Intellasia News Services -- Standard Chartered points out 8 reasons to boost Vietnam's economic growth

Standard Chartered points out 8 reasons to boost Vietnam's economic growth
Source: 23-APR-2008 Intellasia | Thoi Bao Kinh Te Vietnam
23 Apr, 2008 - 7:06:00 AM

The slowdown in GDP growth and a consecutive rise in inflation caused worries on Vietnam's economic prospects. However, Standard Chartered Bank (SC)'s latest report including "On the ground in Vietnam" pointed out eight reasons for Vietnam to boost the economy strongly as follows:

* Political stability-firm background for economic development

* Being one of the most open economies in Asia according to the globalisation tendency

* Regional development-achievements as from joining Asean

* Risk diversification

* Population: young and active

* Enhancing to protect interests of consumers, attract middle class

* Abundant capital-two-edged knife

* Lessons from neighbouring countries-skip development

Given optimism on the prospect of Vietnam's economic structure, but in order to ease shocks for the economy, the foreign bank's experts also proposed that Vietnam should concentrate on curbing price storms through variety determined policies that must be implemented step by step and at least in short-term, the country has to accept real an economic growth lower than targets.

According to the specialists, Vietnam obtained at least three advantages from the commercial opening.

First off, ""the space" for economic growth will widen. Instead of only relying on domestic demand, Vietnamese economy can take full advantages of external conditions to boost growth.

Secondly, with a fairly low income, Vietnam's domestic market has not been enough attractive yet for foreign investors and producers. However, thanks to the enhancement in accessing outside markets, multi-national companies can pay more attention to Vietnam whereby the rotation of capital flows, technology and experiences will be promoted. Also the country feels more easily to access export markets, which is shown that the ratio of Vietnam's export and GDP increased from 30% in 1996 to 67% in 2007, marking one of the highest rate in Asian economies. Particularly, the export turnover rose from US$7.2 billion up to US$48.4 billion dong in 1996-2007 with the average growth of 19% a year.

Aforementioned factors enclosed with stably political environment and administrative supports for business sector, non-terrorism, competitive labour market and investment preferences, Vietnam has turned out the very attractive destination for production diversification as compared with others.

As for Japanese investors in particular, one of important concerns to Vietnam is the risk diversification ability instead of only focusing on China like previous, which shaped the conception "China +1".

Regarding Vietnam's population, Standard Chartered Bank's experts assessed that current labour size and expected increase in the next time will support to production sectors in need of large workforce. Although the current average salary is in the upward trend, labour costs are still competitive, excluding sectors falling in shortage of skilled employees.

The booming stock market has attracted excellent manpower from the banking sector. Demand on high qualified employees for medium and high class positions in both local and foreign companies is increasing considerably, which has caused heavier pressure on salary and welfares. The similar disadvantage also happens in other sectors namely law and accounting.

In the aspect of consumption, the number of 85 million consumers is too large. With the expectation that purchase power will double in next 6-7 years and increase three fold by 2025, Vietnam could become another development source for retailers in the future thanks to increasing demand for individual finance services.

Standard Chartered said that Vietnamese consumers have a clear aware of trade name value and will willingly pay for high quality products if possible.

Saving rate in Vietnam is fairly high as compared with regional countries and growing time by time from 3% in 1990 to over 30% in 2006. The sum of money can be put into investment apart from spending. The saving rate is considered to measure the country's potential consumption power.

Yet, in the latest report, the foreign bank paid special attention to inflation and capital flows. Although four important capital flows including FDI, FII, overseas remittance and ODA have brought in necessary resources for Vietnam's economic growth, it is proposed that the Vietnamese government and State Bank of Vietnam should control cash in circulation more closely to ease the fever and pressure of high inflation that jumped to 19.4% in March 2008.

SC assessed there has not been any signal showing an expected reduction in CPI in the next time. This is also the big challenge as Vietnam now needs more tools to monitor capital inflows in the context that the capital control is still free.

The bank's analysts also predicted that Vietnam's trade deficit could continue widening in next years but the appreciation pressure of the dong could decline due to the strong rise in capital inflows.

Total committed FDI capital amounts to more than US$20 billion, accounting for nearly 30% of GDP of US$70 billion, showing that Vietnam still depends on FDI more than China and other developing countries, excluding concerns on technology and administration quality.

Combination between FDI, ODA and overseas remittance, the total capital flow Vietnam could receive in 2008 is estimated at about US$30 billion excluding FII. The figure exceeds SC's forecast on this year's trade deficit of US$20 billion. With the huge capital amount, Vietnam will never lack capital for development targets. But SC gave warnings that as for Vietnam, the abundant capital situation could become a two edged knife.

Especially, capital inflows into Vietnam could change if foreign investors are afraid of Vietnam's economic and business risks such as high inflation whereby Vietnam's finance sector will be affected strongly. Therefore, Vietnamese government should pursue reliable monetary policies and reform processes in order to maintain a stable economy.