Vietnam’s government fiscal stimulus is having a positive impact on the economy, especially in light of the fact that 2009 is considered a year of great challenges, the Standard Chartered Bank’s analyst Tai Hui has said.

Positive impacts

The impacts can be seen clearly as a number of sectors in the economy are showing signs of outperforming expectations, such as construction, transportation and communications, financial intermediation, and retail and wholesale trade.

“Several structural factors will drive the country’s development, some of which will remain in place even at a time of weak growth in the advanced economies”, head of the Southeast Asia Research Department Tai Hui said in a report released early this month.

Furthermore, the country’s trade deficit in the first six months of the year stood modestly at 2.1 billion USD against 14.2 billion USD recorded last year in the same period, he said and attributed this to the smooth operation of Vietnam’s first oil refinery at Dung Quat Bay, helping to reduce imports of refined petroleum products - a significant contributor to last year’s trade deficit.

The analyst kept his opinions unchanged on the medium-term outlook for Vietnam although there are still great challenges for the domestic and regional economy ahead.

Challenges ahead

Tai Hui projected that the government is expected to run a sizeable deficit, approaching 10 percent of the GDP in 2009, as a result of fiscal measures to drive the economy, including an extension of the personal income tax payment deadline, interest subsidies for bank lending, and government spending on infrastructure projects.

He also affirmed that inflows of overseas remittances and foreign direct investment (FDI) will continue to slow on the back of weaker global growth till by the end of the year.

A crucial hurdle Vietnam faces in the coming years, highlighted in the report by Standard Chartered, was infrastructure which, according to Tai Hui, is unlikely to be sufficient to accommodate rapid growth or supply chain management.

Vietnam’s economy grew 3.9 percent in the first half of the year and according to Standard Chartered’s calculations, domestic demand is gaining momentum, while export performance remains lacklustre. Exports contracted by 10 percent year-on-year in the period and the weakening of industrial production continued, but retail sales are still a strong point in the economy./.