Wednesday, 02 May 2012
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Vietnam: Emerging Market Toolkit – April 2012
British Embassy Hanoi
Vietnam’s recovery from the global economic crisis has been rapid but uneven. High growth has been accompanied by macroeconomic instability, which the government is now trying to address.
Vietnam is broadly supportive of UK global economic objectives (free trade, climate change, IFI reform).
With nearly 90 million people growing at about 7% a year, Vietnam has the potential to be much more influential.
In 2011 Vietnam introduced a number of measures designed to reduce the trade deficit to 10.4% of export turnover from 17.5% of export turnover in 2010.
1986 saw the introduction of Vietnam’s “Doi Moi” economic reforms; similar to those begun in China around a decade earlier (1979). In many ways, Vietnam now looks like China 10 years ago, including GDP per capita, the share of the economy run by state owned enterprise, and the state of economic reform.
Due to a higher degree of isolation from global trade and capital markets, Vietnam was spared the pain suffered by others in the region during the Asian Financial Crisis in 1997. Vietnam suffered its own near financial crisis in 2007 (a year before the global financial crisis) - when the stock market halved (reversing the doubling seen in 2006). This was due to a reversal of the over-confidence associated with Vietnam’s 2007 WTO accession and the subsequent boom in FDI , totalling US$71.7 bn in 2008 (up from US$21.3 bn in 2007 and US$12 bn in 2006). Partly due to the earlier crash, partly due to the low level of openness and sophistication of Vietnamese financial markets, the economy was not heavily affected by the global financial crisis, growing 5.3% in 2009.
Vietnam has promising long-term growth potential, often coming towards the top of GDP growth forecasts over the next 30 – 40 years. However, Vietnam has macro-economic weaknesses. Inflation is the most serious (18% in December 2011) but on the decrease (14% in March 2012). Among three reform plans (public investment, banking sector and State owned enterprises), moves in banking sector reform is more visible. According to the Governor, between five and eight domestic banks will soon merge, after the merger of three small banks in December 2011. Bank bad debts are officially estimated at 3.6% of total outstanding loans, while Fitch estimates that this figure should be 12%. Interest rates were cut by 1% in March with a hope to restore production when the inflation is on the decrease and Q1 GDP growth rate is at the lowest level (4%). While Vietnam’s overall government debt level is relatively benign (44% of GDP 2011), it is on the increase thanks to high fiscal deficit (4.9% of GDP (2011). The fiscal deficit, trade deficit (8% of GDP in 2011) and fears of further devaluation have prompted the ratings agencies to downgrade their sovereign credit ratings since December 2010, with the most recent one being in B+ (Fitch rating).
Economic Drivers and Structural Change
The economy is balanced and well-diversified. From a low-income, rural and agricultural-based country a few decades ago, Vietnam has developed into a middle-income country, aiming to become a modern industrial country by 2020. The components of GDP have been transforming, mainly from the dominance of agriculture to a much greater role for Industry and Construction, which now accounts for over 40% of GDP. (see chart)
Political stability has been an important part of Vietnam’s growth trajectory over the past few decades. Vietnam’s political situation is much more stable than peer countries in the region which is an important advantage in attracting investment, and boosts its competitiveness.
Ongoing economic liberalisation is also key. Since Vietnam began a program of economic liberalisation in the mid 80s, the country has achieved tremendous growth. With the gradual privatisation (Vietnamese prefer the euphemism equitisation) of State-owned enterprises (see chart), the country aims to raise productivity and competiveness and to cut ineffective operational costs for better economic performance.
Vietnam also benefits from favourable demographics (average age 27), rural-urban migration (with 60% of the employment still in agriculture) and a large labour force. It is the world’s 13th most populous country (88 mn) and has a young population (90% of the population is within or below working age), which provides a large domestic consumer market and a young labour force.
Risks to continued economic growth are:
Slow-down in economic reform. The number of State Owned Industries fell from 12,000 to 6,000 between 1992 and 1998, then from 6,000 to 2,000 between 1998 and 2004. Since then barely 100 a year have been privatized and the rate of privatization slowed further since 2009. The economic downturn makes it difficult to implement the Government plan of halving SOE number to 650 by 2015.
