Economists are urging Vietnam to diversify its trading partners as an over-reliance on the Chinese market may prove problematic as territorial tensions continue rise.
A dispute over portions of the East (or South China) Sea has threatened the future economic relationship between the neighboring countries, said Nguyen Duc Thanh, director of the Vietnam Center for Economic and Policy Research (VEPR) at the Vietnam National University in Hanoi.
Economic growth is likely to tumble to 4.15-4.88 percent this year from last year's modest 5.42 percent due to Vietnam's deteriorating relationship with China, he said during a presentation of VEPR’s Vietnam Annual Report 2014: “The Constraints to Growth” on Thursday.
Meanwhile, Inflation in 2014 is predicted to fall from its 2013 level and remain stable at between 4.76 percent and 5.51 percent.
Without the territorial conflict, Vietnam could see GDP growth of 5.4-5.5 percent this year, he said. “The incident’s impacts may stretch late into this year, or next year.”
Given the low prices of Chinese manufacturing equipment and raw materials, they remain the preferred choice of many local producers, he said. Local enterprises should expand their import markets as well as their material and equipment capacities to maintain production without relying on China.
“Vietnam should identify strategic partners like Japan, Korea, Australia, India and ASEAN to build up long-term cooperation and decrease dependence on China,” Thanh said.
Thanh said Vietnam is also overly-dependent on China as an export destination and the country’s earnings from shipments of agricultural products like rice, fruits and rubber will be affected.
However, Vietnam, a small-scale economy, could find other partners to reduce the export dependence on China, he said.
“Facing tensions with China, Vietnam needs to commit to changing its economic model, development path and ideology in governing its economy. The economic slowdown has offered a number of reasons to call for radical reforms and reduce dependence on China,” the VEPR report said.
Some took a more nuanced approach to recent developments.
Standing on the sidelines of the conference, Vo Tri Thanh, vice head of the Central Institute for Economic Management, said Vietnam should not ignore the Chinese market. Instead, the country should determine to manage the risks and capitalize on opportunities afforded by bilateral cooperation.
On the plus side, the current dispute with China may be a great motivator for Vietnamese enterprises to accelerate their restructuring to reduce an unhealthy dependence on the market, he said.
Echoing him, economist Le Dang Doanh said Vietnam now faces both opportunities and challenges in its relations with China. In the short term, Vietnam may face big losses if China uses economic tools to exert political pressure.
However, the challenge may present a good opportunity for the country to strongly restructure its economy, he added.
The economy has righted itself since the inflation shock of 2011 and the economic downturn of 2012. The stable macro environment is boosting economic activity, albeit slowly, along with structural adjustments, according to the VEPR report
However, the root of the recovery, and Vietnam's basic productive capacity remains shaky as many domestic firms have proven weak and have yet to find a market for their goods.
The country's much bemoaned dearth of skilled and high-quality laborers was blamed on a failure of both the low-level and high-level education and training systems.
The report also cited corruption as a critical constraint to growth. Last year's Provincial Competitiveness Index showed that 65.8 percent of foreign investor considers corruption in Vietnam more serious than other surveyed countries.
Poor infrastructure, especially transportation networks, has proven a binding constraint. Poor energy infrastructure was predicted to be a vital constraint in the medium and long-term, it said.
This year's Global Competitiveness Report ranked Vietnam 82nd in infrastructure, compared to the Philippines (96), Indonesia (61), Malaysia (29), Thailand (47), China (48).
VEPR said it is crucial to continue privatizating state-owned enterprises pursuant to the Prime Minister’s directive at the beginning of the year to rapidly restructure the economy.
After a period of tension with China, exchange rates should be adjusted.
“Exchange rate policies should focus not merely on short-term adjustments for the second half of the year (increase by 2-3 percent) but also a stable future in order to promote domestic production,” it said.
DON'T LOWER ECONOMIC GROWTH TARGETS
Vietnam could reach its economic growth target of 5.8 percent this year, as damages caused by riots sparked by China's incursion into Vietnam’s EEZ have been fundamentally resolved and bilateral trade, so far, has remained unaffected, one official said.
The government has not considered adjusting its economic growth target after the incident, chairman of the government’s office Nguyen Van Nen said at a press briefing on Thursday.
However, the riots have affected production and disrupted lives in the provinces of Dong Nai, Binh Duong and Ha Tinh, he said.
The localities have assessed damage at the affected businesses and cut red tape to support firms in pursuing reimbursements and insurance settlements, he said.
Vietnam has committed to preventing further riots, Nen said, and many of those affected have resumed production and are committed to doing long-term business in the country. Nen said the government will continue to take steps to reduce the incident’s impact on the economy and meet Vietnam's economic growth target.
Deputy Minister of Industry and Trade Do Thang Hai said that state management agencies have sought measures to reduce reliance on the Chinese market even though trade along the Vietnam-China border remains normal.