Vietnam Economic Briefing (Dec 2011)

Vietnam’s GDP growth is expected to be about 6% for 2011, despite the various pressures of inflation, economic slowdown and falling sentiments amongst the business community.

With a new Cabinet in place, the country is embarking on a series of reforms which could be as instrumental as the “Doi Moi” (or “renewal”) exactly 25 years ago which set Vietnam on the path towards becoming a vibrant economic powerhouse within the region.

Some blame the poorly performing state owned enterprises (SOEs) for some of the country’s economic woes. Significant investment and capital were allocated to SOEs with poor returns on investment. Gross inefficiencies in operations and ill-advised diversifications into areas where they have little expertise or experience (such as stock markets and property investments) are two of the reasons why the SOEs have performed poorly.

I’ve outlined below the background to the current Vietnamese economy, responses by various stakeholders and my own personal comments and suggestions.

The scenario now

Vietnam’s economic challenges now include:

  • High inflation rate (currently at close to 20%);
  • A slowdown in economic growth and output;
  • Rising external debt;
  • FDI pledges have dropped by about a fifth – compared to 2010;
  • Further devaluation of the Dong vis-à-vis the US Dollar, further exacerbating inflationary pressures;
  • Increased incidences of bad-debt and non-performing loans – creating a greater pressure on the banking sector.

The government’s efforts

Prime Minister Nguyen’s key considerations for Vietnam include:

  • To ensure that Vietnam meets it’s socio-economic developmental objectives;
  • Ensure that the State Bank of Vietnam work closely with relevant stakeholders and achieve a targeted, flexible and corrective monetary policy so as to maintain growth and curb inflation;
  • To have a re-active approach to issues that arise from wider implementation of monetary policy and ensure social cohesion and harmony;
  • Control market prices and reduce trade deficit;
  • Be better prepared for natural disasters and ensure better disaster management (eg. floods, storms, etc);
  • Improve public sector and administrative reforms.

Macroeconomic stabilisation and inflation control are key pillars to achieving economic growth. The Vietnam Cabinet is also committed to improving efficiency and competitiveness (particularly amongst State Owned Enterprises (SOEs)).

There are three economic restructuring initiatives proposed:

  • Streamlining the public investment mechanism to ensure greater timeliness and efficiency;
  • Improving the productivity of SOEs;
  • Restructuring the commercial banking system.

The Prime Minister has also indicated that there will soon be separation of ownership and management of the largest SOEs (including the likes of PetroVietnam and Vinashin) which will force SOEs to adopt OECD levels of corporate governance. There will also likely be privatisations of SOEs which are better suited to the private sector (such as coffee, textiles and seafood) whilst nationally important industries such as power, oil and gas will be retained by the government.

The government will also continue to ensure that the agricultural sector is supported and grows sustainably; implement social welfare policies to achieve lower unemployment and poverty; and press on with economic restructuring reforms required for growth.

World Bank support

A Consultative Group (CG) meeting of donors will take place in Hanoi, Vietnam on the 6th of December to focus on restructuring the economy and poverty reduction in Vietnam.

Of concern to the World Bank is how restructuring efforts by the government in the public investment and banking sector will support social welfare and poverty reduction initiatives.

Suggestions for Vietnam

The Vietnam government should stick closely with its plans to reform public investment, improve SOEs and restructure the commercial banking system.

However the government will still face significant resistance from various interest groups including SOEs and large private conglomerates who may not benefit directly from the economic restructuring activities. The government must press on with reforms in the interest of the country. Failure to resolve the risks posed by debt-ridden state owned banks and enterprises will have the potential consequence of sinking the country in deeper economic malaise.

However, one must not lose sight of the fact that despite the obvious economic difficulties, the country still has a large population base, with a growing middle-class population; there is on-going commitment to education and development; and it has a large Asian economic hinterland.

My suggestions for Vietnam will be:

  • Stay firm on the path towards SOE reforms – an improved efficiency of the SOEs will enable them to become engines of growth for the country
  • Focus on dealing with corruption – failure to do so will erode public sentiment and also depress economic activity and dampen FDI into the country;
  • Maintain emphasis on raising education levels to international best practices and work to building capacity in the areas of people skills development to ensure a higher trained and educated workforce which will force Vietnam to move up the value chain in terms of services offered;
  • The country should continue supporting small and medium sized enterprises as they tend to be another major engine of growth for nations – support the small to see big benefits;
  • Provide easier access to finance – but ensure there are safeguards to prevent excessive and unprotected money lending which may cause a credit bubble;
  • Vietnam must also protect its rice paddy fields (enough golf courses – no more!!) and continue support to its agricultural sector;
  • There must also be a commitment to protect its natural resources (no point selling everything away and not having anything left to enjoy because all the natural beauty of the country is sold down the river in exchange for foreign currency which you cannot really spend anymore);
  • Continue commitment to ensuring good corporate governance in the country – and adopt best practices – starting with SOEs and listed firms. This will be important in building consumer and investor confidence in the market.
  • The government should also foster innovation and nurture and reward innovation at all levels. Vietnam has the human capacity to be one of the most innovative countrie in Asia, if not the world and the government should play this very important strength of the Vietnamese people to the country’s benefit.
  • A radical solution to tackle inflation: Vietnam goes through the inflation cycle every few years. What Vietnam should consider is to have only ONE primary currency, the dong. Under the dual currency system – with both dong/dollar being interchangeable in the market will erode the Vietnam economy over the longer term. This is because Vietnam loses control of monetary policy when the dollarization of the economy is widespread. What Vietnam should do is to peg its dong against a basket of major currencies including the US Dollar, Euros, Yuans, Singapore Dollars, Malaysian Rinngit. They should stamp out the dollarization in the economy by making sure that all goods and services in the country are only provided in dongs – create a wider demand for the dong. Start trading the dong in foreign capital markets. It will hurt initially (for up to 3 years) but once normal situation prevails, Vietnam will have greater control of its monetary policy and the Dong will become an international currency in its own right. Vietnam has sufficient critical mass of almost 90 million people to make this work.