Restoring Aggregate Demand Still Faces Numerous Challenges

Assessing Vietnam’s economic outlook, the Vietnam Annual Economic Review 2023, released at the national scientific conference “Vietnam’s Economy in 2023 and Outlook for 2024: Boosting Aggregate Demand for Economic Growth in a New Context” held on April 17, noted that adverse and uncertain global economic conditions had led to downward revisions to all forecasts for Vietnam’s growth in 2024 compared with those made in 2023.

International organizations forecast economic growth of 5.5–6.0%, below the National Assembly’s target of 6.0–6.5%. Overall, in 2024, Vietnam’s economy will face numerous destabilizing, unpredictable and negative impacts from the global economy.

“The accumulated effects of the global economic slowdown and instability since the COVID-19 pandemic are likely to continue affecting Vietnam’s economy, at least in the first half of 2024, before more positive and encouraging signs emerge,” the publication stated.

According to the authors, domestically, traditional demand-side drivers—investment, consumption and exports—remain weak, businesses continue to face numerous difficulties, and new growth drivers have yet to become clear.

The financial and macroeconomic environment, including the monetary and financial system, corporate bond market, gold market and real estate market, still carries numerous risks.

Meanwhile, institutional changes to facilitate new growth drivers have been slow to be enacted, and the performance of official duties remains slow because fear of making mistakes and taking responsibility is still widespread.

Meanwhile, the quality of growth remains low, and the growth model has seen little improvement. “Vietnam’s economy is therefore forecast to continue facing numerous difficulties and challenges in 2024. Achieving the growth target will be very difficult,” the authors predicted.

Speaking at the conference, Prof. Dr. Pham Hong Chuong, President of National Economics University (NEU), stated that aggregate demand plays an important role in determining the level of economic activity and employment in the economy.

A decline in aggregate demand indicates that the economy is at risk of recession. This affects overall economic growth, with consequences such as declining industrial production, rising unemployment, and falling household incomes and spending…

“Restoring aggregate demand is therefore an important task for Vietnam. This requires the Government and relevant ministries, departments and agencies to urgently take appropriate, timely measures to strengthen demand-side growth drivers, thereby restoring aggregate demand and laying the groundwork for economic development in a new context,” Prof. Dr. Pham Hong Chuong emphasized.

Four Groups of Policy Recommendations

With no substantive improvement in the economic model, the Government will have to rely primarily on demand-side policies to achieve the high growth target as early as 2024, in the short term.

Demand-side growth drivers—investment, consumption and exports—need to be restored rapidly and strengthened further. On this basis, the authors put forward four groups of policy recommendations, as follows:

Macroeconomic policy recommendations to boost aggregate demand: Regarding fiscal policy, the Government could consider further strengthening countercyclical fiscal policy to boost aggregate demand and achieve stable growth amid a downturn, particularly when the budget is not under excessive pressure and public debt is trending downward.

Fiscal policy should be used actively and proactively to stimulate growth and address the problems associated with slowing growth.

Specifically, public investment disbursement should be accelerated effectively, and further reductions in certain taxes and fees could be considered to support businesses and stimulate demand.

On the monetary side, to help credit growth reach its target, the State Bank of Vietnam needs to issue and amend several legal documents related to access to credit.

At the same time, policies should be implemented to improve access to credit, particularly for small and medium-sized enterprises (SMEs), and to reduce lending interest rates…

Policy recommendations to promote investment: The authors recommended that the Government, ministries, agencies and local authorities prioritize the following three major issues:

First, obstacles to public investment disbursement need to be removed. Efforts should focus on coordinated implementation of the following fundamental measures to mobilize and effectively use investment capital across society, thereby boosting aggregate demand and economic growth in 2024.

Public investment should be promoted, with a focus on infrastructure, important transport projects and works of national significance, and the development of social housing and schools. These policies both stimulate aggregate demand in the short term and create long-term supply, while limiting the side effects of demand-side policies.

Alongside this, accelerating public investment disbursement requires measures to amend and improve legal regulations to reduce obstacles at every stage of project management, from preparation to planning and implementation.

Second, a favorable investment environment should be created for the private sector. Specifically, efforts should continue to review and substantially reduce business conditions that hinder production and business activities; accelerate administrative reform and effectively implement one-stop procedures to create a favorable business environment for enterprises to establish themselves and grow; and limit adverse impacts on businesses…

Third, businesses’ access to credit should be improved to unblock credit flows and create favorable conditions for businesses, particularly SMEs, to resume production and business activities promptly…

Policy recommendations to stimulate consumer demand: According to the authors, final consumption currently plays the largest role in aggregate demand. The Government could therefore implement policies to stimulate consumer demand in the following two areas:

For domestic consumption, consumer spending should be stimulated through: (1) Increasing social welfare benefits for people living in poverty and those who have lost their jobs in both the formal and informal sectors; (2) Raising the taxable income threshold and reducing personal income tax rates; (3) Reducing value-added tax on domestic essential goods to stimulate spending demand; (4) Continuing wage reform to stimulate consumption and contribute to increasing aggregate demand.

To improve social welfare for people living in poverty, the causes need to be clearly identified and measures implemented decisively. Vulnerable groups must be placed at the center and made the focus of social welfare policies.

To ensure that assistance reaches the intended groups, measures could include: (i) Developing a coordinated, diverse and high-quality social insurance system that effectively combines social insurance with commercial insurance services to meet people’s differing needs; (ii) Prioritizing the allocation of financial resources to social welfare…

Policy recommendations to develop international trade: The authors recommended expanding trade with markets covered by signed free trade agreements (FTAs), and reviewing and issuing standards and a legal framework for green production for Vietnamese businesses. This will help Vietnamese businesses access markets with demanding requirements, such as the EU.

At the same time, the legal framework governing green credit and green bond issuance should be finalized soon so that businesses can access capital more easily and credit institutions can provide green credit more readily.

Further efforts should be made to improve institutions and policies governing exports and imports, as well as the investment and business environment, with a view to establishing a level and fair competitive environment. The composition of exports and imports should be shifted in a positive direction.

For exports and imports to deliver the greatest positive benefits to the economy, exports in sectors generating high added value need to be promoted.

Source: Finance Magazine