Economic growth in the first quarter fell to an unexpectedly low level. What were the key points in Vietnam’s economy during the period?
We forecast that the economy would face many difficulties in the first quarter, with lower GDP growth and higher inflation compared to previous quarters. However, the figures were much lower than we had forecast. This shows that the economy is facing more difficulties. Many businesses expect the situation to deteriorate further as orders keep falling and access to capital remains limited.
Figures from the General Statistics Office for the first quarter also reveal another point. Normally, when inflation is high, consumption for production and services will decline as people cut spending. However, consumption in the opening months of the year increased year-on-year as the economy restarted, especially with the reopening of international tourism.
Theoretically, inflation will rise due to three factors: demand-pull, cost-push, and currencies. But looking at the circumstances in the first quarter, the global economic downturn led to lower global consumption demand, resulting in a decline in exports of Vietnamese products. Although Vietnam is still posting a trade surplus, export value has fallen significantly. This shows that export orders from businesses are down, fewer jobs are being created, and consumption is falling.
Though interest rates continued to ease, credit growth remains slow as enterprises do not need capital for production and trade while business prospects are not optimistic. The possibility of businesses absorbing capital or increasing their capital demand will increase again when domestic and global consumption recover.
What sectors should be focused on to create breakthroughs, as the goal of 6.5 per cent growth is considered a challenge?
The Ministry of Planning and Investment has mapped out two scenarios for economic growth. To reach growth of 6.5 per cent for 2023, growth in the next quarters must be between 6.7 and 7.9 per cent. This will be challenging but is reasonable.
There is still ample space for growth in the remainder of the year via measures to promote demand. Public investment is considered the top priority. The government, ministries, sectors, and localities therefore need to disburse public investment capital to create spillover effects in other economic sectors.
Normally, disbursement in the first quarter of any year is low but gradually improves in the months that follow. In the second quarter, higher disbursement of public capital together with the impact of interest rate reductions and measures on tax reductions and tax payment extensions will help boost aggregate demand and investment from businesses and individuals.
In particular, measures to remove obstacles facing the real estate market have been proposed and implemented and will help tackle bottlenecks in aggregate demand and the economic picture will be brighter.
FDI has fallen since early in the year and many foreign investors have expressed concern over the application of the global minimum corporate income tax in many countries from January 1, 2024. What are the drivers of growth in FDI?
Under the global minimum tax mechanism, multinational corporations earning revenue of €750 million ($870 million) or more will be subject to a minimum tax rate of 15 per cent. Thus, when a company invests in a foreign country but pays corporate income tax of less than 15 per cent in that country, it will have to pay the difference in the country where it is headquartered.
That is a major concern for FDI enterprises, especially multinational corporations investing in Vietnam.
FDI enterprises are subject to an average tax of 12.5 per cent in Vietnam. If the country where they are headquartered applies the mechanism, these enterprises will have to pay an additional 2.5 per cent. If Vietnam increases its tax rate to 15 per cent, we could collect more tax from around 100 foreign enterprises in Vietnam earning global revenue of $870 million or more. Vietnam therefore needs to make an announcement soon so that foreign enterprises can respond.
Other countries in the region joining the global minimum tax mechanism have remained “silent”, however, and are yet make any announcements about increasing or reducing tax rates.