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P R E S E N T A T I O N
Case Study
Vietnam’s economic
slowdown in 2009
Applying the IS-LM model to analyze Vietnam's 2009 economic slowdown, identify its
causes, and evaluate the government's macroeconomic policy responses.
Explain the causes
of the slowdown
Initially, the economy is at equilibrium E1
r = r₁ , Y = Y₁
Event: The global crisis transmitted negative shock to the Vietnam
economy in late 2008. Vietnam's economy experienced a slowdown in 2009
⭢ Investment decrease
Consumer sentiment has been severely affected ⭢ consumption decrease
AE⭡ = C⭡ + I⭡ + G
⭢ Aggregate expenditure decrease, the IS curve shifts to the left
The economy is at new equilibrium E2
r = r₂ ; Y = Y₂
r₂ < r₁: real interest rate decrease
Y₂ < Y₁: total output decrease
Conclusion: Vietnam's economy experienced a slowdown in 2009 leads to
an decrease in the total output and decrease in real interest rate.
Causes of the slowdown
01
IMPACT OF THE GLOBAL
03
FINANCIAL CRISIS
As a small, highly open economy
heavily reliant on foreign direct
investment (FDI) and exports,
Vietnam could not avoid the
negative shocks that spilled over by
the end of 2008.
Causes of the slowdown
02
NOTICEABLE SLOWDOWN
IN GDP GROWTH
Vietnam's GDP growth dropped to
6.28% in 2008, down from over 8% in
2007. In early 2009, Q1 growth fell to
3.1%-3.14%, significantly lower than
the 7.5% average in Q1 2008,
resulting in an overall GDP growth
of just 3.9% in the first half of 2009.
Vietnam's annual GDP growth rate from 1990 to 2009
Causes of the slowdown
03 04
DECLINE IN INVESTMENT LIMITED DOMESTIC
AND GLOBAL DEMAND DEMAND
The crisis led to a reduction in Domestic market demand was also
global investment, lower constrained, as purchasing power
commodity prices, and had not yet recovered adequately.
weakened international market
demand.
Causes of the slowdown
05
DECREASE IN FDI INFLOWS
Vietnam faced a notable decline in
foreign direct investment (FDI)
inflows in 2009, attributed to limited
capital and tighter global credit
markets. In the first eight months,
newly registered capital was around
US$10.4 billion, significantly down
from 2008, with actual disbursed
capital reaching only US$6.5 billion
by August, also lower than the
previous year.
Causes of the slowdown
06
NEGATIVE IMPACTS ON PRODUCTION AND SENTIMENT
Industrial production growth slowed significantly. In Q4 2008, industrial output grew by only 15.6%, compared to 17.4%
in 2007, and fell to just 2.9% in Q1 2009. Consumer sentiment was affected, and the stock market index continued to
decline. Many enterprises cut back on production due to rising production costs and difficulties accessing bank
credit.
b. Identify fiscal and
monetary policies in the
structure of government
stimulus packages.
1.Monetary policy
The government aggressively loosens its policy by cutting the base
rate from 14% per year to 7% per year within a few months.
The ceiling lending interest rate was lowered (1.5 times base rate):
from 21% to 10,5% for productive activities.
The lending interest rate for credit card and consumption are
negotiable and fluctuating between 12% and 15%.
1.Monetary policy
USE IS-LM MODEL
2. Fiscal policy
The government stimulated consumption and investment
through some components:
TAX CUTS AND DEFERRALS:
30% CUT IN CORPORATE INCOME TAX FOR SMALL AND MEDIUM-
SIZED ENTERPRISES AND LARGE TEXTILE
EXEMPTION OF ALL PERSONAL INCOME FROM THE PERSONAL
INCOME TAX IN THE FIRST HALF OF 2009 AND OF CERTAIN TYPES
IN THE SECOND HALF
50% REDUCTION IN THE VALUE-ADDED TAX
INTEREST RATE SUBSIDIES:
4% ON SHORT-TERM WORKING CAPITAL SIGNED AND
DISBURSED FROM FEBRUARY 2009 TO DECEMBER 2009
4% ON MEDIUM- AND LONG-TERM INVESTMENT LOANS
SIGNED AND DISBURSED FROM APRIL 2009 TO DECEMBER
2011
COMMERCIAL BANKS AND FINANCE COMPANIES EXTENDED
ABOUT D347 TRILLION IN SUBSIDIZED IN 2009.
