentage is rising, particularly in the countries most affected by the crisis, such as the United States (10%), the European Union (10%), the United Kingdom (7.8%), Japan (5.2%), and European countries During the same time period in 2008, this rate increased from 40% to 80% Figure 1.3: Unemployment rate in some countries Source:OECD Governments have also spent a lot of money in order to save their banking systems The US government approved a $150 billion cash tax relief package in 2008, followed by a $700 billion bad asset rescue package (TARP), and an economic stimulus package worth $800 billion USD in February 2019 Many other countries, including the United Kingdom, Japan, France, and China, are also providing solutions on a comparable scale The German government has announced a 500 billion EUR bailout package for the banking system Figure 1.4 shows that credit growth has slowed dramatically in many countries around the world, falling to only 2% - 4% This is the slowest rate of expansion since the early 2000s Figure 1.4: Credit growth in some countries Source: New Zealand Central Bank 2009 However, when compared to the major economic crises of 1929-1939 or the oil crisis of 19731974, the current crisis, despite its strong intensity and great influence, has the ability and time to recover relatively quickly According to statistics, the price of capital assets fell by 50-60% in the 10-15 months following the real crisis, but recovered relatively quickly Meanwhile, the 19291933 crisis lasted more than three years, the oil crisis caused capital asset prices to plummet but only lasted two years, and the 2000 crisis lasted more than 30 months PART 2: ECONOMIC SLOWDOWN IN VIET NAM 2009 2.1 Causes of the economic crisis in Vietnam in 2009 2.1.1 Objective reasons Derived from the financial crisis that occurred in the United States, which was primarily caused by the proliferation of subprime loans, which led to the housing bubble Until the housing bubble burst, a number of financial institutions that had a lot of debt mortgaged by real estate went bankrupt Since early 2008, the world has been witnessing the unfolding and devastating effects of the global financial crisis The global crisis has resulted in a decrease in investment inflows, as well as lower global commodity prices and trade Vietnam, as a small open, FDI-dependent, and exportdependent economy, was not immune to the external shock 2.1.2 Subjective reasons The same period of financial crisis in the United States coincided with a period of rapid development in Vietnam The economy was overheated due to high inflation, and the government was forced to implement a monetary contraction policy As a result, the country is particularly vulnerable to an unexpected global economic slowdown, and given the scale of the crisis and the state of the economy, market structure, and policy options/constraints, mitigating the negative effects of the global crisis would be a stark job for Vietnam Furthermore, the financial market, particularly the stock market in Vietnam, is still young, and investors' psychology is not stable, making them susceptible to the effects of global fluctuations 2.2 Impacts of the global financial crisis 2.2.1 Economic growth rate Up until the first half of 2008, Vietnam was largely unaffected by the global financial crisis The financial and economic environment deteriorated in the fourth and first quarters of 2008 In the first quarter of 2009, real GDP increased by only 3.1 percent year on year, compared to an average of 7.5 percent in the first quarter of 2008 In the first quarter of 2009, industrial production increased by only 2.9 percent The dismal performance in the first quarter of 2009 confirmed the expectation that Vietnam will enter a full-fledged recession in 2009 Some basic macroeconomic data of Vietnam during the crisis are presented in Table 2.1 Table 2.1: Basic Quarterly Macroeconomic data 2.2.2 Import – Export operation This crisis highlighted the vulnerability of Vietnam's export-driven growth on the global market Vietnam's exports fell significantly in the fourth quarter of 2008 as a result of the direct and immediate effects of the global financial crisis According to GSO official statistics, Vietnamese exports declined by 13.8 percent in the first ten months of 2009 compared to 2008 (See Table 2) The total figure obscured the true situation This is because, while some of Vietnam's major export products, such as coffee, rice, pepper, rubber, crude oil, and coal, reported volume increases in 2009, their lower prices have fueled speculation that Vietnam may not be able to meet this revised growth rate Because Vietnam must import 70-80% of its raw materials in order to produce and process export goods As a result, when exports fell, imports fell along with them, and by a greater amount Imports fell by 21.7 percent in the first ten months of 2009 The drop reflected the slowing of economic activity Imports have decreased due to lower demand for capital investment and intermediate goods, as well as falling import prices for petroleum products and materials Table 2.2: Recent export and import performance 2.2.3 Foreign direct investment Foreign direct investment inflows have slowed in 2009 as a result of disposal capital constraints and a tightening of the global credit market Vietnam managed to attract approximately US$ 10.4 billion in registered capital in the first eight months of 2009, which is significantly less than in 2008 The actual disbursement from investment projects is more