Many Motivations for Vietnam’s Continued Economic Growth

14-Dec-2019 Intellasia | VCCI News | 6:02 AM Print This Post

A recent report by the US News and World Report ranked Vietnam No. 8 in the global list of best countries for investment, up from No. 23 in 2018. Vietnam enjoyed relatively high economic growth. This was very significant in this volatile world.

Many positive economic indicators

At the Economic Forum 2020 themed “Adding motivations for new growth cycle” held recently in Hanoi City, Dr Vu Tien Loc, President of the Vietnam Chamber of Commerce and Industry (VCCI), said, in the past year, the Party and the government have made great efforts to reform institutions and business environment. Such targeted indicators as inflation, budget deficit or the size of foreign exchange reserves have all been improved, helping increase Vietnam’s resilience to potential economic shocks in the future.

The latest data on Vietnam’s economic growth prospects from the Central Institute for Economic Management (CIEM) showed that Vietnam’s GDP may grow 7.02 percent in 2019.

“This figure is quite high and optimistic from its forecast growth of 6.82 percent three months ago. In the recent updates on Vietnam’s economic prospects by the World Bank (WB) and the Asian Development Bank (ADB) also showed lower growth rates in 2019, respectively at 6.5 percent and 6.7 percent versus 6.6 percent and 6.8%,” Dr Loc said.

He added that, as a highly open economy, Vietnam must remain wary of risks from a slowing world economy in the next decade. In addition, US-China trade war, geopolitical conflicts, unpredictable monetary policies from nation to nation, and high public debts will pose major erratic challenges.

Furthermore, protectionism and multilateralism impasse, climate change and aging population are hindering Vietnam’s growth in the near future. The trust and investment of the business community will determine economic growth.

What industries will prevail?

In the 2020-2030 period, opportunities will lie in industries with traditional comparative advantages such as garment and textile, leather and footwear, wooden furniture, electronics, agricultural and seafood products, consumer services (retail, distribution, tourism, entertainment, education and health), and support for production networks and value chains (support services, logistics and supporting industries).

Potential also lies in emerging areas (green economy, innovative economy, digital economy and smart city development), infrastructure and real estate (housing, office, vacation property, retail, logistics and industrial park). These are potential opportunities for domestic and foreign investors to tap.

Nguyen Duc Hung Linh, Chief Economist and ResearchDevelopment director, Analysis and Investment Advisory director of SSI, stated five business areas that will thrive in 2020.

The first is consumer goods industries. With a market of 100 million consumers, Vietnam is extremely attractive and Thai investors are grasping every investment opportunity, he said. “When we contact Thai businesses coming to Vietnam to seek investment opportunities in Vietnamese stocks, they tend to be keen on consumer goods companies like PNJ and Vinamilk. This proves the huge potential of these industries,” he said. Not only retail sectors like milk and sugar but other fields like art, entertainment and education also catch their interest because these large-scale industries are still of low quality.

The next will be tourism industry and related industries. International visitors to Vietnam in November reached 1.8 million, representing a year-on-year growth of 39%, the highest growth in 23 months, driven by the 77 percent growth of Chinese tourists. Besides, many other markets posted high growth rates like Taiwan (37.5%) and Thailand (42.9%). As tourists increase, products and services for them will increase as a result. The growth of accommodation and catering sectors is approximately equal to the country’s GDP growth.

The third is logistics industry. According to Linh, this is very different from 2012-2013. The growth of the warehousing industry is higher year after year due to many factors, mainly import and export growth in recent years, to create a huge flow of traded goods.

The fourth is construction and building material industries. By 2020, these sectors will have higher growth, because, after two years of deceleration, public investment will pick up from next year. Besides, private capital will create a huge stepping-stone for the industry.

The fifth is agriculture and support services. This sector’s growth will be slow in 2019 because of drought, he said. Normally, agricultural production gets better a year later and supporting sectors will also benefit from this growth.

Phan Duc Hieu, deputy director, Central Institute for Economic Management (CIEM)

When an enterprise makes a product, it will carry five types of costs, including official cost, opportunity cost, administrative cost, investment cost, and fees. These costs will cause adverse effects, distort the market and reduce competitiveness because they increase product cost

Institutions are still key to economic performance. Over the last five years, the government has issued a series of seven thematic resolutions to improve institutions, reform the business environment and promote business development. This is unprecedented, the government has put forth specific goals for us, for example making the business environment on par with Asean+4 group, and VCCI and CIEM have proposed the government to reduce 50 percent of existing business conditions, and the government has agreed with this proposal.

As for reform dynamics in the following year, the business is the ultimate measure of reform. Some reforms are recognised by authorities but rebuffed by enterprises. Land, tax, fee and social insurance upset businesses most. Reform will hardly be successful if only the government does it. It is high time we had an independent body to monitor and improve institutional quality.

Dr Can Van Luc, Chief Economist, Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV)

There are at least six different capital flows in the market. One is government fund. Companies can source this money from small and medium-sized enterprise development fund, small and medium-sized enterprise guarantee fund and other funds.

The second, very important source is partner fund.

