Viet Nam's economic growth in 2006 and outlook for 2007

· Increase the quality and efficiency of economic growth by improving the institutions of a market economy with socialist orientation; · Further enhance the investment and business climate, attract the investment of entities under all forms of economic ownership, enhance investment management and the efficiency of State investment; · Further adjust macroeconomic policy, reinforce financial management, renovate the price administration mechanism in accordance with market mechanisms; and · Pro-actively implement international commitments, analyze and evaluate the difficulties and challenges in the implementation of interna-tional commitments, accelerate renovation, simplify administrative procedures; ensure transparency; prevent and fight against bureaucracy and corruption, and renovate human resources training to meet the demands of economic renovation and integration to the global economy. r

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69Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW 1. Vietnam's economic growth in 2006 In 2006 the Vietnamese economy had many advantages and disadvantages in the national and global context, which influenced economic performance. In the international environment, the prices of a number of important input goods, especially raw materials and fuel, continued to rise significantly. There were also threats of a reoccurrence of the avian flu and an outbreak of human influenza. 2006 was the first year of the Socio-economic Development Plan 2006-2010. Vietnam's economy saw the widespread appearance of natural disasters and unusual changes in climate and weather that caused damage to agricultural production, the rural economy and the livelihoods of the poor. Natural disasters, unusual changes in climate and weather and the avian influenza are having an adverse impact on economic activities and life, and especially on agricultural production. Vietnam's export products faced major difficulties brought about by fiercer competition and market barriers. Thanks to the efforts of the Government, these difficulties have been gradually overcome, limiting their negative impact on economic growth. As a result, Vietnam's economic performance remained strong despite these adverse shocks, continuing to record a rapid rate of growth. 1.1. Supply side Vietnam's GDP growth rate reached 8.17% in ABSTRACT This paper focuses primarily on analyzing Vietnam's economic growth in 2006 from the supply side and, to a lesser extent, the demand side. Using the structural macroeconometric model for Vietnam's economy, the paper then provides forecasts on the country's basic economic indica- tors in 2007, taking into account the prospects for the world economy and the underlying move- ments in Vietnam's economy. Key words: economic growth, GDP. Vietnam's Economic Growth in 2006 and Outlook for 2007 Dinh Hien Minh ECONOMIC UPDATES Ms. Dinh Hien Minh is a Deputy Director of the Research Department for Trade and Economic Integration Policies, CIEM. PDF created with pdfFactory trial version www.pdffactory.com 2006, lower than the 8.43% recorded in 2005. However, the 2006 GDP growth rate was still much higher than the average for the 2001-2005 period and ranks among the highest in East Asia. The growth rate in value added agriculture, forestry, and fisheries was estimated at 3.40% in 2006. Accounting for just a small share of GDP (18.7%), the sector only contributed 8.15% to the overall GDP growth rate. With the lion's share of GDP (40.98%) and the highest growth in value added (10.37%) in 2006, the industry and construction sector continued to make the largest contribution (of 50.99%) to the overall GDP growth rate. The growth rate of value added in the services sector was estimated to have increased by 8.29%. This is the second year the service sector has experienced a growth rate of over 8%, which was higher than the overall GDP growth rate, since the Asian financial crisis in 1997. As a result, the service sector contributed 40.86% to the GDP growth rate, its largest share since 1997. Agriculture-forestry-fisheries sector In 2006 the agriculture-forestry-fisheries sector encountered a great many difficulties, such as severe and prolonged drought in the early months in a number of cities and provinces in the Red River Delta, outbreaks of foot and mouth disease in livestock throughout the country, harmful diseases causing large-scale devastation of crops in the final months of the year in Mekong Delta provinces, and the Chanchu and Xangsane storms, among other things. Value added in agriculture, forestry, and fisheries in 2006 increased 3.4%, far lower than the 4% and 4.36% recorded in 2005 and 2004, respectively (Table 1). ECONOMIC Updates Vietnam's Economic Growth in 2006 and Outlook ... 