Anemic recovery in emerging markets to weigh heavily on global growth in 2016

Weak growth among major emerging markets will weigh on global growth in 2016, but economic activity should still pick up modestly to a 2.9% pace, from 2.4% growth in 2015, as advanced economies gain speed, according to the World Bank’s January 2016 Global Economic Prospects.

Simultaneous weakness in most major emerging markets is a concern for achieving the goals of poverty reduction and shared prosperity because those countries have been powerful contributors to global growth for the past decade. Spillovers from major emerging markets will constrain growth in developing countries and pose a threat to hard-won gains in raising people out of poverty, the report warns.

“More than 40% of the world’s poor live in the developing countries where growth slowed in 2015,” said World Bank Group President Jim Yong Kim. "Developing countries should focus on building resilience to a weaker economic environment and shielding the most vulnerable. The benefits from reforms to governance and business conditions are potentially large and could help offset the effects of slow growth in larger economies."

Global economic growth was less than expected in 2015, when falling commodity prices, flagging trade and capital flows, and episodes of financial volatility sapped economic activity. Firmer growth ahead will depend on continued momentum in high income countries, the stabilization of commodity prices, and China’s gradual transition towards a more consumption and services-based growth model.

Developing economies are forecast to expand by 4.8% in 2016, less than expected earlier but up from a post-crisis low of 4.3% in the year just ended.

Growth is projected to slow further in China, while Russia and Brazil are expected to remain in recession in 2016. The South Asia region, led by India, is projected to be a bright spot.

The recently negotiated Trans-Pacific Partnership (TPP) could provide a welcome boost to trade.

“There is greater divergence in performance among emerging economies. Compared to six months ago, risks have increased, particularly those associated with the possibility of a disorderly slowdown in a major emerging economy,” said World Bank (WB) Group Vice President and Chief Economist Kaushik Basu. “A combination of fiscal and central bank policies can be helpful in mitigating these risks and supporting growth.”

Although unlikely, a faster-than-expected slowdown in large emerging economies could have global repercussions. Risks to the outlook also include financial stress around the U.S. Federal Reserve tightening cycle and heightened geopolitical tensions.

“Stronger growth in advanced markets will only partially offset the risks of continued weakness in major emerging markets,” said World Bank Development Economic Prospects Group Director Ayhan Kose. “In addition, the risk of financial turmoil in a new era of higher borrowing costs remains.”

Finance ministry weighs in on controversial dairy back taxes

Eight dairy importers and producers in Vietnam may be able to escape back taxes of VND700 billion (US$30.69 million) in a controversial case of import tariff calculations that even officials cannot see eye to eye on.

The businesses, including Vinamilk and Dutch-owned FrieslandCampina, said they have imported an ingredient called anhydrous milk fat from New Zealand-owned dairy company Fonterra since 2000.

Over the years, they have declared it as anhydrous butter fat, which they argue is the same product and is subject to a 5% tariff.

Under Vietnam's existing laws, oil and fat products from milk other than anhydrous butter fat, butter oil and ghee are taxed at a much higher rate of 15%.

Customs officers have recently ruled on the the case, saying that anhydrous milk fat and anhydrous butter fat are not the same.

They demanded back taxes, totaling VND700 billion and dated back to 2010, from the businesses.

In its recent letter to the Prime Minister, the Ministry of Finance has voiced its support for the businesses which have been seeking the government's help in fighting the customs' demand over the past month.

According to the ministry, the two products in question are almost the same. If customs choose to differentiate between them, they should still be taxed similarly, at 5%.

Commenting on the controversy, the ministry blamed it on the lack of transparency in tax rules on dairy products.

Vietnam airlines refuse to cut fares despite cheaper fuel, bigger revenue

Vietnam’s transport minister has called for lower airfares to match a sharp decline in fuel costs, but carriers say their tickets are already affordable.

At a meeting on January 4, Minister Dinh La Thang asked that Vietnam Airlines make its tickets cheaper after the national carrier reported a whopping 129% increase in consolidated revenues, to VND70 trillion (US$3.12 billion) in 2015, and a pretax profit of more than VND1.4 trillion (US$62.3 million).

“With such profits, the airline should cut fares for the sake of passengers,” Thang said, as cited by Tuoi Tre newspaper.

He noted that the price of jet fuel A1 in Asia in December dropped to less than US$48 a barrel, down 40% year-on-year.

