State firms' debts dampen economic efficiency

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Workers at an instant coffee factory belonging to the Trung Nguyen Coffee Group in the northern province of Bac Giang

Eliminating the massive burden of public sector debts and improving the business environment are urgent tasks if the government wants to improve the efficiency of the economy, Trinh Nguyen, an economist with the Hongkong and Shanghai Banking Corporation Limited (HSBC) tells Vietweek.

Vietweek: HSBC forecasts Vietnam's growth to slow to 5 percent this year and 5.3 percent next year. How does this compare with other countries?

Trinh Nguyen: The slowdown reflects both weak external and domestic demand. The eurozone is expected to contract this year while China is slowing down. In this respect, Vietnam follows the trend of major economies. However, ASEAN countries (Malaysia, Indonesia, the Philippines, and Thailand) have had robust growth this year thanks to strong domestic demand. Vietnam, on the other hand, has seen domestic demand decelerate while at the same time facing a tough global environment.

What should the government do to improve the efficiency of the economy?

The government has acknowledged that the state sector is highly inefficient and needs to be reformed. It still makes up about the same percentage of GDP as when the "equitization" process began in 1992. The first step is to get rid of the large burden of debts accumulated after years of leveraging to invest in highly inefficient enterprises.

The faster the government resolves to mop up the bad debt, the sooner the economy will return to its long-term trend. It is not just the ineffective state-owned enterprises (SOEs) that are hurt by the frozen financial market but also highly efficient SOEs and private enterprises. Domestically, lenders are holding back as they are adopting a more conservative approach and eligible borrowers are waiting for when growth returns. Externally, even well-governed and managed enterprises have difficulties accessing the cheap capital that is readily available in the developed world due to the reputational damage that Vietnam has suffered after several publicly featured defaults. Ultimately the government would need to increase the transparency of SOE operations as well as force them to be more efficient (for example, by undertaking only activities that are profitable).

Can Vietnam, in the current situation, again take the measures it did to save the economy during the economic crisis in 2008 and 2009?

No, because it does not have the appetite to increase government debt or aggressively expand the state sector. Vietnam is committed to reducing the state budget as well as increasing the efficiency of public investment. Rolling out a large fiscal stimulus would not be desirable at the moment. The government has taken the right steps in curbing credit growth to keep a stable macro environment and it is committed to doing so. As such, we do not expect a fiscal or monetary stimulus.


"The faster the government resolves to mop up the bad debt, the sooner the economy will return to its long-term trend."

Trinh Nguyen, HSBC Economist

When can we again see the 7 percent growth rates of the past?

Vietnam's growth in recent years has been input-led (increasing labor and capital) rather than productivity-led. This means that for Vietnam to expand rapidly, more capital and labor would be needed. However, given that most of the state investment is poorly used, increasing investment will generate growth but it will come at a cost in the long term.

A more sustainable way to boost growth is through increasing productivity. Significant progress is being made in stabilizing the macro environment but not in improving the productivity of the economy.

What concrete action does Vietnam need to take to boost industrialization?

While Vietnam has attracted foreign producers of high-value-added goods such as electronics, domestic capability remains weak. For domestic firms to move up the value chain, a concerted effort needs to be made to support the linkages between domestic and foreign firms. A specific strategy for the industry that Vietnam targets as well as for domestic firms to improve their capabilities would be required. An example of this is how Ireland targeted the health sector (medical devices) and created an investment agency that coordinates between domestic firms, foreign multinational corporations, and skills training to meet the demand of foreign firms as well as improve Irish linkages with foreign firms. This requires collaboration between different stakeholders as well as a specific vision for industries that Vietnam would like to target. Passively allowing FDI into the country would only benefit investment and employment prospects. Some technological spillover would occur but taking an active approach would ensure that Vietnam maximizes the benefits.

In addition to increasing linkages with foreign firms to gain technological knowledge and be integrated into the global supply chain, Vietnam would need to improve its coordination at the local and state levels to support domestic firms.

To turn Vietnamese goods into world-class products, research and development would be required as well as support such as teaching Vietnamese firms how to market their products. These things can be learned from observing how multinational corporations produce, process, and market their goods. Again, while some Vietnamese firms already do excel thanks to their own research and development and evolution, to make this a nationwide phenomenon rather than an ad hoc process, concrete plans are necessary.

For example, when Intel invested in Vietnam, it quickly learned that Vietnam did not have enough engineers that would adequately meet its needs. Vietnamese universities should be coordinated to train people to meet the evolving needs of society. Vietnam is a highly literate country, which is commendable given its income level, but the population's skill levels are not at international standards. In short, Vietnam needs a more coordinated policy process for it to realize its ambition.

What is really encouraging is that Vietnam is a latecomer to the industrialization process and it can learn from the successes and failures of countries that have already undergone the same experience. All countries that have successfully done so have created an economy that interlocks well with different parts of the system to communicate with each other to evolve and achieve better productivity. Currently, this is lacking in the country. 

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