An expansionary fiscal policy needed for economic recovery

Ho Chi Minh City's 3rd belts

>> Fiscal policy forecast to be key driver for Vietnam's growth in 2023

Vietnam's government has increased public investment to sustain economic development in the face of low private investment and FDI inflows from the beginning of 2023.

According to GSO, the implemented state capital (public investment) increased 17.5% year on year to VND 34.6 trillion in March 2023. The implemented state capital increased 18.1% year on year to VND 91.5 trillion in 1Q23, outpacing the 12.3% year on year growth rate in the same time previous year.  

However, implemented public investment capital in 1Q23 only amounted to approximately 13% of the total year 2023 plan. As a result, the government must continue to encourage public investment in the future months in order to meet the target of disbursing more than VND700,000bn in public investment capital by 2023.

According to Mr. Dinh Quang Hinh, senior analyst, there will be various supportive elements this year to further accelerate public investment projects.

First, in recent years, Vietnam has effectively reduced its national debt ratio. Vietnam's public debt has declined quickly over the years, from 51% at the end of 2016 to 40% by the end of 2022 (IMF estimate), which is substantially lower than Vietnam's public debt cap of 60% of GDP. Low public debt allows for more leeway in fiscal policy to aid economic recovery.

Second, since the beginning of 2023, the rates on Vietnam's government bonds have fallen dramatically. In the primary market as of 12 April 2023, 10-year and 15-year G-bond rates had fallen 137 and 140 basis points year to date, to 3.3% and 3.4%, respectively. On the secondary market, Vietnam's 5-year and 10-year G-bond yields fell 192 and 164 basis points year on year, to 3.1% and 3.4%, respectively.

Third, domestic inflation has slowed in recent months. In March 2023, headline inflation in Vietnam fell to 3.4% year on year from 4.3% the previous month. As inflationary pressures subside, the government may reconsider loosening fiscal policy further to aid economic recovery.  

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Fourth, important transportation infrastructure projects must be launched by June 30. Prime Minister Pham Minh Chinh has instructed the Transport Ministry to finish preparations for the commencement of construction of three highways: Chau Doc-Can Tho-Soc Trang, Bien Hoa-Vung Tau, Khanh Hoa-Buon Ma Thuat, and two ring roads, comprising Hanoi's 4th and Ho Chi Minh City's 3rd belts. These projects must begin before June 30, 2023.  

As a consequence, VNDirect maintained its projection of a 25% rise in implemented state capital compared to the actual implementation in 2022. Furthermore, it expected the government to implement additional fiscal stimulus packages to support economic growth, particularly tax cuts (VAT and corporate income tax). The tax-cut program is intended to boost domestic demand and consumption.

The administration is currently considering redeploying the VAT cut from 10% to 8% for some consumer products, which is comparable to the fiscal strategy established in 2022. If authorized, this strategy will be implemented on July 1, 2023, stimulating domestic demand.