Passengers board a Vietnam Airlines flight at Tan Son Nhat International Airport in Ho Chi Minh City. Photo: Dao Ngoc Thach

Local carriers said they have already cut fares by offering various discounts for domestic routes, allowing many people to fly at the same price of a bus ticket.

Pham Ngoc Minh, general director of Vietnam Airlines, said the domestic air travel market expanded to more than 40 million passengers in 2015 mostly because local carriers managed to win customers from bus services.

Lai Xuan Thanh, director of the Civil Aviation Administration of Vietnam, said it can only encourage airlines to lower their fares, instead of forcing them to do so.

He said the maximum domestic airfares are still 20% lower than the caps set by the agency last October.

Local carriers also said they have had to deal with bigger expenses from aircraft rental and purchases and foreign staff’s salaries due to a stronger dollar.

Fuel import tariffs and environment fees have also been raised, they said.

New exchange rate mechanism has little impact on property market

The new exchange rate mechanism will not make any remarkable impact on the Vietnamese real estate market, assured an expert from the CBRE Vietnam.

The Vietnamese dong remains stable compared to other foreign currencies in the region, CBRE Vietnam Deputy Director Nguyen Hoai An explained, adding that Vietnamese still account for 90 percent of investors in the real estate sector, and domestic capital flows dominate the market.

According to the CBRE experts from Singapore and Hong Kong, Vietnam’s exchange rates remain stable and positive among other Southeast Asian countries’.

They attributed Vietnam’s property market attractiveness to growing population that leads to increased demand for housing.

The State Bank of Vietnam (SBV) decided on January 3 that it will announce a central rate for the VND and the USD on a daily basis, serving as reference rate for credit institutions and foreign bank branches to set their own rates. Banks in Vietnam are allowed to trade the dollar within a three percent range above or below the central rate.

Privatisation to sustain Vietnam's deals blitz

Foreign firms are set to capitalise on Vietnam's privatisation drive and buy into assets such as Vinamilk and Mobifone to gain exposure to its fast-growing economy this year, boosting M&A deals that already hit a record US$4 billion in 2015.

The dealmaking flurry has been encouraged by a turnaround for Vietnam's US$186 billion economy last year, which as recently as 2011 was fighting a 20% inflation rate and a banking sector saddled with bad debt.

"With strong momentum in the Vietnamese economy and Vietnamese companies continuing to grow in scale, the opportunity for foreign companies to engage in sizeable transactions and partnerships has become increasingly attractive," said Rehan Anwer, head of Frontier Markets, at Credit Suisse.

Vietnam's economy grew 6.68% in 2015, the fastest pace in five years. By comparison, growth in the economies of most of its bigger Southeast Asian neighbours isn't expected to be as robust, hurt by tumbling commodities prices and falling currencies.That dampened their merger and acquisition (M&A) volumes last year.

A production line is pictured at a Vinamilk plant in Binh Duong Province, located in southern Vietnam.

Deal values in Vietnam last year were boosted by Thai tycoon Santi Bhirombhakdi-linked Singha Asia's US$1.1 billion stake purchases in the consumer goods and beer units of the Masan Group.

This year, the sale of an up to 45% government stake valued at US$3.1 billion in partly state-owned Vietnam Dairy Products JSC, or Vinamilk, is on the cards. Vinamilk and a finance ministry official were not immediately available to comment.

Fraser and Neave, backed by Thai tycoon Charoen Sirivadhanabhakdi, which has an 11% stake in Vinamilk, and other strategic investors are seen as potential bidders, bankers familiar with the situation said. F&N did not respond to requests for comment.

Other deals likely to materialise in 2016 include a potential US$900 million sale of mobile network provider Mobifone and a partial privatisation of Binh Son Refining and Petrochemical Company (BSR), said a senior executive of an advisory firm with close links to the government.

Mobifone said it does not have any information to share on the sale. A BSR spokesman said no final decision has been taken on the partial privatisation.

Deals are also likely in the textiles, footwear, construction and machinery sectors as investors position themselves before Vietnam and 11 other countries implement the Trans Pacific Partnership (TPP) accord, which aims to liberalise commerce in 40% of the world's economy.

The government has thrown open several sectors for foreign investors, as a long-waited rule kicked in last year allowing foreigners to own up to 100% in Vietnamese listed firms, except for some sectors such as property and transportation.

In banks, the government has promised to raise the 30% maximum limit.

Investors do see risks associated with the market. A key one is a five-yearly congress of the Communist Party which takes place this month, causing uncertainty about the kind of leadership that will emerge from it, though experts say the reform momentum will be unaffected.