than US$ 6.5 billion, which is also less than in 2008 Throughout the course of economic reform, Vietnam has relied increasingly on FDI to sustain its high level of economic growth The slowdown in FDI inflows in 2009 and subsequent years will have serious consequences for Vietnam The FDI sector is critical to Vietnam's exports Over the last six years, the FDI sector has accounted for more than half of Vietnam's exports, according to official statistics 2.2.4 Goods and Services market In the context of the international economic recession, demand has decreased in both production and consumption However, while the Vietnamese macroeconomic situation has improved, difficulties remain ahead Due to increases in production costs, particularly in bank interest rates, many businesses were forced to reduce their production and business plans, reducing their size In real terms, total retail sales of consumer goods and services increased by 31% in 2008 compared to 2007 If the price increase was excluded, the figure was 6.5 percent In December 2008, the Consumer Price Index increased by 19.98% when compared to the same period in 2007 In 2008, the average consumer price increased by 22.97 percent over 2007 In December 2008, the following goods experienced a significant increase in CPI: alimental services prices increased by 31.86 percent, food prices increased by 43.25 percent, and foodstuff prices increased by 26.53 percent Other groups of goods saw their prices rise by about 10% and then fall slightly in the last three months of 2008 due to a decrease in social purchasing power Tourism has grown gradually The global economic downturn has had a significant impact on the number of tourists visiting Vietnam The number of foreign visitors to Vietnam in 2008 reached 4.253 million, up 0.6 percent from 2007 Traveling visitors accounted for 2.63 million, up 1%; business visitors accounted for 845 thousand, up 25.4 percent; and visiting relatives accounted for 509 thousand, down 15.2 percent As a result, the 4.5 million arrivals target was not met 2.2.5 Labor market The global crisis has an impact on the real economy through financial and trade routes, resulting in output and employment losses According to GSO data, Vietnam's industrial production fell significantly in the first quarter of 2009 (Figure 2.1) Figure 2.1: Industrial production (%) Source: GSO, ADB Aside from slowing economic growth, 15% of total jobs were lost, resulting in high unemployment in urban areas and job shortages in rural areas Unemployment causes a segment of the population's living standards to deteriorate, while rising unemployment causes people to migrate to major cities such as Ho Chi Minh City or Hanoi, causing traffic congestion, accidents, and environmental pollution A low quality of life leads to decreased consumption, as well as social disorder, fraud, and increased tension in labor-management relations Many labor strikes occurred as a result of job insecurity The global financial crisis and economic recession precipitated an immediate crisis in the global labor market The Ministry of Labour, Invalids, and Social Affairs (MOLISA) predicted that unemployment would leave approximately 400,000 workers unemployed in 2009 (Thanh & Quynh 2009) In 2008, approximately 55,000 garment workers in Ho Chi Minh City lost their jobs (Cuong 2009) 80,000 workers were laid off in the Dong Nai industrial zone as a result of their companies' closures as a result of the GFC's impact (Lan 2009) This figure, however, only included workers in the formal business sector 2.2.6 Stock Markets face difficulties, the investors meet disadvantages The financial crisis has had an impact on the international financial market Banks and financial institutions in the United States and Western Europe reduced their international operations and concentrated on their home markets Foreign investors and investment funds have had more difficulty mobilizing funds, and they tend to be more cautious in making investment decisions when their major markets are experiencing a number of difficulties, forcing them to restructure the security in Vietnam The amount of money flowing into Vietnam has decreased significantly The Global Financial Crisis had a so-called psychological effect on Vietnamese stock investors, causing the VN index to fall to a record low of around 300 points in 2009, from a peak of over 1000 points in early 2007 2.2.7 Real estate market The majority of real estate enterprises in Vietnam have limited financial capacity; the majority of them rely on external capital, primarily from banks and credit institutions As a result, those businesses are struggling in the current financial crisis By the end of 2007, real estate speculation had pushed the price of Vietnamese real estate to an unsustainable level in comparison to its true value The market developed a virtual fever, and virtual demand increased In 2008, the Vietnamese economy encountered difficulties as a result of the global financial crisis; increased inflation caused people to tighten their purse-strings; the real estate market had been frozen; the price of real estate had dropped by 40%; real estate enterprises were unable to sell their products, incurring a high interest rate as a result of the tightening monetary policies PART 3: THE POLICIES OF THE GOVERMENT In the context of the global economic downturn, the domestic economy is confronted with numerous challenges, which are exacerbated by the Vietnamese market's high openness (export and import exceed 150% of