70 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW VEMR 2004200320022001 2005 2006 Growth rate GDP Agriculture-forestry- fisheries Industry-construction Services 7.79 4.36 10.22 7.26 7.34 3.62 10.48 6.45 7.08 4.17 9.48 6.54 6.89 2.98 10.39 6.10 8.43 4.00 10.68 8.49 8.17 3.40 10.37 8.29 Contribution to GDP growth by percentage point GDP Agriculture-forestry- fisheries Industry-construction Services 7.79 0.92 3.93 2.94 7.34 0.79 3.92 2.63 7.08 0.93 3.47 2.68 6.89 0.69 3.68 2.52 8.43 0.82 4.20 3.42 8.17 0.67 4.16 3.34 Contribution to GDP growth by percentage GDP Agriculture-forestry- fisheries Industry-construction Services 100.00 11.80 50.48 37.72 100.00 10.77 53.37 35.86 100.00 13.20 48.95 37.85 100.00 10.07 53.39 36.54 100.00 9.67 49.82 40.51 100.00 8.15 50.99 40.86 Table 1: GDP growth rate and contribution to GDP growth by sector, 2001-2006 (%) Source: GSO and figures compiled by the author. PDF created with pdfFactory trial version www.pdffactory.com 71Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC Updates Vietnam's Economic Growth in 2006 and Outlook ...VEMR The growth in agriculture was estimated at 2.84%, relatively lower than the figures in 2005 and 2004 (3.10% and 3.39%, respectively). With a share of almost 83% of total value added in the agriculture-forestry-fisheries sector, agricultural production had a major influence on the overall performance of the sector. In 2006, total paddy/rice output reached 35.83 million tons, a decline of 0.1% over 2005. The northern region accounted for 13.12 million tons of rice (compared to 2.45 million tons in 2005), and the southern region made up the remaining 22.71 million tons (compared to 23.34 million tons in 2005). The fall in the country's total rice output resulted from a decrease of 4,800 hectares in the rice cultivation area compared to 2005 (in 2006 the area was 7.324 million hectares) and the productivity recorded in 2005 (4.891 tons per hectare). If 3.82 million tons of corn were to be included, food output in terms of grain was estimated at around 39.65 million tons in 2006, an increased of a mere 0.1% against 2005. Food security is still emphasized and guaranteed thanks to the Government's timely adjustments to rice export volumes. Rice exports were estimated to have reached 4.749 million tons (equivalent to 1.3 billion USD), lower than the 5.25 million tons recorded in 2005. The performance and output of other agricultural crops varied. Sweet potatoes increased by 0.8%; cassava increased 14.9%; soybeans decreased 11.8%; peanuts decreased 5%; miscellaneous vegetables increased 6.4%; and sugarcane increased by 4.9%. Surges in the prices of some export-oriented agricultural products such as rubber, coffee, tea, and pepper also encouraged farmers to expand such production. Rubber output increased 13.4%, coffee 13.5%, and pepper and tea 2.9% and 7.4%, respectively. One exception was cashew nuts, where cultivation areas rose 4.1% to 14,400 hectares yet the total output volume fell by 2%. The land area dedicated to fruit orchards also increased by 7,000 hectares against 2005. The livestock sub-sector suffered drama-tically from various factors such as the avian influenza1 and foot and mouth disease in different regions of Vietnam. However, the number of pigs and poultry did not decrease significantly against 2005, by only 2% and 2.4%, respectively. Cattle numbers, meanwhile, increased by 17.5%. As a result, the total output of live, mature animals reached 3.1 million tons, up 9.3% against 2005, in which buffaloes increased 7.5%, cattle 12.2%, pigs 9.5%, and poultry 7%. Notably, the output of live pigs increased while the number of pigs fell, because they are more widely raised on a large-scale basis, with more effective use of modern technologies and techniques to increase output. Dairy milk output reached 215,900 tons, up 9.2%, and the output of poultry eggs reached 4 million, up 0.5%. In 2006 the forestry sector, which accounts for a small share of the overall agriculture-forestry-fisheries sector, increased output by 1.15% over 2005. This is the first year in quite some time that the forestry sector has achieved a growth rate of over 1% (2005: 0.94%; 2004: 0.82%; 2003: 0.82%; 2002: 0.46%; 2001: 0.48%; and 2000: 0.32%). The area of planted forests was estimated at 184,000 hectares, increasing 3.7% compared to 2005. Wood output was estimated to have reached 3 million cubic meters, up 0.5%. The burned or deforested area fell dramatically in 2006 as the weather was more temperate and there was better forest protection. The total forest area destroyed was estimated at 4,600 hectares (the area burned was 2,100 hectares and the area deforested was 2,500 hectares), equivalent to 45.8% of the figure in 2005. Storms and floods caused losses and a decrease in productivity in fisheries in various coastal regions during 2006. However, the total national output of aquaculture farming reached 1,694,200 tons, up 14.6% against that in 2005. The increase was due to a 3.3% rise in production area and the diversification of farming methods towards higher efficiency and