"Expect hiccups along the way. After all, this is a frontier market," said Orsen Karnburisudthi, Bangkok-based senior investment manager at Aberdeen Asset.

Vietnam, Thailand chart AEC connectivity as the way forward

The formation of the ASEAN Economic Community (AEC) represents a springboard for further development of Vietnam and Thailand economic cooperation and trade relations, offering significant benefit for the two nations’ peoples.

Though Thailand has long been a country of great promise given its resources and geographic proximity to Vietnam, most experts say the potential has remained largely untapped, resulting in the two countries remaining among the world’s poorest.

Economic reforms that began in the mid-1980s have advanced in fits and starts, with much unfinished business lying ahead.

Key to the development agenda of both nations was their joining the World Trade Organization (WTO) and now the further implementation of the AEC underscores the continuation of their emphasis on not only regional, but global economic integration.

Given that the two nations are now at the dawn of the AEC, it is a good time to assess how well they have performed so far and what initiatives should be jointly undertaken to realize their fullest potential, they say.

Both nations have been on track in implementing their AEC commitments, notably in cutting tariffs, eliminating non-tariff trade barriers and creating a business climate conducive to expanding economic cooperation and trade with global partners.

But experts say this is just the start and long-term economic sustainability for both nations requires so much more in the way of well thought out coordinated reforms. The two nation’s peoples will have to work much harder than they have in the past to achieve success.

Speaking at a recent seminar, Prof Nguyen Mai, Chairman of the Vietnam Association of Foreign Invested Enterprises (VAFIE) talked about the potential for Vietnam given the backdrop of the AEC and the potential Trans Pacific Partnership (TPP).

Mai questioned the benefits of the TPP in an interview with Vietnamnet Bridge. "How foolish is it to let foreigners be the main beneficiaries in the Vietnamese market? Who instructs Vietnamese private businesses to benefit from the TPP?”

Dr Nguyen Tri Hieu, a financial expert, also was hesitant to fully back the TPP and was only moderately optimistic about it representing the best way forward for the Vietnam economy.

“Will Vietnam really benefit from the TPP, with growth in the gross national product (GNP) and exports?” Hieu was quoted as saying by Vietnamnet Bridge. “The challenge is huge.”

On the issue of the TPP, Thailand’s Deputy Prime Minister Somkid Jatusripitak in turn recently told the Bangkok Post that his country would be interested in joining the US led trade pact. “We are very interested but we must weigh the advantages and disadvantages carefully.”

Since the TPP is a ‘living agreement,’ additional countries such as Thailand would be able to join even once the current 12 members finish negotiations – which is far from a certainty at this point in time.

The uncertainties surrounding the TPP and the current global environment leave little doubt that the peoples of both Vietnam and Thailand will have to work smarter to achieve high levels of growth in their domestic economies over future decades.

Connectivity between the two countries and coordinated reforms to streamline and simplify trade regulations can aid prosperity for both nations and is an economically viable way forward for prosperity, say most leading experts.

Both nations should strive to transform themselves into a ‘land-linked’ economic region and invest in both policy reform and infrastructure connectivity, most notably as it relates to tourism and developing manufacturing supply chains.

A transformative regional railway initiative should be considered to connect Thailand and Vietnam seaports and major cities and economic trade zones, they say.

The future economic growth of Vietnam and Thailand will depend largely upon how effectively the two countries can facilitate economic cooperation and trade in each other’s country, which is greatly dependent upon improving connectivity.

The effective integration into the AEC will spill over and result in sustained long-term growth and development that will result in increased earnings and standard of living lifting the nations to hitherto untold prosperity, these experts say.

Sun Life Financial increases its stake in PVI Sun Life to 75pc

Sun Life Assurance Company of Canada (Sun Life), a wholly owned subsidiary of Sun Life Financial Inc., and PVI Holdings (PVI) announced today that Sun Life had completed the transaction to increase its equity ownership in PVI Sun Life Insurance Company Limited, its joint venture insurance company in Vietnam, from 49 per cent to 75 per cent.

The transaction was announced in November 2015 and has today closed following the receipt of regulatory approvals in Vietnam and Canada. PVI will continue to own the remaining 25 per cent.