GDP) Although the FDI sector accounts for less than a quarter of total social investment, it always accounts for between 55% and 70% of total import and export turnover, so after the crisis, the world export and investment markets shrank With a sudden decline, Vietnam's economy fell from a growth rate of more than 7% (in 2008) to 3.1% in the first quarter of 2009 Prices for some major export commodities fell sharply, such as rice, which fell by 20% in October 2009; coffee, which fell by 34.5%; and rubber, which fell by nearly 50% Another issue is that, due to the economy's small size, the starting point is low, but it has deeply and widely integrated into the region and the world at all levels, accompanied by Then, in 2008 and 2009, a series of natural disasters and epidemics struck with unprecedented intensity and magnitude People's lives are becoming increasingly difficult; inflation is high, unemployment is high As the economy deteriorates, businesses become depleted Some businesses went bankrupt, while others struggled on In line with the global trend, the government has taken drastic measures to avert an economic downturn, stabilize the macro economy, and transition to sustainable growth Expansion Fiscal Policy is one of the main solutions From a theoretical perspective, under floating rate, a fiscal expansion would raise e that leads to the IS* curve shifts to the right (from IS1* to IS2*) To keep e from rising, the central bank must sell domestic currency, which increases M and shifts LM* right (from LM1* to LM2*) As a result, the output increases compared to the level in the recession period (from Y1 to Y2) Thus, this is a combination of expansionary fiscal policy and expansionary monetary policy (Figure 3.1) Figure 3.1: IS* - LM* model 3.1 Expansion Fiscal Policy In practice, the government employs the following tools to implement expansionary fiscal policy: Tax cuts and deferrals included: (i) a 30% reduction in corporate income tax (CIT) for small and medium-sized enterprises (SMEs) and large textile and shoe manufacturing companies (especially affected by the decline in exports); (ii) exemption of all personal income from PIT in the first half of 2009, and of certain types in the second half; and (iii) a 50% reduction in personal income tax 10 (PIT) in the second half The total cost of these measures was estimated to be D28 trillion, but current Ministry of Finance estimates place the cost at D41 trillion Interest rate subsidies: The government enacted interest rate support policies in order to provide relief to labor-intensive industries while also protecting the banking system's stability These measures included a 4% interest rate subsidy on short-term working capital signed and disbursed between February and December 2009 From April 2009 to December 2011, the same subsidy was applied to medium- and long-term investment loans signed and disbursed In 2009, commercial banks and finance companies extended approximately D347 trillion in subsidized loans The program's cost was estimated to be D10.6 trillion In 2010, a 2% interest rate subsidy was added to medium- and long-term investment loans signed and disbursed in 2010, and the period for interest rate subsidies was limited to 24 months from the date of disbursement in 2010 As a result, commercial banks and finance companies extended approximately D66.1 trillion in subsidized loans, with the program's additional cost estimated at D3.69 trillion Social assistance spending: The program assisted poor families and community groups that were at risk of falling into poverty as a result of the economic slowdown Wage subsidies for distressed businesses, disaster mitigation programs, one-time cash payments to poor families on the occasion of the Lunar New Year (favoring 2.3 million households), and housing assistance for low-income families were all part of the assistance package The government also made National Employment Fund loans available to laid-off workers for training and self-employment Special consideration was given to assisting the 62 poorest districts in Vietnam, where poverty rates are close to 50% (nearly times the national average) Infrastructure investment: The majority of the discretionary fiscal stimulus program's funds were allocated to increasing infrastructure spending (around D81.7 trillion, or 56 percent of the total program) The investment effort necessitated accelerating the implementation of priority projects under the 2010–2011 public investment program, which was valued at approximately D35.5 trillion These included transportation, rural irrigation, canal upgrading, poverty reduction, and social housing projects Many were chosen because they were quick-paying, labor-intensive projects that would have the greatest impact on job creation if they were implemented In 2009, approximately 80% of the expenditure brought forward from 2010–2011 projects was disbursed Furthermore, the government has accelerated the implementation of projects that were delayed in 2008, carrying over approximately D30 trillion in capital expenditure from the previous year The issuance of treasury bonds financed approximately D20 trillion of infrastructure investment (including carry-over from 2008 and expenditure brought forward from 2010–2011) 3.2 Loose monetary policy Contributing to this achievement as well as maintaining a fixed exchange rate the government has flexibly and prudently combined the expansionary monetary policy with the previous expansionary fiscal policy Monetary policy has focused on