The Impact of the Global Financial Crisis on Vietnam's Economy

While OPEC countries' production has always been at a level that is beneficial to those countries, it has pushed oil prices up rapidly. On June 26, 2008, crude oil prices reached 140.39 USD/barrel - an unprecedented high in history. Because oil is an input for the production of most goods in every economy, its price increase has pushed international prices, especially raw materials, to a peak in the second quarter of 2008. Sky-high fuel prices have directly affected production activities and led to an increase in prices of other items in the CPI basket. And a series of countries are facing the risk of inflation more clearly than ever.

According to statistics from the US Department of Labor, in the first 5 months of 2008, energy prices increased by 16.5%, approximately the 17.4% increase in the whole of 2007. Crude oil prices and other fuel prices increased by 50.7% over the past 12 months. Energy prices in May 2008 alone increased by 4.4%, of which gasoline prices increased by 5.7%, electricity prices increased by 0.9%, heating oil prices increased by 10.4% and gas prices increased by 5.6%. Food prices increased by 5%, of which bread prices increased by 10.5%, milk prices increased by 11%, cooking oil prices increased by 12.8%. Airline ticket prices in May 2008 also increased by 3.2%. In May 2008, overall consumer prices in the US increased by 4.2% over the past 12 months and was the highest increase since January 2008, while core consumer prices increased by 2.3% compared to May 2007.

In India, the Ministry of Commerce also announced that the inflation rate in the country increased to a seven-year high in the last week of May 2008 and remained at 8.25%. The increase in the wholesale price index was mainly due to the increase in the prices of food and canned goods. In 2007, the inflation rate in the country was only 5.09%. All these changes came just a week after the Government decided to increase the price of petrol because the government was forced to cut the price support policy in the context of the increasing global crude oil prices. This price increase further raised concerns about the situation.

inflation. This problem will seriously affect people's lives, especially the poor.

China's inflation has only seen its first month of decline after a year of continuous increases. In May 2008, the country's inflation rate fell to 7.7% year-on-year, down from 8.5% in April but still an uncomfortable level of inflation (Source: vnexpress.net, 2008 ).

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During the same period, many other countries such as South Korea and Russia are also facing many challenges, the most worrying of which is the problem of rising inflation and difficult living conditions for people. Many countries are even facing the risk of entering a hyperinflationary phase, thereby reducing domestic consumption demand and slowing economic growth.

However, the slowdown in global demand has led to a collapse in primary commodity prices. Despite production cuts and geopolitical tensions, oil prices have fallen more than 60% since their peak in July 2008. Food and metal prices have also been revised downward in line with recent developments. Slow real economic activity and low primary commodity prices have dampened inflationary pressures. In advanced economies, headline inflation is forecast to decline from 3.5% in 2008 to a record low of 0.25% in 2009, before rising to 0.75% in 2010. Moreover, a number of advanced economies are expected to experience a period of very slow (or even negative) consumer price growth. In emerging and developing economies, inflation is forecast to decline from 9.5% in 2008 to 5.75% in 2009 and 5% in 2010 (Source: vnexpress.net, 2009 ).

And a new risk is emerging: the recession of the economies of countries and it is spreading globally. The common market of Europe (Q2: 0.1%) and Japan (Q2: -0.7%) have entered recession, and

The US unexpectedly grew by 3.3% in the second quarter due to increased exports, reduced imports and increased defense spending. But this will not continue because the US dollar is appreciating again and there are signs that consumer spending will decrease sharply, especially in August, when unemployment rose to 6.1% and 84 thousand more people lost their jobs (Source: vneconomy.vn, 2008 ).

Leading economists have said the recession will be the deepest in 60 years, and global growth is expected to be negative this year . Two months ago, the International Monetary Fund predicted the world economy would grow a dismal 1.5% this year. But former IMF chief economist Michael Mussa said the global situation had worsened since then, with growth now expected to be negative 0.8% in 2009. He predicted output would fall by 2% in the United States, 5% in Japan and 2.5% in the eurozone.

The above analysis and figures have shown us the severe impacts of the global financial crisis on all aspects of the world economy. A good sign is that at the G20 summit on April 2, the leaders of the world's 20 largest financial countries pledged to spend over

$1 trillion in emergency loans to prevent a credit freeze, at the most dangerous moment for the world economy since the Great Depression. We hope this action will create positive effects in recovering the world economy as well as avoiding an unwanted Great Recession in the future.

CHAPTER II

IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BUSINESS ACTIVITIES

SMALL AND MEDIUM ENTERPRISES IN VIETNAM.

In this chapter II, I will present the impact of the global financial crisis on the operations of small and medium enterprises - a very important part and the largest in the Vietnamese economy. But first, to have an overview, I would like to present the most general points about the impact mechanism as well as the impacts of the global financial crisis on the overall Vietnamese economy.

1. Impact of the global financial crisis on Vietnam's economy

As the thesis mentioned in Chapter I, the global financial crisis broke out in the US and left serious impacts not only in the country with the world's largest economy but also negatively affected many economies of other countries on almost all continents. According to the opinion of leading financial experts, the global financial crisis did not directly affect Vietnam's financial system too much because the Vietnamese financial system has not really integrated with the global financial system. No financial institution in Vietnam has invested in real estate securities as well as stocks of US financial institutions. We have only just opened the capital account but have hardly opened the outflow, so the amount of money Vietnam invests abroad seems to be insignificant and the indirect capital flow into Vietnam is not much, so Vietnam's financial system will not be affected much by this crisis compared to countries with a deep level of financial integration. But its impact on

The impact on our country's economy is not small, and in this section I will present that impact through the following aspects: impact on the overall growth rate of the economy and inflation; impact on trade activities; and impact on the banking system and the Vietnamese stock market.

