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Adapting to circumstances

Released at: 09:46, 24/06/2017

Adapting to circumstances

Photo: Viet Tuan

VET spoke with Senior Economist Dr. Vo Tri Thanh about the government’s work on macroeconomic policy during its first year.

What is your view of the government’s macroeconomic efforts since last year?

There have been three main points in the government’s macroeconomic policy over the past year. Firstly, the spirit of policy and reform. This is a problem that began in 2011, when Vietnam faced a decline in growth quality and some macroeconomic instability. 2011 can therefore be seen as a turning point in policy reform. Vietnam needs to focus on macroeconomic stability and structural reforms, especially in banking and finance, public investment, and State-owned enterprises (SOEs). It also needs efforts in integration. Since 2014 and 2015, thanks to improved macroeconomic stability, the country’s economy has undergone a gradual recovery.

Secondly, there have been new developments since the start of the new government’s term. Protectionism and nationalism emerged globally after Brexit and the US election. The global economic recovery remains slow and uncertain. In particular, the fourth industrial revolution (Industry 4.0) will change the way business is conducted, and in addition to growth linked to productivity, much attention is needed on social issues and climate change.

Thirdly, Vietnam must have a vision to exceed its middle-income status. It will only enjoy the “golden age” of its population for the next ten years, when there will be some new challenges.

What have been the positive macroeconomic policies the government has completed over the last year? How have these policies helped the business community in particular?

The government has paid strong attention to stabilizing macroeconomic management. It has been flexible and done quite a good job in managing financial and monetary policies, even though there remain unresolved issues in this area. It paid serious attention to interest rate and exchange rate issues.

The pace of restructuring and equitization at some large SOEs has been sped up, together with IPOs and listings. This process has also been conducted in a more transparent manner. The government has issued a resolution to resolve bad debts at banks and regulations to handle weak banks, as a preparatory step in strengthening the banking sector.

Vietnam’s integration strategy achieved two good points before protectionism recently gained some traction. Firstly, it has connected well with major regional markets and trading partners by signing free trade agreements (FTAs). Secondly, it has established good strategic partnerships on the basis of mutual benefit. But since global developments have been changing so rapidly, Vietnam must quickly adapt to every new change, for example the TPP. 

What policies have not been so positive?

Firstly, inflation seems to be trending upwards, so the country’s monetary policies must support the State budget, since collections are still below par due to lower-than-expected economic growth and unfinished reforms to budget expenditure. In the meantime, the government has issued a large volume of bonds to cover debt repayments and infrastructure investments. Consequently, both the budget deficit and public debt remain high.

Secondly, although the economy has been growing at some 6 per cent or more, this is still short of the break-even point in balancing macroeconomic issues. The economy’s major driver is still the foreign-invested enterprise (FIE) sector, while the domestic sector is weak. Long-term challenges also require greater changes and efforts by the government.
Thirdly, structural reforms continue at slow a pace, so the government must quickly complete the legal framework and infrastructure.

What has impressed you the most about the government’s macroeconomic policies over the last year?

I have been most impressed by the government’s reform efforts. This can be seen clearly through strong commitments to reforms in all fields made by the head of the government. Commitments have been gradually realized through actions in certain areas, such as improving the business environment. Vietnam’s competitive ranking indexes have improved a great deal. The local market has seen strong reactions, for example the increasing number of newly-established enterprises in 2016 and the early months of 2017, especially in the property sector.

I am also impressed by the government’s efforts to speed up banking sector reform as well as on the external relations front.

What are Vietnam’s economic challenges in 2017 and to 2020?

Most of the country’s macroeconomic targets have not been reached. The world is still full of uncertainty and there are some political, economic, trade, and monetary risks, while capital flows are still affected by policies based on protectionism and liberalization.

On the domestic front, since the economy has been going through deeper structural reforms, it is not just monetary policy but also the entire banking sector that needs to be effectively handled and reformed, together with resolving bad debts and weak banks without causing major shocks to the sector as a whole. SOEs also needs to be reformed and restructured faster, which may involve more resources. There might possibly be some trade-offs in both the mid and long term.

On the external front, Vietnam’s economy needs to rebuild trust among the public, investors and business communities regarding its ongoing reform efforts in the mid and long term. This is the government’s greatest challenge, so it should identify priorities because the country’s resources are limited. 

Do you think the government will be able to handle these challenges to 2020? 

I think the government may not have done well initially but there have been relative gains. There is real change in reforms and in the quality of economic growth. This needs to be viewed in the context of Vietnam still being in a transitional period and at a development turning point, and the economy is still developing without stable resources to cope with sudden shocks. But I believe that Vietnamese people are very flexible enough to adapt and cope.

This is the turning point for Vietnam. Nothing can stop it reforming. Some may question the pace, but all Vietnamese people support reforms. I believe Vietnam will face many challenges, so the government should select which priorities to address first. It should also have better supervisory mechanisms that work independently, without facilitating “interest groups”, and instead closely link and connect markets and the policy-making process.

What advice would you give foreign investors about doing business in Vietnam?

There are four reasons foreign investors should invest in Vietnam. Firstly, it is at a turning point and still a developing economy. It may not be viewed as a promised land, but is still worth investing in.

Secondly, Vietnam’s existing disadvantages could be advantages for foreign investors. For example, its unfinished economic structure create room for cooperation. Its educational system, infrastructure network, and human resources are areas that foreign investors should invest in.

Thirdly, Vietnam’s economy has been quite open if you look at it from a trade and foreign investment standpoint. Vietnam has many FTAs with major trading partners, helping investors connect with other markets.

Finally, Vietnam has a stable political environment while its reforms are generally on track, benefiting investors in the areas of tourism and agriculture, for instance, in the long term. Vietnam also has some new areas for foreign investment, such as startups, IT, and logistics. It has not only been open to traditional investments but also to new kind of investments, especially in new high-tech industries and sectors. The forms of investment available in Vietnam now have also been diversified, making it worth doing business in the country. 

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