The country needs counter-cyclical mid and long-term policies to avoid stagnation and "the middle income trap," Antonio Berenguer, trade counselor, head of Trade and Economic Section of the EU Delegation in Vietnam, tells Thanh Nien Weekly in an interview.
Thanh Nien Weekly: Vietnam is facing a high risk of inflation in 2010. How will inflation affect European firms operating in the country?
Antonio Berenguer: Generally speaking, inflation causes negative affects not only on European companies but on all companies operating in Vietnam. At this point in time, one of the main factors behind the current level of inflation is the 8.84-percent devaluation of Vietnamese dong that took place over the last four months. As a result of this, first, rising inflation makes products of the companies which rely on imported inputs, materials and machineries more costly. Policy makers may seek to curb imports and encourage exports as Vietnamese products become cheaper and, ultimately reduce the trade deficit. This all looks good but there are unintended ramifications to this policy. Vietnamese industry is still developing and most imports in Vietnam are not of consumer goods but of raw materials and construction inputs, which are important to build a solid industrial base. We can expect that industrial development will slow down as a result of this, in the mid-run, albeit with a slight increase of cheaper exports in the short-run.
Many foreign-invested companies rely on imports for their products and, as devaluation makes imports more expensive, products will in turn become more expensive. We should not forget that inflation as economists rightfully refer to as a kind of tax imposed on consumers wields a negative impact on the purchasing power of local consumers. The consumer price index (CPI) of Vietnam in February has increased by 1.96 percent month-on-month.
The increase is in fact the highest rise in the past 20 months. You see, no matter how fast the economic growth of Vietnam can be, the surge of the inflation induces local consumers to tighten their purse strings, thus reducing the sales of goods and services and the economic pace of the country as a whole.
What's the biggest obstacle faced by European companies in Vietnam? What are your suggestions for the Vietnamese government?
Vietnam has achieved certain encouraging improvement in creating a pro-business climate for companies, particularly as a result of WTO accession. A mere look at Eurocham's 2010 White Book on Trade Issues and Recommendations provides a panoply of trade barriers that need addressing by the government of Vietnam. It is hard to single out a few barriers that are more significant than others. To name a few, I would start by the difficulties that distributors are facing in meeting the criteria of Economic Needs Test which is regulated by the Decree No. 23. I would also add the need to develop a nationwide strategy for roll out of shops and outlets. Another good example is intellectual property protection. Vietnam has good laws and regulations to protect intellectual property rights (IPRs), but the complex enforcement system and unclear competence among relevant authorities make it almost impossible to uproot IPR violation effectively by foreign right holders. Lack of tax deductibility of promotional and advertisement expenses, excessive fiscal burden for imports of cars or wines and spirits, and red tape in administrative procedures are also prime concerns of the EU industry.
How do you assess Vietnam's capacity to attract foreign direct investment (FDI), especially from European companies?
Both trade and FDI have been negatively affected by the economic downturn. In 2009, US$16.3 billion was invested into 839 new FDI projects, down 46.1 percent in number of projects and 75.4 percent in amount of capital, and $5.1 billion was injected into 215 existing projects, 1.7 percent decline in amount of capital. Similarly, FDI implementation has gone down, more than $1 billion and exports have decreased by 9.7 percent.
EU companies, FDI and exports from Vietnam have been affected at roughly the same ratio than other foreign invested enterprises, who have concentrated in existing ventures as opposed to starting new investments.
The EU, however, remains committed to Vietnam and its attractiveness. Many EU companies continue to revisit their China-Vietnam strategy with a view to bring more weight to the Vietnam component in their investment decisions. I believe that these changes will continue to be more evident by the year-end and the beginning of 2011.
What's your assessment of Vietnam's exports, especially its shipments to the EU, in 2010?
Vietnamese companies have demonstrated their resilience during the economic crisis. The 9.7-percent decline in export performance in 2009, in my judgment, is not at all discouraging in fact, it is rather good when compared with neighboring countries. This year's slow recovery suggests that in 2010, perhaps a 5-7 percent growth is within the reach. But, it should be noted that as an export-oriented economy, Vietnam's trading performance depends a lot on consumer behaviors in importing partners.
We have seen very positive signals in the US and EU economies recently. Having said that, I would think we should not be too focused on how many percentage points the country gets on export performance, but we'd better see whether or not sustainable and predictable market access is established for the country's producers.
On one hand, Vietnamese companies would need to move from a manufacturing base that relies on cheap labor and raw material processing to a mechanism based on high value-added production and services, as I indicated before. On the other hand, Vietnam can improve the tariff regime that it enjoys in third country markets, in particular the EU. The recent announcement by the Prime Minister of Vietnam, on the occasion of the first visit of the EU Trade Commissioner De Gucht, of a new bilateral Free Trade Agreement between Vietnam and the EU could signify tariff reductions for major Vietnamese industries such as footwear or textiles of more than 10 percent that is, more than $200 million in savings for Vietnam.
What are the challenges for Vietnam as one of the countries in the region with rapid economic growth?
The rapid economic growth in the past years has made, in recent years, an incredible dent in poverty in Vietnam. Vietnam already achieved the average GDP per capita of more than $1,000 and, as the second largest rice producer in the world, it exported as much as six million tons of rice in 2009.
But challenges remain ahead and, in particular, the one of stagnation the so-called "middle-income trap." Indeed, Vietnam remains a manufacturing base of mostly labor-intensive products with little value added. Vietnam's main vector of competitiveness is cheap labor.
Vietnam must rapidly put in place counter-cyclical mid and long-term policies to develop more vigorously its services sector. Otherwise, other neighboring countries with abundant cheap labor will soon become credible alternatives to Vietnam in terms of attracting investment.