sustainable development. PDF created with pdfFactory trial version www.pdffactory.com Aquaculture output was estimated at 2 million tons, an increase of 0.7% (marine exploitation was up 0.9%) compared to that in 2005. Growth was limited due to a number of storms in 2006, which damaged and destroyed thousands of offshore fishing vessels, reducing both the fleet and the number of fishing days. A surge in petrol prices also led to fewer off-shore fishing vessels. In addition, the sea tuna harvest was lower than in 2005. Overall, total production output and value in the fisheries sector during 2006 reached 3,695,900 tons and VND41,711.2 billion, increases of 6.6% and 7.7%, respectively. The growth in value added in the sector was 7.53%, less than the 10.23% recorded in 2005. Industry-construction sector In 2006 the industry and construction sector continued to grow rapidly, by 10.37% - higher than the average annual growth of 10.25% in the 2001- 2005 period but slightly lower than the 10.68% posted in 2005. By sub-sector, growth rates in value added in industry and construction in 2006 were 10.18% and 11.05%, respectively, compared to 10.60% and 10.81% in 2005. Among industrial sub-sectors, the mining and quarrying industry grew slowly, by 0.80% compared to 1.01% in 2005 (and 8.86% in 2004). This stemmed mainly from the State's 2005 guideline to conserve natural resources together with the limited technical capacity of existing mines (while newly-discovered mines have low reserves). The growth of the mining and quarrying industry was due to an increase in coal, metal and precious stone. With a share of about 16% in the industry and construction sector, the mining and quarrying industry contributed just 0.12 percentage points or 1.11% to the growth rate of the overall industry and construction sector in 2006; rather low compared to previous years. Crude oil output was 17 million tons, 8.2% less than in 2005, which in turn was 7.7% less than the figure in 2004. The manufacturing industry continued to grow steadily, at 12.38%, but less than in 2005 (13.14%). Consequently, its contribution to the overall growth of the industry and construction sector accounted for 67.70%. High growth was exhibited in a range of key products in the manufacturing sector: foodstuffs and beverages, including processed aquatic products for export (over 17%); leather and imitation leather goods (18.5%); wooden products (over 23%); rubber and plastic products (27%); metal products (24%); electrical devices (over 28%); radio and communications devices (over 18%); and other transportation vehicles, mainly ship building and repair (23%). The growth of these products was a key factor contributing to the overall growth in the industry sector in 2006. However, some important processed industrial goods, such as ready-made clothes, cement, cardboard of all kinds, rolled steel, finished silk, and pesticides experienced slower growth rates of around 10%. The output of some mechanical products (such as electrical engines, transformers, electrical batteries, electrical fans, bicycles, assembled televisions, and assembled automobiles) also grew more slowly than in 2005. The electricity, gas, and water production and supply sector was estimated to have grown by 11.56%, making a 0.82% larger contribution and equal to 7.94% of the growth rate for the industry and construction sector in 2006. Despite facing various difficulties, especially in capital disbursement, the construction sector still recorded 11.05% growth in value during 2006. This was the highest growth rate (and largest contribution to the overall growth) by the construction sector since 2002. It should be noted that many industrial goods, on which import tariffs were cut under the frameworks of ASEAN and ASEAN - China Free Trade Areas (AFTA and ACFTA), experienced slower growth in 2006. Furthermore, in the last few years, the gap between growth rates of 72 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC Updates Vietnam's Economic Growth in 2006 and Outlook ...VEMR PDF created with pdfFactory trial version www.pdffactory.com 73Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC Updates Vietnam's Economic Growth in 2006 and Outlook ...VEMR production output and value added of the industry sector alone has been widening, from 4.24 percentage points in 2001 to 5.37, 6.37, 6.37, 6.58 and 7.56 percentage points in 2002, 2003, 2004, 2005 and 2006, respectively. The above tendency was partly caused by the underlying structure and competitiveness of Vietnam's industry. Production in many industries depends heavily on imported materials, whose prices have been increasing. Assembled and processed goods with low value-added content are still key export items of Vietnam's processing and manufacturing industry. Technology transfer and scientific and advanced technical applications in the industry sector progressed very slowly. Urgent improvements are therefore required in the