Vietnam sizes up obstacles to surmount in year ahead

The year 2015 has witnessed many positive changes in the government’s macro-monitoring, especially in terms of interest rate policies, exchange rates, and improvements in the business climate to bring them in line with international practice.

The economy grew 6.68% in 2015, with the consumer price index falling to 0.63% year-on-year. The economy’s value grew to US$204 billion, a doubling from 2010. GDP per capita also rose significantly hitting US$2,228, up 1.9 times against 2010.

According to ANZ, Vietnam’s consumer confidence index rose 2.5 points to 144.8points in December 2015, noticeably higher than the average of 136.6 points recorded over the previous two years. This level marked a record high for Vietnam’s consumer confidence, and put Vietnam in the Asian-region pole position for the first time.

66% of the 1,000 respondents to ANZ’s survey said that they believed that economic conditions in Vietnam would be “good” over the next five years. Only 5% forecast that the economic would be “bad” for the same period.

The year 2015 also saw the entry into force of the new laws on Enterprises and Investment, as well as the amendment and supplementation of the Law on Property Business. In addition, amendments and supplements were made to the laws on excise and housing.

The new policies have been warmly welcomed by both local and foreign enterprises, as they have created an open legal framework for enterprises to do business easily. They have also eased conditions for the establishment of almost 95,000 enterprises. New enterprises were up 26.6% in number, and 39.1% in terms of capital, as compared to 2014.

Additionally, in the year just gone, about 20,000 enterprises resumed operations, about US$14.5 billion worth of foreign direct investment was disbursed, and the export turnover reached US$162.4 billion, up 81% on-year. All these achievements have laid firm groundwork for Vietnam to perform in the next stage of its development.

International economic integration

Last year also marked a new milestone in Vietnam’s international economic integration. Vietnam signed free trade agreements (FTAs) with the Eurasian Union (Russia, Belarus, Kazakhstan and Armenia)-VCUFTA and the Republic of Korea (VKFTA). The country also concluded negotiations on the Trans-Pacific Partnership (TPP) with 11 partners and the FTA with the EU (EVFTA), and joined the newly-formed ASEAN Economic Community (AEC).

The new FTAs will enable Vietnam to access a global market of over 1.4 billion people and US$43.7 trillion in GDP.

Under the VCUFTA commitments, about 59% of tariff lines will be removed upon this agreement’s entry into force, and a further 25% will be reduced annually. It is forecast that Vietnam’s annual exports will rise by 63% to Russia, 41% to Belarus, 8% to Kazakhstan, and exceed US$10billion overall by 2020.

Under the VKFTA terms, RoK has committed to reduce import duties by 95.4% (or 11,668 out of the total 12,232 products imported from Vietnam). Over the next 15 years, Vietnam has pledged to reduce import duties by 89.2% for many Koreans products such as textiles and garments, plastic materials, electronic spare parts, and vehicle components.

The two countries have set a trade turnover target of US$70 billion by 2020. The figure for the first 11 months in 2015 was US$33.6 billion.

Meanwhile, under the TPP, the 12 member state have committed to eliminating 78%-95% import tariff lines for Vietnam upon the agreement’s entry into force.

The Peterson Institute International Economics has forecast that the TPP will help increase Vietnam’s GDP by another US$23.5 billion by 2020 and US$33.5 billion by 2025. It will also help add US$68 billion to Vietnam’s export turnover by 2025.

The World Bank has also predicted that the TPP will help Vietnam’s GDP increase by an additional 8%-10% by 2030 (as compared to a non-TPP status).

Regarding the EVFTA commitments, Vietnam and the EU will remove more than 99% of import tariff lines. A small number will remain, for which the EU and Vietnam have agreed on partial liberalisation through zero-duty tariff rate quotas.

According to the European Trade Policy and Investment Support Project (EU-Mutrap), the EVFTA will help Vietnam’s GDP increase by another 7%-8% in 2025, with an export turnover expected to climb by an additional 50% by 2020, and 93% by 2025 (as compared to a non-EVFTA status).

Challenges remain

The year 2015 also witnessed some unsolved economic issues. For example, public debt, including government debt, is coming close to set limits. However, the government recently downplayed these concerns, stating that public debt remained a safe level.

According to the International Monetary Fund, Vietnam’s rate of public debt payment per total budget revenue has increased from 22% in 2010 to almost 26% in 2014. Local debts, in particular, are on an uptrend. Some localities are even suffering from a large budget deficit due to their expansion of current expenditures.

Additionally, the interest rate and exchange rate is being watched closely by enterprises every day as this has a major impact on their balance sheets. There has been a widening gap between the lending rate and the deposit rate, which has brought large profits to banks, because while the deposit rate has declined, the lending rate is still very high.

According to the State Bank of Vietnam (SBV) in 2015, the credit growth rate was 18%, which is the highest rise over recent years.

However, while the lending rate averages 5%-6% in many regional nations, in Vietnam this figure is far higher. Also, procedures for providing loans remain quite complicated. As a result, only 25% of loans go to small-and-medium-sized enterprises, while the remaining 75% of loans are obtained by large-scale enterprises whose governance and performance are weak.

Thus, while some economic achievements have been recognised, the majority of enterprises are currently tormented by cumbersome administrative hurdles in tax, customs, market management, and environmental policy.