A worker welds a truck at a Truong Hai factory in the northern province of Hung Yen. Vietnam could speed up growth by fostering the private and foreign-invested sectors, which are already productive, an economist says. Photo: Reuters
Want a healthy economy? Limit credit, improve state investment and support the private sector, Trinh Nguyen, Asian Economics Research economist at HSBC, tells Vietweek in an interview.
Vietweek: In your recent report, you say economic growth should be built on increased productivity rather than credit expansion. However, at the moment, most companies still depend on credit. How do you explain this?
Trinh Nguyen: Credit is important to growth and would be useful to long-term sustainable growth strategies should it fund productive activities. Over the past nine years, credit in Vietnam has expanded more than 30 percent. While this supported growth, it also supported the expansion of nonproductive sectors of the economy. Productivity, after rising rapidly in the 1990s, slowed in the past decade as the additional input of capital generated less positive residual effects.
By June 30, 2012, credit had expanded by 5.6 percent compared to end of 2011, in line with our expectation of 13 percent growth for the year and the State Bank of Vietnam's target of 14-16 percent. The sluggish rate of credit growth (last year's was 14.4 percent) indicates that the Vietnamese government is willing to prioritize a more sustainable growth strategy over short-term growth. High inflation in 2011 shows that this [credit expansion] is not a sustainable strategy.
Obviously, in the mean time, measures meant to tighten the economy affect the whole economy, especially firms that over-leveraged during the boom years. This will force them to concentrate on their core activities and consider a more conservative approach to investment. From a government perspective, the slowdown of the economy will give policy makers a chance to focus on long-standing challenges and the inefficient allocation of capital in the economy. While Vietnam is unlikely to return to its 7 percent growth rate in the next several years, the adjustment process is necessary for the economy to increase its productivity and attain sustainable growth in the future.
What are concrete measures that can help Vietnam increase productivity?
While Vietnam has made significant strides to improve the economy, it faces several challenges: the economy has become highly dependent on capital inputs, but state-owned enterprises (SOEs) make up a large portion of total investment and are not generally using their capital efficiently; and SOEs require credit growth to be maintained, crowding out capital for more efficient enterprises and causing disruptions to the macro-economy.
Thus, improving the efficiency of state investment would go a long way in terms of raising productivity growth more broadly across the economy. The government recently passed a law requiring SOEs to disclose their earnings a helpful step in driving accountability and change. Additionally, the Ministry of Finance also passed a resolution requiring SOEs to withdraw from their non-core investments by 2015. While these measures are a step in the right direction, more needs to be done to restructure SOEs and ensure better financial discipline; real progress will likely take time.
In the short term, Vietnam could cultivate growth by fostering sectors that are already productive: the private and foreign-invested ones. For firms looking to start a business in Vietnam, the process is still relatively cumbersome, requiring many procedures. Once businesses are established, firms face many challenges, as the fragmentation of power between the central and local government complicates the task.
Currently, exporting and importing goods takes on average more than 20 days in Vietnam and less than 15 days in Thailand. While improvements have been made in this area, the pace could be more rapid Thailand improved significantly from 2006 to 2012. The challenges above illustrate a still relatively uncompetitive business environment in Vietnam.
These, however, are not intransigent problems. The improvement that Thailand has made to increase the efficiency of exporting and importing suggests that Vietnam could take steps to clear its complicated customs procedures. In fact, the overall message here is that huge upsides to productivity gains exist if some of these challenges are addressed.
While Vietnam has progressed from a country that once relied heavily on crude oil exports to an exporter of manufactured goods, it still has to import many of the raw materials and components to produce them. This is due to the fact that the country still has not developed a processing capability and an integrated supply chain. Developing the capacity to supply raw materials and parts to manufacturers would further enhance Vietnam's competitiveness. While China's labor costs three times Vietnam's, many manufacturers still remain in China for its convenient business environment and supply chain.
Still, Vietnam's cheap wages, political stability, and burgeoning domestic market attract a steady inflow of foreign direct investment. Inflows into Vietnam exceed that of the Philippines and Thailand. However, given that the country has strong fundamental advantages, the current level could be even further enhanced with a better business environment.
In addition to attracting more foreign investors, improving infrastructure and the business environment would further allow the private sector to flourish. This sector is the most productive in Vietnam and supporting it would enlarge an already thriving sector.
Vietnam's foreign currency reserve has increased this year and is now able to cover 10 weeks of imports. It may increase to 12 weeks late this year. Is the increase enough to ensure the stability of Vietnam's forex market, and manage its risk?
This is a positive step in that Vietnam has more room to manage its risk. However, 10 weeks of imports is still low and more can be done.
The exchange rate has remained unchanged for the past six months. Should Vietnam keep it fixed for the rest of the year?
The combination of a significant tightening of monetary policy in response to an increase in commodity prices and a large-step devaluation of the dong, have provided greater support for the dong, albeit with assistance from administrative measures to curb trading in gold and foreign exchange outside of the banking system.
With the coordination and flexibility of the central bank through its foreign exchange policy and monetary policy, these factors were generally positive for the trade deficit this year with abundant foreign direct and indirect investment. And remittances and foreign exchange reserves rose sharply this year, so we believe that rates will stabilize and increase slightly between now and year-end.
As predicted by HSBC, the USD/VND will be between 21,400 to 21,500 by the end of the year, a 2.4 percent rise compared with the start of the year.
Many of the factors that have worried us on the VND remain inflation, negative real interest rates and a sizable trade deficit but we are seeing improvements in these indicators. For the moment, the risks are still skewed slightly to further VND weakness. However, we are watching these indicators and if we continue to see improvement, then VND may start to become more attractive again.