Ms. Sharon Toh, Head of ASEAN for SWIFT in Asia Pacific, explains the importance of robust financial infrastructure for Vietnam.
Opportunities for Vietnam in ASEAN/AEC
A rising tide lifts all boats and Vietnam is riding the wave of ASEAN growth. McKinsey reports that the region of 600 million has a combined economy that ranks seventh in the world and is projected to rise to fourth by 2050.
By the end of 2015 it is expected that the ASEAN Economic Community (AEC) will facilitate the regional integration of markets, labor and production, bringing in additional foreign investment, technology, and capital for its member countries, Vietnam among them.
From an economic standpoint, Vietnam has significant potential for growth. Already the sixth-largest economy in ASEAN, it is well-positioned to capitalize on the economic opportunities offered by integration into the AEC. A large, rapidly urbanizing population of 90 million, with rising incomes, 6 per cent annual GDP growth, and high digital penetration compared to its neighbors puts it on track for rapid economic growth.
Indeed, just seven years after joining the WTO Vietnam is one of the top three sources of imports for the US. It has lowered corporate income taxes, built development zones, and complied with AEC tariff requirements in order to better woo light manufacturing away from the south of China, and has positioned itself to capitalize on the AEC and free trade agreements (FTAs).
Safe, reliable, robust and secure financial market infrastructure is key for future growth. Despite this, challenges for the economy remain fundamentally embedded in Vietnam’s financial infrastructure. A case in point is the preference of many for cash and cash holdings, A cash-based system will not be sustainable, especially for businesses, as the number of financial transactions in Vietnam is set to grow and will drive demand for more efficient scalable and highly-reliable payment systems.
The level of spending and financial transactions is set to rise exponentially, with growth in the manufacturing economy and growth in the middle class. Spurred on by a rising population, higher incomes, and urbanization, the middle class will further drive demand for goods and services. Without strong infrastructure for payments and settlement, trade and foreign direct investment may be stifled.
The pace of business and growth will slow significantly without efficient financial market infrastructure to handle rapid, secure financial transactions. With Vietnamese businesses at times relying on staff to physically count cash by hand, the lack a reliable system for payments and infrastructure could seriously impede and hinder economic growth. However, the development of modern payments systems will rely on common standards and robust financial infrastructure shared across Vietnamese banks.
Leading the charge for economic growth
A strong financial ecosystem will be at the core of Vietnam’s economic transformation. The State Bank of Vietnam has succeeded in many aspects, controlling inflation, stabilizing the macro-economy, and implementing monetary policies to control bad debts in local banks as well as the consolidation of the fragmented banking industry.
An important next step is to improve operating efficiency and governance. Furthermore, the central bank must continue to provide leadership in the adoption of common international financial messaging standards and the improvement of infrastructure, in order to reduce costs and attract foreign investors.
Strong payment and credit system infrastructure helps reduce operational costs for banks. This has a cascading effect, improving the speed of transactions while building up capacity for high volumes of transactions. Transfers clearing more quickly, at all hours of the day rather than taking two to three days to clear, will help accelerate the pace and growth of businesses while bringing in further investment. Cross-border settlements and infrastructure will also be necessary to capture the opportunities offered by AEC and FTAs to Vietnam’s manufacturing-export driven economy.
Building a strong financial foundation to make conducting business easier secures vital foreign investment for Vietnam. Developing the national infrastructure, in terms of technology as well as educational capacity, will be key to boosting domestic productivity and competitiveness against regional competitors in the AEC, and to do so requires a strong foundation for the financial system, in the form of robust market infrastructure.
Vietnam has the right mix of elements for success and strong potential to leapfrog its neighbors and competitors to transform its economy. Key to its sustained future growth is safe, reliable, robust financial infrastructure to support the foundations of business development.
A single, unified standard for market infrastructure ensures consistency across banks in terms of security, networking availability, and cross-border payments, making it quick and easy to conduct business.
SWIFT will continue to serve Vietnam in establishing market infrastructure (for securities and payments) and ensuring regulatory compliance to join the global economy. As a cooperative of the financial industry, we have a goal of bringing the global financial services community together to define standards, shape market practice, and debate issues of mutual interest. As part of this role, SWIFT organizes Sibos, an annual conference, exhibition and networking event for the global financial industry.
At Sibos we believe that attendees from Vietnam will find the forums on market infrastructure, payments and standards of great relevance in providing insight to guide the development of the financial infrastructure necessary to support Vietnam’s growth. The first-ever ASEAN Day will also be held at Sibos, to address the challenges and opportunities present in the upcoming AEC.