2. Fiscal policy
The government stimulated consumption and investment
through some components:
SOCIAL ASSISTANCE EXPENDITURE: THE PROGRAM PROVIDED
ASSISTANCE TO POOR FAMILIES AND COMMUNITY GROUPS
VULNERABLE TO FALLING INTO POVERTY AS A RESULT OF THE
ECONOMIC SLOWDOWN.
WAGE SUBSIDIES TO DISTRESSED FIRMS, DISASTER MITIGATION
PROGRAMS, ONE-OFF CASH PAYMENT TO POOR FAMILIES (2.3
MILLION HOUSEHOLDS)
EXTENDED LOANS FROM THE NATIONAL EMPLOYMENT FUND TO
LAID-OFF WORKERS FOR TRAINING AND SELF-EMPLOYMENT
SPECIAL ATTENTION WAS GIVEN TO THE ASSISTANCE OF THE 62
POOREST DISTRICTS IN VIET NAM. WHERE POVERTY RATES ARE IN
THE VICINITY OF 50% (NEARLY 4 TIMES THE NATIONAL AVERAGE).
2. Fiscal policy
The government stimulated consumption and investment
through some components:
INFRASTRUCTURE INVESTMENT
THE LARGEST SHARE OF THE DISCRETIONARY FISCAL STIMULUS
PROGRAM WAS DEVOTED TO INCREASING INFRASTRUCTURE
SPENDING (AROUND D81.7 TRILLION, OR 56% OF THE TOTAL
PROGRAM).
THE INVESTMENT EFFORT REQUIRED ADVANCING TO 2009 THE
IMPLEMENTATION OF PRIORITY PROJECTS UNDER THE 2010-2011
PUBLIC INVESTMENT PROGRAM, VALUED AT ABOUT D35.5 TRILLION.
ABOUT 80% OF THE EXPENDITURE BROUGHT FORWARD FROM 2010-
2011 PROJECTS WAS DISBURSED IN 2009.
2. Fiscal policy
USE IS-LM MODEL
COMMON VS. PREFERRED
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C. Assess the
impact of the
stimulus package
on the output of the
economy.
Firstly, the monetary Policy
USE IS-LM MODEL
Firstly, the monetary Policy
The impact of Monetary Policy
Cutting the base rate: From 14% per year to 7% per year within a few months
Ceiling lending interest rate: From 21% to 10.5% for productive activities
Lending interest rates for credit card and consumption: Are negotiable and fluctuating
between 12% and 5%
=>expansionary monetary policy reduces the cost of borrowing which is the interest rate.
Therefore, consumers tend to spend more while businesses are encouraged to make larger
capital investment. This policy also increases inflation levels. The devaluation of local currency is
beneficial to the economy’s export ability because exports become cheaper and more attractive
to foreign countries.
Secondly, the fiscal Policy
USE IS-LM MODEL
An increase in disposable income means that
people have more money to spend, which boosts
The impact of
demand, production and economic growth.
fiscal Policy
Taxes cut and deferrals:
the overall cost of these measures was estimated
at D28 trillion. But current estimates from the
Ministry of Finance place the cost at D41.3 trillion.
Social assistance expenditure:
The program provided assistance to poor families
and community groups vulnerable to falling into
poverty as a result of the economic slowdown.
Infrastructure investment:
The largest share of the discretionary fiscal
The impact of
stimulus program was devoted to increasing
infrastructure spending (around D81.7 trillion, or
fiscal Policy
65% of the total program)
The growth rate of GDP:
In the first quarter of 2009 was only 3,14% but in
the second, third and fourth quarter of 2009, it
increased gradually to 4.46%, 6.04% and 6.9%
respectively.
