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Elephant in the room

Released at: 03:29, 08/10/2014

Elephant in the room

Vietnam's economic recovery has been promising in the first six months of the year but the annual result will be very much shaped by the territorial dispute with China.

by Hai Bang

As the end of the first half of the year wraps up there is real evidence that Vietnam’s economy is on the up. Prime Minister Nguyen Tan Dung told the mid-term Vietnam Business Forum 2014 last month that the overall economic situation in the first half and for the year as a whole is stable and will see steady progress. “Inflation remains under control and the five-month figures indicate that annual growth may be 5.8 per cent,” he said, adding that Vietnam’s plans to boost economic growth to exceed the average of 6 per cent in 2015.

Mixed picture

Vietnam is currently posting a major surplus in its balance of payments, which is projected to exceed $8 billion this year. The country’s foreign reserves, meanwhile, are at record levels of over $35 billion, highlighting the stability of the Vietnam dong and the strengthened profile of Vietnam in the international arena. Foreign investors have purchased a net $188 million of Vietnamese stocks so far this year, with net buying now set to be recorded for nine straight years. The country also granted 291 new trading accounts to foreigners in the first four months of the year, bringing the total to 17,022, according to data from Vietnam Securities Depository, which offers trading support services. These indicators, along with the message from the PM, to some extent bolster the belief that economic recovery is in place and that Vietnam is still a good bet for foreign investors.

Official figures released early last month by the Ministry of Industry and Trade also indicated stronger signs of economic recovery in the first five months of 2014, with an increasing index of industrial production (IIP) and higher export revenue. The IIP rose 5.6 per cent year-on-year in the January to May period; higher than in the same period of last year. Meanwhile, Vietnam’s export revenue hit $58.5 billion, an increase of 15.4 per cent, while it spent $56.9 billion on imports, up 9.6 per cent year-on-year. Vietnam therefore enjoyed a trade surplus of $1.65 billion, with local enterprises seeing export revenue increase 11.9 per cent year-on-year to reach $19.05 billion, or 32.6 per cent of the total.

But there is certainly room for improvement. The root of the recovery, and the basic productive capacity of the economy, remains fragile and enterprises are struggling to find markets. A recent survey carried out by the General Statistics Office revealed that 34.8 per cent of respondent enterprises saw higher demand in the local market this year compared to 2013. However, 50.5 per cent said that they hadn’t taken out loans for their business activities. On the other hand, investment and trade by foreign-invested enterprises (FIEs) have become more influential on the economy, demanding greater reforms to enhance the business environment towards transparency and equality between economic sectors.

In the first half of the year attention, however, was almost solely focused on the tensions emerging between Vietnam and China in the East Sea. With the country set to challenge its neighbour’s territorial claims in an international court, there are certain concerns facing local authorities. While the content of trade deals and the question of how far China is willing to compromise on certain matters is important matters of debate, what is clear is that Vietnam heavily depends on China in terms of net imports of raw materials and fuel, and construction equipment, machinery and construction services at many energy and infrastructure projects. This is why deteriorating relations between the two countries may have an adverse impact on Vietnam’s economy.

While the situation in East Sea is anything but favourable for Vietnam, economic drivers to boost growth are thankfully still in place, as pointed out by Mr Le Anh Tuan, Director and Head of Research at Dragon Capital. “The first one is the Free Trade Agreement (FTA) with the EU, as Europe right now is the biggest trading partner with Vietnam, and Vietnam has a trade surplus of about $14.5 billion with Europe, or 8 per cent of GDP,” he said. “If the FTA is signed, we expect Vietnam to relieve about 35 per cent of export growth to Europe over the next few years.” There is also the Trans-Pacific Partnership (TPP), he added, and if the agreement is completed this year or next year Vietnam expects it to add 1 per cent annually to economic growth.

The second big thing, Mr Tuan went on, is the reform of the State-owned enterprise (SOE) sector by means of equitisation. Out of 1,000 SOEs, 400 may be equitised over the next two or three years, which will provide a good number of companies for the stock market. Last but not least, the banking sector is undergoing reform, with 15 to 20 banks expected to be operating by 2017 against 743 in 2011.

Glass half full

At the start of the year economists were cautious. The economy may rebound and post growth of 5.5-5.8 per cent, they believed; a touch higher than the 5.42 per cent recorded last year. While such a rebound is not just wishful thinking, economic growth for 2014 is likely be shaped by, firstly and most importantly, how Vietnam settles its dispute with China, with policies initiatives over the next six months also playing a major role.

Despite there being signs that the economy is starting to bounce back, the Vietnam Center for Economic and Policy Research (VEPR) doesn’t believe the rebound will be strong enough to completely offset the negative impacts from the tensions with China. For this reason, VEPR expects economic growth to slow to 4.15 per cent at worst and 4.88 per cent at best. The report also estimates inflation to come down to between 4.76 per cent and 5.51 per cent this year. “Vietnam should have short and medium-term solutions to deal with the existing complex circumstances,” Mr Nguyen Duc Thanh, Director of VEPR, said as he released the Center’s report. The issues for Vietnam in the short and medium-terms include the choice of giving priority to policies for recovering economic growth and enterprises or to suitable monetary policies and macro-economic stabilisation.

With a more optimistic view, in a report on Vietnam’s economy released in May Ms Trinh Nguyen, Asia Economist at HSBC, believed that growth would increase slightly to 5.6 per cent this year, with the manufacturing and service sectors to be the key instruments in sustaining growth in the near term, considering that construction and agriculture sectors are lagging behind. “The manufacturing sector is doing the heavy lifting in Vietnam and its improvement will help bolster beleaguered domestic demand,” she wrote. “The strong bounce in output, new orders, new export orders and employment are much needed to counter balance the domestic slump.” She also expects that the country’s exports will have another stellar year, in contrast to the rest of the region, due to increased investment in manufacturing in the country and trade negotiations to expand market access.

On a similar note, analysts at E&Y said that consumer goods manufacturers should look positively at Vietnam. It predicts any upturn in economic growth to be slow in 2014 but believes that growth will pick up and reach the 7 per cent target by 2016 as the government reduces the fiscal deficit and lowers inflation. “Despite recent GDP growth slowing, Vietnam remains a compelling market of almost 90 million potential consumers,” said Mr Andrew Cosgrove, Consumer Products Lead Analyst at E&Y. “Similar to other emerging market economies, as the middle class grows and the country becomes more westernised, consumer demand for convenience and easy-meal solutions will present great opportunities for packaged food companies.”

Overall, the perception among foreign investors is that the recent dispute with China won’t overly affect Vietnam’s long-term prospects. A EuroCham Business Climate Index (BCI) survey conducted in May showed that business confidence and outlook among European businesses in Vietnam have continued to increase quarter-on-quarter. “It is expected that the continued positive development of the BCI is linked not only to the ongoing trade negotiations, such as the EU-Vietnam FTA, but also the creation of the ASEAN Economic Community in 2015,” said Ms Nicola Connolly, EuroCham Chairwoman. “Our members have a strong belief in the Vietnamese market and are very hopeful about a strong, implementable FTA.”

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