Contrary to experts’ hopes for a strong global economic recovery, the first six months of 2022 witnessed many challenges. Heritage welcomes Professor Tran Tho Dat, an Economic Adviser for the Prime Minister and Chairman of the Education and Research Council – National Economics University, to discuss his predictions for the rest of 2022

Professor Tran Tho Dat

Could you sum up the world’s economy during the first six months of 2022? 

Halfway through 2022, early expectations for strong economic recovery have been adjusted and experts are warning about the risks of a recession. The primary reason behind these adjusted projections is the Russo-Ukrainian conflict, which has led to skyrocketing fuel prices and rampant inflation, forcing central banks to dramatically increase interest rates as a countermeasure. China’s ongoing Zero-Covid policies have also aggravated supply chain disruptions, pushing up the cost of living and jeopardizing many countries’ economies and food security. Many economies, especially up-and-coming ones, are facing risks of inflation due to rising costs of fuel and food, disadvantageous exchange rates, and pressure to increase interest rates just as their economy has started to bounce back.

What has Vietnam’s economy achieved during the first two quarters of the year?

While the global economic outlook remains dismal, Vietnam’s economy is experiencing significant recovery despite these “headwinds”. It boasted high growth in the second quarter of 2022, at 7.72% – the fastest quarterly GDP growth of the same period from 2011 to today. During the first six months of 2022, the country’s GDP grew by 6.42% compared to the same period last year; increased by 2.04% compared to the first six months of 2020; and rose by 5.74% compared to the same period of 2021. In recent years, trade activities have continued to face difficulties, as they focus on large markets like the USA and the EU, where inflation has caused rising costs and a Tight Monetary Policy is curbing people’s spending. That said, during the first six months of 2022, Vietnam’s total trade turnover increased by 16.4 compared to the same period last year: export turnover soared by 17.3%, while import turnover increased by 15.5%. As a result, the country’s balance of trade is projected to feature a trade surplus of USD 710 million.

Despite pressure from global rising product costs, the average CPI for the second quarter of 2022 rose by 2.96% compared to the second quarter of 2021. For the first six months, CPI rose by 2.44% compared to the same period last year. This required a huge effort by governmental agencies that manage monetary and fiscal policies, as fuel costs rose by 54.92% compared to the same period last year. Being food-independent and having plenty of domestic resources, Vietnam is managing to keep food prices stable, which is helping to curb inflation. In an era where manufacturing activities rely heavily on imported materials – the costs of which are skyrocketing – and rampant inflation is challenging large economies as well as other countries in the region, controlling inflation plays a vital role in stabilizing the economy. 

Inflation is the most challenging macroeconomic issue in the upcoming months

The global economy could fall into a recession if inflation keeps rising and monetary policies continue to be tightened. How would this affect Vietnam’s economy in the upcoming months? 

Vietnam has a highly integrated economy with a total trade turnover of more than 200% of the country’s GDP. FDI is still a major driving force behind growth, so changes within the global economy are sure to have varying degrees of effects on the domestic economy. 

Firstly, even though imports from our top markets have shrunk considerably as consumers spend less, the impact on our export activities will not be too drastic. Since Vietnam’s primary export goods are essential items, prices and income elasticity will not be high.  

Secondly, even though the strengthening of the USD will cause pressure on Vietnam’s exchange rate, the VND remains one of the most stable currencies in the region. The core elements that have kept the VND stable in recent years are still being maintained, namely improved trade surplus and stable foreign exchange reserves, which are now at a record USD 110 billion. 

Thirdly, as the global financial market tightens itself, the Government and Vietnamese enterprises will have a harder time mobilizing capital on international markets and must settle for higher interest rates. However, the impact on Vietnam’s foreign debts is minimal, especially on debts within the enterprises sector. 

Fourthly, direct foreign investments suffered setbacks, aligning with global trends. However, these capital inflows are seeing signs of growth as Vietnam remains a promising market in South East Asia. Compliant with their “China Plus One” strategy, many businesses will expand their activities in other developing countries. If we take advantage of this opportunity, Vietnam has the potential to be an important manufacturer in the global supply chain. 

Finally, the most challenging macroeconomic issue in the upcoming months is inflation. The CPI for June 2022 has increased by 3.37% compared to the same period last year, leaving little room in the remaining months to keep this number at 4%. Imported inflation will spread more quickly, affecting the prices of goods. Financial and fiscal support packages will start to play a more active role in the economy. This will be a major challenge.

Vietnam's economy is experiencing significant recovery despite the global fluctuations

What actions do you recommend for businesses and investors in this current situation?

Risk management and prevention skills are more crucial than ever when many unstable elements coincide, significantly increasing the risks of a global recession. As recovery faces numerous difficulties and the inflation storm rages on, businesses with long-term strategic visions that can control costs and maintain their profit margins will surpass the headwinds and recover quickly. Businesses must use alternative, less expensive input materials flexibly to control input expenses. As for output, adaptive measures include focusing on products with high-profit margins and adjusting retail pricing for different market segments to fit current inflation levels and people’s purchasing ability.

For individual investors, in a period of soaring inflation and high risks of recession, it is necessary to diversify your investments into various assets. It is especially important to prioritize the quality of your assets and switch to a more defensive investment strategy. When investment channels face risks – such as cash being devalued, bank savings facing low-interest rates, real estate investments reaching their peak, real estate credits being put under tight controls, and decreasing liquidity, the priority is to invest a certain amount of capital into safe havens such as high-credibility bonds, stocks with high capitalization, and a stable rate of cash dividends. 

Thank you!.