=>In conclusion, IT IS INFERABLE THAT Using stimulus packages including
monetary or fiscal policy will effectively increase the output of the
economy .
These stimulus packages help to maintain the economic growth at an appropriate rate.
The growth rate of GDP in the first quarter of 2009 was only 3.14%, but in the second, third and fourth
quarters of 2009, it increased gradually to 4.46%, 6.04% and 6.9% respectively. For the whole year of
2009, GDP in Vietnam increased by 5.32% making it to become one of the countries with the highest
GDP growth rate in the region.
In terms of macro effects, this stimulus package made inflation increase. The devaluation of local
currency is beneficial to the economy’s export ability because exports become cheaper and more
attractive to foreign countries.
=>In conclusion, IT IS INFERABLE THAT Using stimulus packages including
monetary or fiscal policy will effectively increase the output of the
economy .
Additionally, domestic consumption and demand shows signs of recovery when total
retail sales of consumer goods and services have increased by 21.9%.
The 2008-2009 stimulus package mainly focused on business development and export, stimulating
consumer investment, ensuring social security with a scale of 8 billion USD, equivalent to 5.6% of GDP
at that time to stimulate the economy.
This stimulus package helped the country overcome the crisis, the macro economy was basically
stabilized and became one of the few countries with positive growth.
d. What are the limitations
and difficulties that may
occur when implementing
the government stimulus
package?
1. Monetary Policy
Initially, the economy is at equilibrium E1
r=r1 ; Y=Y1
Event: The government conduct expansionary
monetary policy→ Money supply increases
→ The LM curve shift to the right
The economy reaches the new equilibrium at E2
r=r2, Y=Y2
r2<r1: Real interest rate decrease
Y2>Y1: Total output increase
Conclusion: The government expansionary monetary
policy leads to a lower real interest rate
2. Fiscal Policy
Initially, the economy is at equilibrium E1
r=r1, Y=Y1
Event: The government expansionary Fiscal Policy.
Government spending increases, Tax decreases → Disposable
income increase → Consumption increases
AE↑ = C↑ + I + G ↑
Aggregate expenditure increase→ the IS curve shift to the right
The economy reaches the new equilibrium at E2
r=r2, Y=Y2
r2>r1: Real interest rate increases
Y2>Y1: Total output increases
Conclusion: The government expansionary Fiscal Policy leads to
the higher real interest rate
The limitations and difficulties
Risk of causing a deeper recession:
Higher real interest rate from fiscal
policies against the monetary policy
(give interest rate subsidies => r
decrease), The macroeconomic policies
are not stable cause a risk of deeper
recession.
IInflation:
+ Money supply and credit expansion, large
The limitations stimulus
inflation.
packages have put pressure on
+ Interest-rate subsidy, low official lending rates
and difficulties resulted in a surge in domestic credit expansion
and undermined the progress in taming
inflation.
Exchange rate:
+ Due to increasing current account deficit and capital outflows, the domestic currency lost
value significantly.
+ Rapid credit growth, expansionary fiscal policy, led to increase in imports and a widening trade
deficit.
+ A larger demand for foreign exchange by importers, combined with market expectations that
the Dong would be devalued, led to a shortage of foreign exchange.
Increased Public Debt:
+ Increasing public spending to stimulate the
economy can lead to increased public debt. This
The limitations
can put pressure on the national budget in the
future when paying interest and principal on the
debt.
and difficulties + Difficulty: Managing and controlling public
debt to ensure it does not exceed safe levels is a
major challenge. Additionally, facing pressure
from international financial institutions and
investors adds to the difficulty.
Currency Depreciation:
+ Expansionary monetary policy, especially injecting money into the economy, can lead to the
depreciation of the national currency. This can cause imported inflation, increasing the prices of
imported goods and services.
+ Difficulty: Controlling currency depreciation and its impact on inflation and trade balance is a
complex task.