Macroeconomic imbalances. Vietnam’s large and consistent trade deficits and high inflation make a volatile macroeconomic environment and can damage business confidence. Despite the decreasing trend, the inflation remains as high as 14% in March 2012, mainly driven by food costs. This is the highest inflation rate in Asia. Although improved from USD 12.6 billion trade deficit in 2010, the trade balance remained deficit of US$9.5 billion (8% of GDP in 2011).
Persistently high levels of corruption. Transparency International’s league table places Vietnam as the 112th most corrupt country (out of 183) – this contrasts with China at position 75. Corruption is seen by the business community as the single biggest factor holding back long term growth.
Growth in 2012 is likely to reach 6%. This is lower than originally anticipated because of a renewed (since February 2011) attempt to stabilise the macroeconomic environment, through raising interest rates to control inflation, restraining (rampant) credit growth, and reigning in the fiscal deficit. Meanwhile the annual inflation rate is expected to less than 10% in 2012. The completion of the 5-yearly Communist Party Congress in February 2011 meant the government is now better placed to take such difficult (and unpopular) positions, which signal a clear and welcome intent to focus on stability rather than solely on growth. Notable actions taken since the end of the Party Congress show that the government has begun to realise the importance of taking firm action to address the threats of high inflation, inefficient investment, unstable banks, and systemic low confidence in the Dong, including a substantial tightening of monetary policy. But they have yet to seriously address State Owned Enterprise reform which matters for long term growth
International Positions and Policies
ASEAN: Strengthening, and working within ASEAN is one of the main pillars of Vietnam foreign policy. Vietnam chaired ASEAN in 2010 and attended the G20 in this capacity.
EU-Vietnam FTA: After deciding to suspend the EU-ASEAN FTA negotiations (differences over Burma), the EU has progressed with independent ones. Singapore and Malaysia being the most advanced under discussion, and Vietnam being the third in line. The FTA is very important to Vietnam because the EU is a focal and significant export market (of key products such as leather shoes, sea-products, garment and textiles). Yet Vietnam suffers from a lack of necessary resources and capacity to negotiate. Both Vietnam and EU have not yet reached an agreed approach.
WTO / Doha Development Agreement: Vietnam joined the WTO in 2007, and this brought about large reductions in tariffs. But these still remain higher than in most other SE Asian nations (about 50% in many sectors). WTO entry created a surge in trade (Vietnam’s exports/GDP is 156%) and Vietnam now has a very open economy (i.e. trade relations with over 230 countries, including exports to 219 countries and imports from more than 151 countries). Vietnam therefore is quietly supportive of progress in the WTO negotiations. Vietnam is a member of the new Trans Pacific Partnership - an FTA being negotiated with the USA, Singapore, Brunei, Chile, Malaysia, New Zealand, Australia and Peru (which excludes China).
International Financial Institutions (IFIs): Vietnam tends to borrow from ADB, WB and countries (notably Japan). Vietnam is supportive of the “Chiang Mai” Initiative, which is an East-Asian attempt to form a currency safety net (seen by some as an effort to form an Asian-IMF). However, this has been in discussion since 1997 and still remains non-operational.
Climate change: Vietnam is one of the world’s most vulnerable countries to the impact of climate change. This is partly due to the agrarian nature of its economy, the long and very low-lying coastline, and reliance on rivers originating in China, Laos and Cambodia. They have developed a low-carbon economic development strategy with foreign aid partners (including DFID).
Millennium Development Goals (MDGs): As a large recipient of international aid, Vietnam takes a keen interest. Of all the MDGs, Viet Nam has made the most impressive progress on MDG 1 on poverty reduction. Vietnam has done very well in poverty reduction and reached middle-income status (US 1,116 per capita) in 2010. From a poverty rate of 58.1% in 1990, the country has successfully reduced poverty to 15% in 2011 – one of the world’s largest improvements. Aid flows are expected to fall over the next 5 years with DFID set to exit in 2016.
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