The third is foreign capital. Foreign investment funds are currently very keen on Vietnamese companies. Some companies can pool a lot of money, from $1 million to $3 million. This is also a feasible and important source of capital for startups.

The fourth source is credit and guarantee.

The fifth comes from the capital market. This is also an extremely important source of fund, especially stock and bond markets. Currently, Vietnamese businesses lack interest in this channel.

The last is equity capital and contributed capital. The own capital or equity shrinks in comparison with the total capital. This proves that the fund demand is very important in the near future.

Credit flows expanded to 133 percent of the country’s GDP, a relatively high rate in the current context of income per capita and development level of Vietnam as warned by international organisations. This year, the credit growth is forecast at 13 percent and 12 percent next year. This rate is not hard for Vietnamese businesses. When compared to the region, even though Vietnam grows 10%, its credit growth expands at the fastest pace in the Asean region. Asean countries are also controlling credit growth, reined from 4-6%. Therefore, a 12 percent growth is relatively high when banks are falling short.

Bui Ngoc Son, Institute of World Economics and Politics

We expect that Vietnam will become an attractive destination for FDI flows moving away from China and will benefit from this. However, the benefits are not as great as our forecast at the beginning of this year.

FDI inflows slumped in October and November 2019 but China became the top investor. In the first 11 months of 2019, foreign investment increased in projects but declined 7 percent in value. Added fund by existing investors slipped 10.7%. Many signs show that FDI flows from western countries, redirected from China to avoid the US-China trade war, increased slightly, because Vietnam has weak supporting industries, poor infrastructure, weak logistics and high costs.

Meanwhile, China’s FDI flows rose sharply. This is fuelling the fear that this investment is aimed to cloak products with made-in-Vietnam origin or purchase Vietnamese brands to export to other markets or sell in Vietnam, evidenced by the much sharper growth of equity purchasing fund than other capital flows. This flow overwhelmingly grew 47.1 percent over the same period of 2018 and accounted for 35.4 percent of total FDI inflows as of November 20, 2019. Furthermore, most are small projects and large-scale projects are too few.

In addition, the VND/USD exchange rate decreased by 0.2%, meaning that dong appreciated from the beginning of the year, while the CNY/USD exchange rate rose by 4.6%, meaning that the Chinese yuan depreciated in the same period. This made Chinese goods even cheaper than Vietnamese by nearly 5 percent in the past 11 months.

This is detrimental to the competition of Vietnamese goods against Chinese rivals at the domestic market. That is why retail chains mushroomed in the context of US-China trade war and many were found to sell Chinese goods, not Vietnamese.

Tran Huu Huynh, Chair of Vietnam International Arbitration Centre

Rarely has any country with similar economic conditions to Vietnam integrated and participated in many markets as it has. However, do we really understand EVFTA thoroughly? This agreement is said to be the highest and deepest, and poses the broadest requirement for administrative procedure reform and business environment improvement for integration. How many EVFTA analyses have been done for businesses to gain insights and seek business opportunities from this pact?

As for the digital economy and shared economy, we need to focus on them in the following years because this is an opportunity for us to close the gap. However, to do this, we necessarily prevent risks and protect investors. Without investors, we would be offshore outsourcing subcontractors for good. There must be a national committee to protect investors and minimise risks against investors.

The Vietnamese government has set international standards on business environment and competitiveness to Vietnam. At the same time, it uses public and business satisfaction to measure the country’s business environment improvement.

However, no specific responsibility and accountability is assigned to each ministry and agency. Failing to do this, we will be unable to cure “illness” although we know it.

Trinh Minh Anh, Chief of the Inter-sectoral Steering Committee for International Economic Integration

2020 is a watershed year as 13 FTAs to which Vietnam is a signatory will principally enter the enforcement phase. Besides, the working delegation in charge of the South American market (Mercosur) has achieved many good outcomes, expected to open up the opportunity for Vietnamese businesses to promote trade and investment in this market.

The FTA Vietnam has signed with the European Union (EU) is also showing positive signals. This is one of two agreements with the broadest scope and highest level of commitments of Vietnam to date. This agreement is expected to be further reviewed by EU countries for approval in 2020.

Notably, the US-China trade conflict will not likely end quickly but will have unexpected developments, possibly detrimental to Vietnam next year. The United States continues to have tense conflicts with its partners, even with its allies. It is not excluded that the US will also take tense actions against Vietnam if Vietnam does not take positive actions to narrow the trade deficit.

South Korea is applying its New Southern Policy as it has shifted investment flows and production plants as well from China to Southeast Asian countries, including Vietnam.

Under this circumstance, businesses should focus on three opportunities: First, they need to harness potential from effective FTAs to increase exports to foreign countries and foreign direct investment inflows. Micro and small businesses can follow investment flows and export flows of other businesses and gasp the opportunity to engage in supply chains to reach partners from big markets like the EU, the US and China.

Second, businesses need to pay attention to origin of goods and traceability of products and they need to prove to partners and important markets that Vietnam is very serious about product origin.

Finally, they need to pay attention to trade shifts and investment flows in the context of complicated trade conflicts. At the same time, they must increase the chance of tapping the opportunity and proactively access information on supply channels administered by ministries, agencies and VCCI.

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Category: Economy, Vietnam

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