More and more information flows about a promising fiscal relief package in the “Economic Recovery and Development” program have been on mainstream media recently.
Although it has to be examined and pass through complicated legislative progress, it is worth speculating that whether the government is able and willing to launch such a large support program and its possible impact on the economic growth for the medium-term.
First, is it possible to launch that large fiscal support package? From Kis Vietnam’s view, it is absolutely a yes. Vietnam’s fiscal health has been improved significantly over years with robust fiscal revenue and well-controlled state expenditure. The state-budget balance over GDP ratio was healthy and maintained above the state-deficit ceiling level, except for the year 2020 due to several support measures of taxes & fees deferral. Not only that, but the government also has a large room to borrow with the current government debt-to-GDP ratio being estimated at only 43.7%, equivalent to a fiscal space of about 16.3% GDP or about VND1,380,000bn to reach the government debt ceiling of 60% GDP.
Besides, the global and domestic monetary conditions are also supportive of financing the fiscal deficit at super-low interesting rates. For the present, 5-year and 10-year government borrowing costs (G-bond yields) were nearly at their record lows, below 0.9% and 2.2% as of October 2021. On the other hand, inflation conditions remain extremely subdued, with 9M21 average inflation of just 1.82%, one of the lowest inflation levels on record. This means that the support package, if effective, would be financed at record-low costs and would create limit ed inflation risk to the macro environment.
Second, is it necessary for the economic recovery for the medium-term? It is also a yes in Kis Vietnam’s opinion. For now, we are talking about the economic recovery to the pre-pandemic levels, but from that base whether the economy is able to reach sustainable growth of 6.5% – 7% for the medium term or not is another question. “What we think is that the demand side, including the private consumption and investment, needs a sufficient boost from the government. If not, the consumer behavior towards saving and risk-avoiding investment sentiment would be a threat to the recovery path of the economy”, Kis Vietnam stressed.
Third, what benefits should be expected from the “Economic Recovery and Development” plan? Kis Vietnam said the first part of the support program would be to ensure social security benefits for the affected population, especially the low-income class at the bottom line. Health insurance benefits, vocational training support for unemployed workers, and preferential credit policies for the low-income class were extremely necessary in order to reconnect the labor market to the supply side. Furthermore, net transfers to those in the low-income group is also boosting consumption demand from the private economy.
The second part is to provide various types of support to both the supply and demand sides. Reduction and extension of various tax obligations would ease liquidity pressure for individuals, companies, and the overall economic cash flow in the reopening phase. It also helps ease the overall price level for goods and services, boosting demand in the early recovery stage. Another key point in this subprogram is the support of capital injection and subsidized interest-rate loans into affected companies. These supports are intended to boost investment demand and create a new growth engine for the medium term.
Last but not least, public investment expenditure would be the most important pillar of the program in Kis Vietnam’s view. This estimated VND220,000bn infrastructure and development investment package (of about 3.5% GDP) is expected to bolster aggregate demand, create more jobs to resolve unemployment problems, and promote investment demand from the private sector through its spillover effect.
The economy has been through the worst contraction in the third quarter under massive pressure from the unprecedented health crisis and also an unprecedented response from the government and society. However, the people, the government, and also the economy is quickly learning priceless lessons and taking strong and effective actions to switch to living with the coronavirus. Early macroeconomic data in the first two months of the reopening phase shows promising signs that the economy has been fast adopting new normal, broken supply chain issues have been resolved, and consumer demand has been rebounding at a marked pace.
In order to accelerate the economic recovery for a longer period and preserve economic growth for the medium and long term, the economy is in need of a booster shot, a sufficiently large fiscal relief package. From Kis Vietnam’s view, this fiscal support package, if successfully passed, would be a key to unlocking the full potential of the economic recovery.