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