industry sector's competitiveness to meet the requirements of international integration, particularly following Vietnam's accession to the WTO. Services sector In 2006 the services sector saw relatively high growth in value, by 8.29% (2005: 8.49%). This is the second consecutive year that growth has exceeded 8% and was higher than the GDP growth rate. By sub-sector, the income of market-based business services grew 8.38% (compared to 8.67% in 2005), social and professional services 8.09% (2005: 8.08%), and public administration services 7.57% (2005: 7.21%) 2 . In 2006, market-related business services contributed up to 79.32% or 6.57 percentage points to the value-added growth rate of the services sector. The sub-sectors of these business services recorded faster growth than those of wholesale and retail trade; hotels and restaurants; transportation; posts and telecommunications and tourism. Wholesale and retail trade - accounting for one-third of the total value-added element of the services sector - grew by 8.55% in 2006. Despite high oil prices and associated pressures to increase fees, road and air transport of passengers, including the network of municipal and inter-provincial bus routes in major cities and other provinces, went up dramatically due to the restructuring of the sector in a more effective and rational manner. As a monopoly industry with the main task of serving communities, the posts and telecommunications sector has developed a competitive service market with high growth rates3. As at December 2006 there were 25.4 million telephone subscribers (both fixed and mobile), increasing by 60% and with a telephone density of 30 telephones per 100 people. In 2006 there were about 1.19 million new Internet sub- scribers, bringing the total number to 4 million with a concentration of 4.7 subscribers per 100 people. Total turnover of the posts and telecommu- nications sector went up by more than 13% in 2006. Vietnam welcomed 3.58 million foreign visitors during 2006, up by 3% - a relatively low growth rate compared to 18.8% in 2005. This mainly resulted from the fall in the number of visitors from China (falling 28% compared to 20055). Domestic tourists amounted to 17 million4, up 5.6%. However, as the origin of foreign visitors is shifting towards countries with high incomes, such as Japan, the US, South Korea, and Singapore, turnover from tourism rose drama-tically, by 20% over 2005's figure. In 2006, the value added of social and professional services increased by 8.09% compared to that in 2005. A policy of commercializing such branches as education and training, public health services, culture and sports has now come into effect. Non-state education and training, as well as health, developed rapidly and contributed significantly to accelerating value-added growth in these branches to 8.42% and 7.84%, respectively. The cultural sector, with lower levels of commercialization than that education and training and health, recorded growth to its value added of 7.67%, lower than that in 2005 but still much higher than the annual average level in the 2001-2005 period. PDF created with pdfFactory trial version www.pdffactory.com Public administration services, despite recording a lower growth rate than the other two sub-sectors, performed much better than in previous years. Its value added increased by 7.51% in 2006, primarily because of the Government's new wages policy (adjusting salary payrolls and increasing the minimum salary from VND290,000 in October 2004 to VND350,000 in October 2005, and to VND450,000 in October 2006). Notably, the contribution of public administration services to the value-added growth rate of the whole services sector was small, at only 0.5 percentage point or 6.05%, due to its small share (of roughly 7%) in the value added of the services sector. The services sector is still developing more slowly than its full potential, which hinders the process of enhancing competitiveness in the entire economy. The role of social and professional services in the services sector is still yet to be fully recognized. 1.2. Demand side5 The remarkable growth rate of GDP in 2006 is again attributed to domestic demand. However, the GDP growth rate in 2006 was driven not only by domestic demand but also by exports. The contribution of exports to GDP growth was the highest in the aggregate demand, reaching more than 203.18%. Moreover, the contribution of the overall trade balance (net exports minus net imports) in overall GDP growth was -3.87% (Table 2). Consumption made a smaller contribution to the overall GDP growth rate, of 54.89% or 4.48 percentage points in 2006. The growth of consumption continued to decelerate from 7.51% in 2005 to 6.28% in 2006, of which growth rates of final consumption by the State and private households were 7.01% and 6.20%, respectively. In 2006, GDP per capita at current prices was VND11.575 million, while consumption per capita was VND7.941 million. As