promoting economic growth in response to the domestic economic recession and the global economic crisis since the second half of 2008, using a variety of tools: (i) Implementation of the basic interest rate support mechanism, which actually expands the money supply; (ii) Reduction of the basic interest rate from 14% to 8.5%, as well as the discount and refinance rate pairs to 7.5% and 9.5%; (iii) Reduction of the reserve requirement ratio for dong to 5%; (iv) Pay SBV bills totaling 20,300 billion dong in advance Open market operations primarily consist of purchasing valuable papers in order to supply more money; (v) Maintained the prime interest rate at 7% for the majority of 2009, rising to 8% in November 2009 11 3.3 Evaluate the effectiveness of policies: Vietnam's economy gradually recovered In 2009, despite many difficulties caused by the financial crisis and economic recession, Vietnam's trade with other countries reached around 130 billion USD Vietnam also has 457 investment projects in 50 countries and territories with a total capital of approximately 7.2 billion USD, with particularly effective investment cooperation with Laos, Cambodia, and the Russian Federation The flexible and synchronous implementation of expansionary fiscal and other macroeconomic policies has aided Vietnam's economy Enterprises have overcome adversity, production has been restored and developed, and labor has been re-engaged; 76,000 new businesses have been established, creating over 1.5 million jobs Since the second quarter, the value of industrial production has steadily increased again; the next month is higher than the previous month, months increased by 6.5% over the same period in 2008, and the year is expected to increase by 7.2% The construction industry's added value increased from -0.4% in 2008 to 11.3% in 2009 The service sector's added value increased by about 6.5% Despite natural disasters and epidemics, agriculture has grown steadily, with production value increasing by 2.6% in nine months and expected to increase by 2.8% over the same period last year GDP growth was only 3.14% in the first quarter of 2009, but it gradually increased to 4.46%, 6.04%, and 6.9% in the second, third, and Table 3.1: GDP growth rates in Southeast Asia fourth quarters of 2009 Vietnam's GDP Country GDP growth rates (%) increased by 5.32% in 2009, making it one Indonesia 4.0 of the countries with the highest GDP Malaysia 3.6 growth rates in Southeast Asia (Table 3.1) Inflation has fallen to 6.88% (from 23% in 2008), and the stock market, financial services, and banking activities have gradually recovered Philippines Thailand Viet Nam -3.5 4.6 Source: IMF (10/2009) 3.4 The challenges for Vietnam's economy The rate of GDP growth in 2009 was the slowest in the previous ten years Growth is still primarily in the breadth of the economy, the economic structure is inefficient, and labor productivity, quality, and competitiveness remain low Businesses and the economy as a whole have not made significant changes in the direction of turning challenges into opportunities to restructure production Although the industry has overcome obstacles, growth remains low Agricultural production is becoming less sustainable, with production value per unit of arable land remaining extremely low Exports and tourism both fell precipitously Consumption of goods remains difficult The economy's macroeconomic balances are not very strong The management of the exchange rate and the foreign exchange market is not very flexible, resulting in dollar hoarding, unnecessary stress, and an overall balance of payments deficit1, despite the fact that the country's foreign currency source is still quite abundant The expansion of the fiscal deficit and the loosening of monetary policy always carry the risk of resuming high inflation The management and use of The current account balance is expected to be in deficit by about 6.5 billion USD, the capital balance to be in surplus by about 7.3 billion USD, and the overall balance to be in deficit by about 1.9 billion USD 12 public assets, the state budget, and capital in state-owned enterprises are not strictly enforced, and efficiency remains low It is difficult to ensure social security and social welfare as a result of the economic downturn The target of job creation and labor export was not met, and the urban unemployment rate increased (4.66% compared to 4.65% in 2008) The state's management of labor, particularly of foreign workers in Vietnam, is poor People's lives continue to be difficult for a large portion of the population, with a high number of poor and re-poor households, particularly in mountainous areas, ethnic minority areas, and areas affected by natural disasters and epidemics Some social security regimes and policies have been slowly implemented, and there are still negative consequences in some areas The stimulus package had certain effects, such as timely support for businesses, which assisted Vietnam in avoiding the risk of economic recession However, it also causes some issues, such as unfair competition, inequity among businesses, and can lead to a decline in competition among Vietnamese enterprises 3.5 Recommendation Firstly, continue to improve the investment and business environment; increase production and service development; develop a scheme and take a step toward restructuring the economy and changing the growth model as soon as possible Secondly, financial and monetary policies must be flexible and prudent in order to stabilize the macro economy, prevent