Barriers for Vietnam to absorb capital flows from the Asean Economic Community

05-Jan-2016 Intellasia | Vietnamplus | 6:00 AM Print This Post

The Asean Economic Community (AEC) is going to be officially established and Vietnam by that time will continue to receive many foreign direct investment (FDI) as well as financial and credit resources from the development projects of the world community.

However, the question is whether Vietnam is capable to absorb such huge capital resources, especially in the context when the production, administration and operation capacity of enterprises remain limited. At the same time, the banking sector is having tied-up capital and have to apply many measures to stimulate lending.

Talking about this issue, Dr Nguyen Tri Hieu, a banking and finance expert had a talk with reporter of TTXVN. Regarding the opportunities and impacts brought by the commitments on free movement of capital flows, Dr Hieu said that, when participating in a common market with other countries in the region, which is called the Asean Economic Community, Vietnam will have to open the economy to facilitate the capital flows between the member countries. In addition to the ability to attract a large amount of credit from foreign direct investment, Vietnam can receive payment flows from commercial relations such as trade, import and export, and travel services, etc. Thus, there will be officially three capital resources from investment, credit activities, and payment circulating among AEC countries, including Vietnam. This scenario obviously would positively impact on the economic and financial activities of the country. The government, business community, and the people will all benefit. It could be the strengthening of investment, improvement of infrastructure, and more convenient foreign trade exchange. The people will have more choices of financial products related to banking, insurance, and securities sector, etc.

However, these only are expectations, and realising those expectations depends on many factors, particularly there is a need to evaluate and assess the ability to absorb the capital inflows of Vietnam’s economy at the present time.

Dr Hieu frankly said that foreign investors and banks are still cautious when choosing Vietnam as the destination for investment, especially due to the credit risks, bad debts, and slow process in economic reform and restructuring. Dr Hieu recalled the situation of Mexico when it had to soon witness the withdrawal of the foreign capital inflows because the economy was unable to absorb the credit funds which accounted for half of the foreign capital poured into the Latin America. Moreover, the peso devaluated and a large amount of US dollars were withdrawn from the country as investors worried about the economic sustainability when the Mexican government devaluated the peso and converted the peso debts into US dollars. Consequently, the Mexican economy fell into a real crisis, which later even spread and negatively affected the economies of other Latin American countries.

According to Dr Hieu, such situation is no exception to any country. Therefore, the AEC countries, particularly Vietnam needs to prepare the defense measures. The economic institution needs to be changed to be suitable to the AEC countries and avoid creating differences which can lead to regrettable risks. The most important thing is to avoid creating gaps as Vietnam has not really had a proper market economy. If comparing to small countries like Laos, Cambodia, and Myanmar, there are similarities. However, if comparing to Thailand, Singapore and Malaysia, the countries which have really had a market economy, the differences are clearly seen. The main differences in market economy institution will be the barrier which restrict the absorption of capital flows and financial resources.

In Dr Hieu’s point of view, for a long time, in Vietnam, foreign exchange rates have been managed and controlled in a regulated frame of the State Bank of Vietnam (SBV). When the capital flows can freely circulate, they will surely be affected by the foreign exchange management policy. In addition, the banking sector will be difficult to gain initiative as on one hand it has to carry out the policy to stabilise the dong, and on the other hand has to deal with pressure from the foreign exchange rate fluctuations. Therefore, the capital flows from investment, trade and payment may have to face many changes.

Dr Hieu believed that after the establishment of AEC, commercial banks of Vietnam may be allowed to freely provide financial services for the people and domestic and overseas enterprises among the Asean countries; or they can expand operation in the AEC member countries easily and freely and vice versa. Competition in the banking sector will increase and cause great pressure as the banks of Vietnam are mainly small-scaled with limited capital, shortage of modern products, and restricted governance capacity.

However, according to Dr Hieu, Vietnam is not yet a lucrative market for regional banks, as the average income of Vietnamese people is not high at around 2,000 US dollars per year. Foreign banks are also hesitant to offer credit to Vietnamese enterprises due to the concerns on the risk of bad debts. At the present time, banks need to accelerate the process of restructuring, modernise more products and services to increase utilities to customers, do research and introduce more derivatives in foreign currency forward transactions in order to provide flexibility for the foreign exchange trading market, and ensure the rights and strengthen the confidence of customers.


Category: Economy, Vietnam

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