1.1. Impact of the global financial crisis on the overall economic growth rate and inflation

It can be said that the global financial crisis has caused relatively clear impacts on the economic growth rate and inflation rate. Our country's GDP growth rate has decreased significantly compared to previous years, while inflation in 2008 (the year when the effects of the financial crisis were most evident) reached its highest level in recent years.

1.1.1. Impact on economic growth rate

After a long period of stable and strong economic growth, in 2008 our country's economy began to show weaknesses. Macroeconomic indicators were higher year after year, reports were optimistic about Vietnam's economic prospects, foreign capital continued to flow into our country, making us subjective and unable to foresee the difficulties of the economy after a period of hot growth. It is undeniable that our country has achieved great results in the past, but early optimism has made us respond more slowly to the developments of the economy, as a result, the initial optimistic assessments have turned into concerns about a crisis in 2008. And the reality is that although it was not directly affected by the global financial crisis, it has left clear marks on our country's economy.

Figure 2: GDP growth rate and regions from 2004 to 2008

10.2

10.6

10.38

10.6

7.47

7.69

8.5

8.29

8.68

8.4

8.23

8.48

7.2

6.33

6.23

3.5

3.69

3.4

3.79

2004 2005 2006 2007 2008

GDP

Hot, dry

Industry, Manufacturing and

construction

Translation

Year

(Source: General Statistics Office, 2008)

From Figure 2 above, we can see that the GDP growth rate in 2008 was the lowest in the past 5 years, reaching only 6.23%. The main reason for this slow growth is the slow growth rate of the industrial production and construction sectors as well as the service sector. The sacrifice of the economic growth target in 2008 was for more urgent goals such as controlling inflation, trade deficit, and solving difficulties in the financial and banking systems.

In 2008, the industrial production and construction sector also had the slowest growth rate compared to previous years, reaching only 6.33%. The main reason was that the production of the mining industry decreased significantly compared to the previous year (added value decreased by 3.8%); the processing industry accounted for 63.5% of the total industrial added value, but the added value only increased by 10%, lower than the increase of 12.8% in 2007; especially the added value of the construction industry did not increase this year, while in 2007, this industry increased by 12%. The reason was that the global financial crisis pushed up international prices, directly affecting the input material prices of this sector. Bank interest rates were pushed up to deal with inflation, which also caused

Enterprises face many difficulties in mobilizing capital for production, business and investment. In addition, the competitive pressure of imported goods continues to increase after import tariffs on electronic goods and processed foods are reduced according to the roadmap to join the WTO (Source: General Statistics Office, 2009 ).

The industries most affected by the crisis include the chemical, fertilizer and tobacco industries. Due to the dependence of the chemical and fertilizer industries on imported raw materials, the production of superphosphate and NPK fertilizers was strongly affected by the high input prices in the first months of the year (urea prices increased 3.3 times, potassium increased 4 times, DAP fluctuated about 4.75 times, especially sulfur increased 12 times). In the fourth quarter, raw material prices gradually decreased but consumption demand also decreased. Therefore, the output of all types of phosphate fertilizers only reached about 1,530 thousand tons, an increase of 7.5% compared to 2007, while the remaining products all decreased, such as urea fertilizer estimated at 915.5 thousand tons, down 3.6%; NPK fertilizer estimated at 1,521 thousand tons, only 82.8% of 2007 (Source: Ministry of Industry and Trade, 2009 ).

The tobacco industry in 2008 also suffered a similar fate. The situation of purchasing raw materials in the world and in the country encountered many difficulties due to the reduction in the area of raw material crops, widespread viral diseases on plants, causing the price of raw materials to increase (domestic raw materials increased by 80%, imported raw materials increased by 50%). That caused the output of cigarettes in the country and in the world to decrease sharply. In the country, manufacturing enterprises were also under pressure from the continued smuggling of cigarettes and the increase in special consumption tax. Therefore, the output of cigarettes in 2008 only grew slightly compared to 2007, estimated at 4,435 million packs, an increase of 3.2% compared to 2007 (Source: Ministry of Industry and Trade, 2009 ).

Also affected by the global financial crisis, the service sector's performance in 2008 was more stable than that of the industrial sector.

industry and construction, but the added value only reached 7.2%, lower than the 8.7% increase in 2007. In particular, the agriculture, forestry and fishery sector, although facing general economic difficulties, still had a growth rate of 3.79% in 2008, higher than the 3.4% in 2007. The main reason was that agricultural production had a good harvest, the rice output for the whole year increased by 2.7 million tons compared to 2007 and was the highest increase in the past 11 years (Source: General Statistics Office, 2009 ).

1.1.2. Impact on inflation rate

2008 was one of the years when the consumer price index (CPI) of our country fluctuated the most. As the thesis explained in Chapter I, this fluctuation was the result of fluctuations in world prices, especially of important commodities such as oil and input materials for production. The CPI continuously increased in the first half of the year and then turned negative in the last months of the year, creating two opposing concerns: inflation and recession.

Figure 3: CPI index over months in 3 years 2006, 2007, 2008

Increase (%)

(unit: %)

3.91

3.56

2.99

2.38

2.2

2.14

1.56

1.13

0.18