overall GDP growth outpaced consumption growth, savings per capita increased significantly, accounting for more than 31.4% of GDP in 2006 compared to 30.3% in 2005. It should be noted that the contribution of investment to the GDP growth rate since 2003 has begun to decrease. This mainly comes from the decelerated growth of investment, which was much slower than those of consumption and export. Investment accounted for 42.58% of the GDP growth rate in 2006. Its share in the GDP was estimated at 36.79%, slightly higher than the 36.32% in 2005. In short, Vietnam's economic achievements in 2006 give cause for optimism, with growth of 8.17% being close to the planned target for the year. This sets a good precondition for the fulfillment of the Socio-Economic Development Plan 2006-2010. Nevertheless, the quality of growth, particularly the competitiveness of the national economy, failed to improve significantly. The structural shift among the three sectors (agriculture - forestry - fisheries, industry- construction, and services), and especially within each sector, has been rather slow. 2. Vietnam's economic outlook for 2007 2007 marks the full integration of Vietnam into the international economy. This is the first year Vietnam will begin to implement its WTO commitments as an official member, and it has also been granted PNTR status by the US. 2007 is also the second year of implementing the Socio-Economic Development Plan 2006-2010, bringing about both opportunities and difficulties for the country. Based on the achievements in 2006 as well as the weaknesses that need to be addressed, the National Assembly (Term XI, Session 10) promulgated Resolution 75/2006/QH11 on the tasks in 2007, with main socio-economic targets as follows: · GDP growth rate to be between 8.2 and 8.5%; of which value added in the agriculture-forestry-fisheries sector is to increase by 3.5-3.8%; the industry and construction sector 10.5-10.7%; and the services sector 8.0-8.5%; 74 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC Updates Vietnam's Economic Growth in 2006 and Outlook ...VEMR PDF created with pdfFactory trial version www.pdffactory.com 75Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC Updates Vietnam's Economic Growth in 2006 and Outlook ...VEMR · Inflation rate (CPI) to be lower than the economic growth rate; · Total export value to increase by 17.4%; · Total import value to increase by 15.5%; · The ratio of total investment to GDP to be 40%; · Total State budget revenue to reach VND281.9 trillion, and total State budget expenditure to be VND357.4 trillion. The state budget deficit is to be VND56.5 trillion (5% GDP); · About 1.6 million new jobs will be created, of which 80,000 will be exported workers; and · Poverty is to fall to 16%; the malnutrition among children under 5 years to fall to 22.3%. After twenty years of economic renovation (doi moi), Vietnam has recorded a number of major achievements and gained invaluable experiences. Economic development has been rapid and impressive. The country's deep integration into the regional and global economies has also brought about new opportunities in its reform and deve-lopment process. With the achievements of 2006, these factors will be a strong driving force for Vietnam's economic growth in 2007. However, there are still underlying weaknesses in Vietnam's economy. GDP growth, albeit high, was less than its potential. Competitiveness, quality of growth, and efficiency of investment, particularly State investment, are limited. Meanwhile, unpredictable movements in the global economy (oil prices, the avian influenza, and natural disasters) may negatively affect Vietnam's economy. These are the major challenges in realizing the National Assembly's socio-economic targets for 2007. 2004200320022001 2005 2006 GDP (contribution by percentage) 100.00100.00100.00100.00 100.00 100.00 GDP (contribution by percentage point) Consumption Investment Net exports Of which: Exports Imports Errors 7.79 5.18 3.66 0.39 16.80 -16.41 -1.44 7.34 5.72 3.95 -3.21 11.66 -14.87 0.89 7.08 5.33 4.02 -3.66 5.89 -9.55 1.39 6.89 3.42 3.29 -0.22 8.91 -8.13 0.41 8.43 5.41 3.81 2.15 15.63 -13.48 -2.94 8.17 4.48 3.48 -0.32 16.59 -16.91 0.52 Consumption Investment Net exports Of which: Export Import Errors 66.52 46.93 5.06 215.71 -210.65 -18.51 77.87 53.78 -43.72 158.78 -202.51 12.08 75.24 56.82 -51.65 83.25 -134.90 19.59 49.62 47.65 -3.23 1129.21 -132.44 5.97 64.12 45.18 25.55 185.40 -159.85 -34.85 54.89 42.58 -3.87 203.18 -207.05 6.40 Table 2: Contribution to GDP growth by component of the aggregate demand, 2001-06 (%) Source: GSO and figures compiled by the author. PDF created with pdfFactory trial version www.pdffactory.com To elaborate on the above, three forecasting scenarios for Vietnam's economy were simulated using the structural macro-econometric model, taking into account the prospects for the world economy, the underlying movements of Vietnam's economy and some