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Vietnam Today

On the mend

Released at: 17:29, 05/01/2015

On the mend

Signs of recovery emerged for Vietnam's economy in 2014 but it wasn't all good news.

by Hai Bang

After years of recording growth a touch lower than many of its emerging-market counterparts, 2014 saw more indications that a corner may have finally been turned by Vietnam’s economy. As the year unfolded the economy was in a stronger place than where it began the year, though more work remains to control public debt and increase economic efficiency and competitiveness.

Grounds for optimism

The strengthening of the economy over the course of 2014 has been accompanied by a stable and predictable exchange rate, a strong foreign direct investment (FDI)-driven manufacturing sector, and a greater proportion of higher value added products in exports, according to Mr. Attila Vajda, Managing Director of Project Asia Research & Consulting Pte Ltd. He also noted a positive trade balance and balance of payments with subsequently increasing foreign exchange reserves, falling borrowing costs for corporates, a pick-up in real consumption and consumer confidence, the bottoming out of the real estate market, and a rise in demand for housing.

Latest figures from the General Statistics Office (GSO) show that Vietnam attracted some $17.33 billion in FDI in the first eleven months of 2014. Meanwhile, the country expects to enjoy a trade surplus of $1.5 billion for the year as a whole, with export turnover hitting $137 billion during the first eleven months, an increase of 13.7 per cent over the same period last year. Growth in 2014 could be more than 5.9 per cent, while inflation may be kept below 3 per cent, Prime Minister Nguyen Tan Dung told the annual Vietnam Business Forum. This is especially notable given the fact that the country became reluctantly involved in a territorial dispute with China in April.

Estimates from both the government and independent institutions say that Vietnam’s economy is improving faster than previously predicted. The World Bank predicts Vietnam’s economic growth will stand at 5.6 per cent at the end of the year, higher than the 5.4 per cent recorded in 2013. Meanwhile, ANZ put growth for 2014 at 5.6 per cent and forecast 5.8 per cent for 2015, with foreign investment playing a significant role.

While these figures paint an encouraging picture, more should be done to help make sure the economy gets to where it’s supposed to go. The momentum of economic recovery, as pointed out by Mr. Michael Krakowski, Program Director and Chief Technical Advisor at GIZ Vietnam, remains weak and slow. “In addition to weak aggregate demand, some more prominent reasons are the slow implementation of decisions on restructuring the economy, State-owned enterprises (SOEs), and especially public investment, thus failing to create the fundamental changes and framework conditions necessary for a new growth model,” he said. Banking system restructuring, he went on, was implemented only at a few small sized banks, not for the whole system.

Remaining challenges

There can be no doubt that Vietnam’s economy picture is improving, but while the optimism is warranted there remain challenges that may affect recovery in the future. One is the country’s slow clean-up of non-performing loans (NPLs). Bank NPLs increased sharply in 2014, standing at around $8 billion and accounting for 4.11 per cent of total loans at the end of July. Vietnam’s recent efforts at cleaning up bad debts via the Vietnam Asset Management Company (VAMC) allowed credit institutions to sell bad debts for special bonds, which can then be used as collateral to secure loans from the central bank at 2 per cent below the normal lending rate. VAMC, however, has only bought around VND100 trillion ($4.76 billion) worth of bad debts to date.

Surging public debt is also very much an issue, resurfacing in 2014 and expected to be more acute in coming years given that the pressure from repaying principal and interest due in the next three years is very high. If domestic consumption does not grow faster and global growth continues to be sluggish, which Mr. Vajda believes are both very likely scenarios, then increased public spending is still the easiest way to keep the economy growing above 6 per cent per year, as per the government’s target. “As such, public debt will likely grow further in the coming years and extending the maturity of the debt to above five years, as per the currently proposed solution, can solve the cash flow issues associated with it but not necessarily the long-term servicing capability issues of this debt,” he said.

Meanwhile, the private sector, the engine of Vietnam’s economic growth, is showing signs of weakening, according to senior economist Truong Dinh Tuyen. The sector, he said, will continue to feel the pinch if Vietnam pursues growth acceleration because the government will be forced to increase public investment, which will result in an increase in public debt. “The government will have to issue bonds to fund its investing and this will squeeze credit for businesses and increase interest rates while credit growth slows down,” Mr. Tuyen said. He also questioned if the dominance of foreign-invested enterprises (FIEs) was a good thing for Vietnam, given the government’s policy of combining economic growth with accumulating internal strength and increasing national power and domestic enterprise competitiveness.

“Despite the great progress made in 2014, 2015 will be an equally or even more challenging year given that the global economy is very fragile and the external context will be a drag rather than a supporting factor for Vietnam. As such, Vietnam really has to focus on internal reforms and productivity gains in order to be able to continue its economic recovery story in the coming years. We believe that the government’s 6.2 per cent GDP growth target for 2015 is achievable and overall we retain our optimism over the country’s prospects. In summary, we expect more volatility in the numbers at the macro level but better performance and results at the micro level for Vietnam’s economy.”

Mr. Attila Vajda, Managing Director, Project Asia Research & Consulting Pte Ltd

Other challenges for Vietnam are in respect to improving value added in the global value chain and general international competitiveness. Shortcomings are still found in the quality of human resources in both the private and public sectors, the lack of funding availability for most corporates, single digit real consumption growth, and slow SOE reforms.
Despite these remaining challenges, analysts agree that policy responses have been much stronger than in the past. For example, credit has to go to the State Bank of Vietnam (SBV) as its management of monetary policy has supported monetary and exchange rate stabilization, the successful stabilization of the gold market, and the combating of dollarization, thus creating conditions for significant reduction in interest rates.