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Propose recommendations to
implement stimulus package effectively
Government should use the expansionary
policy then calculate the size of the
expansionary fiscal policy.
Initially, the economy is at equilibrium E1
r = r₁ , Y = Y₁
Event: When the government conducted expansionary
monetary,money supply increased=> The LM curve shift to the
right
The economy reached a new equilibrium E2 where:
r = r₂ ; Y = Y₂
r₂<r₁: real interest rate decreases
Y₂>Y₁: total output increases
Conclusion: The government conducting expansionary
monetary policy leads to an increase in the total output, a
decrease in real interest rate.
Government should use the expansionary
policy then calculate the size of the
expansionary fiscal policy.
Initially, the economy is at equilibrium E₂ where:
r=r₂; Y=Y₂
Event: The government conducted expansionary fiscal policy =>
Government spending increases, tax decrease => Disposable
income increases => Consumption increase
AE↑ = C↑ + I + G↑
Aggregate expenditure increases. The IS curve shifts to the right.
The economy reaches a new equilibrium E₃ where:
r=r₃; Y=Y₃
r₃>r₂: real interest rate increases
Y₃>Y₂: total output increases
Conclusion: The government conducted expansionary fiscal
policy leads to a higher total output and real interest rate.
Calculating the size of the Home About Contact
expansionary fiscal policy
But r₃ can be higher or lower than r₁ and Y₃ can be higher and
lower than Y₁ depending on how much the IS curve shifts.
However, the government should calculate the size of
expansionary fiscal policy after using the expansionary monetary
policy to control the real interest rate. The government did first
use monetary policy to reduce interest rates and stabilize
liquidity. Then, fiscal stimulus was deployed — its size had to be
calculated considering how much monetary policy had already
eased conditions, to avoid:
Overheating the economy.
Triggering inflation (which became a concern by late 2009–
2010).
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Other recommendations
DEVELOP A COMPREHENSIVE AND SCALABLE STIMULUS PRIORITIZE TARGETED AND SECTOR-SPECIFIC SUPPORT
FRAMEWORK Allocate resources to high-impact sectors with strong recovery
Design a unified national recovery plan with a clear structure potential, such as:
and objectives. Manufacturing
Ensure the scale is large enough to create real economic Agriculture and food supply chains
momentum, but remains within the government’s fiscal Tourism and services
capacity to avoid future debt distress. Digital economy and green technology
The stimulus must be aligned with the economy’s absorption Avoid spreading support too thin across sectors — focus on
capacity to prevent inflation, asset bubbles, or inefficiency. where returns and employment effects are highest.
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Other recommendations
STRENGTHEN LIQUIDITY AND FINANCIAL STABILITY FOR ENHANCE RISK MANAGEMENT AND OVERSIGHT MECHANISMS
ENTERPRISES
Provide cash flow relief for viable businesses through: Establish a centralized monitoring and evaluation system to
Interest rate subsidies track the effectiveness and transparency of implementation.
Deferred tax obligations Involve independent auditing bodies and civil society
Loan guarantees and credit access for SMEs oversight to prevent misuse of funds.
Engage international partners (e.g. ADB, IMF, World Bank) to Introduce adaptive policy tools that allow for real-time
mobilize external resources, not just for funding but also for adjustment based on data and feedback.
technical and policy support.
Discussion Home About Contact
Vietnam policy is against active policy.
Inside lag: Delay between economic shock and response (end
of 2008 to January 2009).
Industrial production slowed to 15.6% in late 2008, down from
17.4% in 2007.
GDP growth in 2008 was only 6.28%, compared to over 8% in
2007.
In January 2009, the government implemented fiscal policies
to stimulate consumption and investment.
Outside lag: Time for policy to impact the economy is over a
year.
GDP growth gradually increased in 2009: 4.46%, 6.04%, and
6.9% in the second, third, and fourth quarters, respectively.
Overall GDP growth for 2009 was 5.32%, making Vietnam one of the
region's highest growth countries.
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