necessary adjustments of macroeconomic policy. It should be noted that: (i) the impact of the strong surge in the oil price on the national economy over recent years has not been as strong as during the oil crises of 1973-1975 and 1979-1980; and (ii) the surge in the oil price has a two-way effect on Vietnam's economy, as the country both exports crude oil and imports refined oil products. The following briefly describes the various scenarios and associated assumptions used for macroeconomic forecasting for Vietnam's economy in 2007. The baseline scenario is to forecast Vietnam's economy in the "normal condition", in accordance with common expectations of the world and of Vietnam's economic development. The global economic growth rate in 2007 is projected to be slower than in 2006. However, Asian countries, especially China and ASEAN members - Vietnam's main trading partners - are expected to record higher growth rates. In addition, Vietnam's trading partners6 are expected to record economic growth of around 5% per annum. The world oil price will fall but remain high, at USD56 a barrel, 3% less than in 2006. Import prices of materials will increase 2% (at current USD prices) compared 76 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC Updates Vietnam's Economic Growth in 2006 and Outlook ...VEMR Baseline scenario Optimistic scenarioa Pessimistic scenarioa Assumptions Real GDP growth of trading partners World crude oil price World material prices World agricultural product prices (USD) Nominal exchange rate (VND/USD)b Oil export volume (million tons) FDI disbursement (USD) Budget investment (VND) Money supply (M2) Results Real GDP (1994) CPI (inflation) (average) Export growth rate Trade deficit (% of GDP) Budget deficit (% of GDP) +5.0 -3.0 +2.0 -4.0 +2.0 +5.0 +25.0 +16.0 +25.0 8.50 7.70 23.10 -4.29 -4.54 +35.0 8.70 7.90 26.30 -3.54 -4.79 -20.0 +20.0 8.10 7.20 16.50 -3.54 -4.93 Table 3: Assumptions and forecasts for selected macroeconomic indicators in Vietnam's economy in 2007 (%) Note: Trade in the model is calculated in accordance with System of National Account. a Other assumptions are kept unchanged as in the baseline scenario. b The positive increase (+): devaluation. Source: Results from CIEM model forecasts. PDF created with pdfFactory trial version www.pdffactory.com 77Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC Updates Vietnam's Economic Growth in 2006 and Outlook ...VEMR to that in 2006, while export prices of agricultural products will go down by 4% compared to 2006. Because of the assumptions of high oil prices and high efficiency of tax collections, State budget revenue will remain high in 2007. Accordingly, State investment (at current prices) is assumed to increase by 16%. Crude oil output in 2007 is assumed to go up by 5% compared to 2006, which may be relevant given the State's view to conserving natural resources. The investment climate will be further improved, due to the fact that Vietnam will reinforce its institutions and fulfill its WTO commitments. The disbursement of FDI at current USD prices in 2007 is assumed to increase by 25%. At the same time, Vietnam is expected to pursue relatively cautious macro economic policies (via tightening monetary and exchange rate policies). In 2007, the Vietnam dong (VND) is expected to depreciate 2% against the USD in nominal terms, while money supply (M2) will increase by 25%. In Scenario 1 ("optimistic scenario"), the world economic outlook will be brighter and Vietnam's investment environment will become more attractive to foreign investors. The only different assumption under this scenario is a 35% increase in disbursed FDI capital in 2007 (Table 3). Scenario 2, with more "instability", has different assumptions about the volatility of international oil prices and the disbursement of FDI. The oil price under this scenario is assumed to go down by 20%. Meanwhile, disbursed FDI will increase only by 20% per annum. Under the baseline scenario, GDP will increase by 8.5% in 2007, with an inflation rate of 7.7%, export growth of 23.1% and a trade deficit of 4.3% of GDP. The results of this scenario also show that the economic growth rates of three main sectors - agriculture-forestry-fisheries, industry-construction, and services are 3.5%, 10.6%, and 8.7%, respectively. The ratio of total investment to GDP is 38% at current prices. It should be noted that, in 2007, growth of services will be rapid and faster than that of overall GDP (even higher than the target of 8.0-8.5%). Scenario 2 predicts the economic growth rate to decline by 0.4 percentage points in comparison with the forecast under the baseline scenario. Meanwhile, the economic growth rate will be relatively high under Scenario 1, at around 8.7%. As a whole, the forecast results based on the macro-econometric model by CIEM have shown that Vietnam's economy will continue to grow rapidly (by 8%). Therefore, the target of economic growth (and its main sectors