One of the key things to note is that the government, for the first time, has established a special taskforce that includes the Ministry of Planning and Investment (MPI), the Ministry of Finance (MoF), the Ministry of Industry and Trade (MoIT) and the SBV to cooperate in implementing macro-economic management regulations. Specifically, MPI will be responsible for the building and management of economic growth focusing on GDP growth, total social investment, State credit, investment of all types of enterprises, the PPP model, and social consumption. The SBV is tasked with building and managing inflation goals and especially total credit growth in the economy, means of payment, interest rates, the balance of payment and exchange rates. The MoF is responsible for fiscal policies, including balancing budget collections and spending, State budget overspending, the management of debts and foreign debt payments, and public debt. The MoIT, meanwhile, is in charge of regulating domestic trade, exports, imports, the trade balance, and the development of the domestic market.

Looking to 2015

2015, economists expect, will perhaps be equally challenging for Vietnam’s economy. Mr. Tuyen predicts that the economy will grow faster, by 6-6.2 per cent, in 2015 if the government’s directions help to improve the business environment and SOE reform is further accelerated in the short term to create another engine for growth. He also expects that negotiations on most free trade agreements (FTAs) will be completed within the first six months of the year. “To implement FTAs Vietnam will need to accelerate the pace of institutional reform to attract investors, expand its export market, and stimulate growth,” he stressed.

“Vietnam needs strong political determination to reform, particularly SOEs, and to build a specific action plan for implementing new FTAs, particularly the Trans-Pacific Partnership (TPP) and the EU-Vietnam FTA, to achieve its core interests. The country needs to transform its growth model based on applying new and environmentally-friendly technology and improving human resources, production and service management, and capital efficiency.”

Mr. Truong Dinh Tuyen, Senior Economist

“In the medium and long run, the biggest challenge for Vietnam is to successfully restructure its economy, for which institutional reform is of the highest relevance. This means developing strong institutions that allow markets to develop but also provide an adequate regulatory framework for market participants. This implies limiting the scope of and restructuring SOEs, strengthening the banking and financial system, building up regulatory institutions in the electricity markets, and enhancing the efficiency of public investment.”

Mr. Michael Krakowski, Program Director, Chief Technical Advisor, GIZ Vietnam

Free trade is a great engine for growth but, as noted by Mr. Krakowski, the challenges of ASEAN integration and new FTAs in the future are still not fully reflected in policy measures, creating risks for economic development. “The structure of Vietnamese participation in international value chains, consisting quite often of ‘imports - assembly manufacturing - exports’, results in low added value for Vietnam,” he said. “Value added must be increased in order to comply with rules of origin and thus being able to take advantage of new export opportunities resulting from the FTAs.”

In terms of risks on the horizon, analysts are particularly concerned about a slowdown in the global economy in 2015. This is why Vietnam needs to change its existing methods and create a driver in terms of institutions. The country also needs to build on internal reforms and create a modern market economy institution based on three pillars: the market, the State, and society. 

Ministry of Finance (MoF): Despite predicted fluctuations in the oil price, the gains will be higher than the losses

Deputy Minister of Finance Do Hoang Anh Tuan said that State coffers in 2014 have not been heavily affected by fluctuations in the global oil price due to a shift in collection sources. “Oil export revenue is estimated to account for only approximately 10.2 per cent of the total State budget in 2014, compared with the previous 20 to 25 per cent,” he explained.

MoF will implement comprehensive measures to meet the 2015 State budget collection target of VND911.1 trillion ($42.77 billion). Even though falling crude oil prices may slash the budget by around VND50 trillion ($2.38 billion), MoF is already prepared to increase domestic revenue collection to balance the loss.
Vietnam has to spend more on importing petroleum products compared with its earnings from exporting crude oil. Therefore, an ongoing decline in oil prices will result in lower prices for petroleum products, which in turn will help enterprises cut their production costs. Enterprises can expect higher profits, which will consequently add to tax contributions to the State budget.

Ministry of Planning and Investment (MPI): 
GDP may fall by 0.8 to 1.2 per cent due to lower oil prices

The decline in the oil price reduces the profitability of crude oil exporters, prompting them to narrow their production. GDP may decline as result, given the contribution crude oil exports make. Still, it’s unfair to say that the economy will suffer negative effects, according to Minister of Planning and Investment Bui Quang Vinh. In the last three to four months gasoline prices have continued to fall, to the benefit of consumers. Transport costs have also fallen, reducing the cost of doing business and making enterprises more competitive, he noted.

“Assuming that crude oil prices will continue to decline, producers will only be slightly profitable or not at all,” he said. “If we cut crude oil output by 30 per cent, for example, GDP growth could fall by 0.8 to 1.2 per cent next year,” he predicted.

With market fluctuations affecting Vietnam, the country must prepare a plan to respond promptly and effectively, to minimize the harm on domestic production, and select the best solutions to develop. State agencies must work closely together to provide accurate information on the matter. The experience of 2012-2013 in controlling prices and managing inflation indicate that if cooperation among State agencies is solid then proper solutions will be identified. 

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