re-inflation, and achieve growth targets Operating monetary policy proactively and flexibly in accordance with market principles, ensuring stable currency value, meeting growth targets, and controlling inflation; strictly controlling credit quality, reducing bad debts; managing and creating conditions for the stock market to develop effectively and sustainably, becoming an important capital mobilization channel of the economy, and ensuring the safety of the financial system Operating the foreign exchange market and exchange rate flexibly in relation to interest rates, the consumer price index, trade balance, and other investment channels in order to encourage exports, reduce trade deficits, and improve the balance of trade and international payments Thirdly, the SBV requires greater flexibility in operating monetary policy instruments, particularly requirement reserve instruments, refinancing loans, open market operations in order to deal with problems in the banking system as well as the monetary market in the implementation of macroeconomic objectives It is related to the perfecting of legal documents on credit control in high-risk areas such as real estate and securities Simultaneously, the SBV requires additional research, surveys, and analysis of the nature of credit lines among real estate clients, including investors, buyers, construction contractors, and other contractors, in order to provide the necessary risk management measures Fourthly, more specific measures must be taken by the government, the Ministry of Construction, the Ministry of Finance, and local governments to ensure the healthy and sustainable development of the real estate market In summary, economic globalization, financial markets, real estate markets, banking, financial, and monetary activities are all intertwined in the context of the introduction and use of many new and complex financial instruments and products As a result, in the process of international integration and implementation of international commitments, Vietnam should understand their 13 characteristics and impacts in order to avoid economic risks Simultaneously, measures should be implemented to ensure the real estate market's healthy and sustainable development 14 CONCLUSION As the global financial crisis unfolded in 2008, the severe consequences were felt on all continents, including Vietnam The economy is doing well in the face of the global economic crisis, thanks to decisive, timely, and determined policy responses The experience in Vietnam demonstrates the importance of a strong fiscal policy in dealing with falling aggregate demand as a result of the global economic downturn In retrospect, it appears that the Vietnamese government chose an effective mix of stimulus measures The rapid loosening of monetary policy, in conjunction with the first phase of the interest rate subsidy scheme, acted as a "mass bail-out" for the frozen banking and credit sector, and tax exemptions and deferrals were successful in averting a more severe economic downturn The interest rate subsidy has kept credit flowing into the economy at a time when banks might have preferred to hoard their liquidity and avoid taking risks It enabled the refinancing of enterprise debts contracted at extremely high interest rates, which could have resulted in a slew of defaults in the face of rapid deflation And it boosted commercial banks' profits at a time when the quality of their portfolios was deteriorating and interest rate margins were thin Unlike other countries, Vietnam does not yet have modern social insurance mechanisms, leaving it without an important automatic stabilizer during an economic downturn Instead, Vietnam was forced to rely on alternative mechanisms, such as cash transfers, which are fraught with complications As the need to strike the right balance between stimulus and stability becomes more pressing, the macroeconomic debate should not push other critical policy reform agendas to the sidelines There is a need to support economic activity while also maintaining stability, and the government must strike the right balance However, key structural reforms are also required to sustain long-term growth The crisis emphasizes the need and provides an opportunity to address structural issues The most important issues are increasing competitiveness and improving the investment climate Despite these short-term challenges, Vietnam's positive medium-term growth outlook remains solid This includes its young and relatively well-educated population, which is expected to yield a positive demographic dividend Despite some concerns about the budget deficit and debt 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development”, prepared for the Annual Consultative Group Meeting for Vietnam, December 2009 20 World Bank, 2009b, “Taking stock: An update on Vietnam’s recent economic development”, prepared for the Annual Consultative Group Meeting for Vietnam, June 2009 17 ... months PART 2: ECONOMIC SLOWDOWN IN VIET NAM 2009 2.1 Causes of the economic crisis in Vietnam in 2009 2.1.1 Objective reasons Derived from the financial crisis that occurred in the United States,... 1.3 The impact of global financial crisis on world economy PART 2: ECONOMIC SLOWDOWN IN VIET NAM 2009 2.1 Causes of the economic crisis in Vietnam in 2009 2.1.1 Objective... also less than in 2008 Throughout the course of economic reform, Vietnam has relied increasingly on FDI to sustain its high level of economic growth The slowdown in FDI inflows in 2009 and subsequent