of Vietnam's economy) can be fulfilled. Despite higher growth and a higher inflation rate than in 2006, macroeconomic stability should be maintained. The forecast results also show that Vietnam's economy seems to be sensitive to external factors, such as the volatility in world oil prices and FDI inflows into the country. It is worth noting that the forecasts for Vietnam's economic growth in 2007 made by a number of international financial institutions and the Institute of Developing Economies (IDE) are quite optimistic. According to these forecasts, economic growth in 2007 is slightly lower, ranging from 7.5-8.3%. At the same time, the forecasts show a more cautious view of macroeconomic stability in Vietnam. Their forecasts on the inflation rate are lower than CIEM's (Table 4). Variable GDP growth rate Inflation (CPI) IMF 7.6 7.1 WB 7.5 6.5 ADB 8.3 6.8 IDE 8.4 6.5 Table 4: Forecasts by international organizations of Vietnam's GDP growth rate and inflation rate in 2007 (%) Note: Average inflation rate. Source: IMF (2006), World Bank (2006), ADB (2007), and IDE (2006). PDF created with pdfFactory trial version www.pdffactory.com Therefore, the issue for Vietnam is not only to realize its annual socio-economic development targets but also to speed up innovation, which will create a firm foundation to sustain high growth rates and ensure sustainable development over the following years. The ideas and solutions recommended in Resolution 03/2007/NQ-CP (dated 19 January 2007) basically reflect these ideas, which are to: · Increase the quality and efficiency of economic growth by improving the institutions of a market economy with socialist orientation; · Further enhance the investment and business climate, attract the investment of entities under all forms of economic ownership, enhance investment management and the efficiency of State investment; · Further adjust macroeconomic policy, reinforce financial management, renovate the price administration mechanism in accordance with market mechanisms; and · Pro-actively implement international commitments, analyze and evaluate the difficulties and challenges in the implementation of interna-tional commitments, accelerate renovation, simplify administrative procedures; ensure transparency; prevent and fight against bureaucracy and corruption, and renovate human resources training to meet the demands of economic renovation and integration to the global economy. r Notes: 1 For most of 2006, there were no new occurrences of the disease, but its recurrence remained a threat. In mid December, a case of avian influenza was discovered in Ca Mau and Bac Lieu provinces in the Mekong Delta. 2 The services sector is divided into three sub-sectors: (a) market-related business services: trade, hotels and restaurants; transportation; posts and tourism; finance and banking; insurance; real estate; consultancy; community and individual services; and household-hired labor services; (b) social and professional services (scientific activities; cultural and sporting activities; health services; education; and associations); and (c) public administration management services (governance; national security and defense). 3 EVN Telecom, a telecommunications company, opened its mobile phone network in March 2006, while the Hanoi Telecommunications Company (HT Mobile) was granted a license to test its CDMA mobile phone network service in October 2006. 4 Pursuant to Chinese regulations, Chinese tourists must use cards and passports at border gates and Chinese citizens are not allowed to use exit and entry licenses to enter countries sharing borders with China. 5 It should be noted that consumption, investment, import, and export in this Section are calculated at constant prices (unless otherwise specified) and in accordance with the System of National Accounts. 6 The GDP growth rates of Vietnam's trading partners were weighted using their trade volumes with Vietnam. References: n Central Institute for Economic Management (CIEM (2005). Vietnam's Economy 2004, Science and Techniques Publishing House, Hanoi. n CIEM (2006). Vietnam's Economy 2005, Political Publishing House, Hanoi. n Government of Vietnam (2006). Report on Socio-Economic Situation in 2006 and Plan for Socio-Economic Development for 2007. Presented at 10th Meeting, National Assembly term XI. n GSO (2006). Statistical Yearbook 2005, Statistical Publishing House, Hanoi. n GSO (2006). Socio-Economic Situation in 2006. n IMF (2006). World Economic Outlook September 2006, September. n Institute of Developing Economies (IDE) (2006). '2007 Economic Outlook for East Asia' mimeograph. n International Financial Statistics Database. Available at: [2 January 2007]. n Japan External Trade Organization (JETRO) (2007). 'Japan's Outward FDI by Country /Region'. [Online]. Available at: [5 January 2007]. n World Bank (2006). East Asia Update 2006, November. n World Bank (2007). 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