“Through our increased ownership in PVI Sun Life, we will continue to foster Sun Life’s business and regional Asian expertise and capabilities with PVI Sun Life,” said Kevin Strain, president of Sun Life Financial Asia. “Riding on our successful partnership and long-term commitment to PVI and Vietnam, we are committed to helping the Vietnamese people achieve lifetime financial security by offering a strong suite of insurance and wealth management products.”

Michael Elliott, CEO of PVI Sun Life said PVI Sun Life would further enhance its ability to serve clients and support the development of Vietnam’s life insurance and pension markets by drawing on Sun Life’s capabilities.

“By making use of our two shareholders’ respective strengths and with a shared vision to improve the lives of Vietnamese, PVI Sun Life will continue to offer and refine a range of tailor-made financial solutions. And as always, our underlying goal is to help more and more of our customers to achieve lifetime financial security,” he said.

Vietnam has been one of the fastest growing economies in Asia in recent years and the life insurance and pensions industry is expected to continue experiencing strong growth. Since its launch in 2013, PVI Sun Life has established itself as the sixth largest life insurance provider in Vietnam and a market leader and industry pioneer in pensions.

FTAs bring great opportunities to leather sector: official

The conclusion of the Trans-pacific Partnership (TPP) agreement and other free trade agreements (FTAs) will bring great opportunities to Vietnamese businesses, especially leather and footwear firms.

Deputy Minister of Industry and Trade Ho Thi Kim Thoa made the remark during a conference in Hanoi on January 19, which was to review the production and export-import of the leather and footwear sector in 2015, and define development orientations in 2016.

Leather and footwear producers need to limit imports of materials in order to enjoy tariff incentives when they export their products to the US and European markets, Thoa stressed.

FTAs also put great pressure on Vietnamese footwear exporters, said President of the Vietnam Leather and Footwear Association Nguyen Duc Thuan.

He underlined that Vietnamese enterprises should be considering advanced technology applications in production in order to increase product quality and productivity.

Vietnam earned 15 billion USD from exporting leather and footwear products in 2015, up nearly 16 percent against the previous year.

The sector aims to enjoy a year-on-year boost of between 15-20 percent in export value in 2016.

Vietnam’s footwear export to traditional markets recorded huge growth in 2015, hitting nearly 50 percent in Chinese market, and 20 percent and 10 percent in the US and EU markets, respectively.

Producers paying special attention to renovating production, improving the quality of their products, and actively seeking new markets significantly contributed to the sector’s huge development in the past year, Thuan said.

Dong Nai: FDI companies raise minimum wages

Nearly 400 FDI companies in the southern province of Dong Nai have increased their minimum monthly wages by about 500,000 VND (22.3 USD) for each worker on average.

The rise, which was reported to the provincial Department of Labour, Invalids and Social Affairs, complies with the Government’s Decree 122/2015/ND-CP, which was issued in November 2015 and stipulates that regional minimum wages would be raised from January 1, 2016.

Deputy Director of the department Pham Van Cong said Dong Nai is housing 1,600 foreign invested projects, and most of the companies that have made wage reports are of large scale and use a great number of workers.

Many other FDI firms have also hiked salaries in line with Decree 122 but have not reported to the department, he added.

Additionally, a majority of FDI businesses in Dong Nai already paid their employees more than the State regulated levels by 300,000 – 500,000 VND per capita a month in 2015.

The continued wage rise illustrates their compliance with Vietnamese laws and care for workers’ benefits, Cong said.

Regionally-based monthly minimum wages vary in four different regions based on four separate benchmarks determined by living standards in each area.

Under the Government decree, the minimum monthly wage for Region 1, which covers urban Hanoi and HCM City, will be 3.5 million VND (155.6 USD), up 400,000 VND (17.8 USD) compared to the 2015 level.

The minimum monthly wage for Region 2, which covers rural Hanoi and HCM City along with urban Can Tho, Da Nang and Hai Phong cities, will be 3.1 million VND (136.4 USD), up 350,000 VND (15.6 USD).

The level for Region 3, which includes provincial cities and the districts of Bac Ninh, Bac Giang, Hai Duong, and Vinh Phuc provinces, will be 2.7 million VND (118.8 USD), up 300,000 VND (13.3 USD).

For Region 4, which encompasses the remaining localities, the level will be 2.4 million VND (105.6 USD), up 250,000 VND (11.1 USD).

The new wages are applied to workers in businesses, unions of cooperatives, cooperatives, cooperative groups, farms, households, individuals and organisations that employ workers under labour contracts.

They serve as the basis for employers and workers to negotiate and pay monthly wages.

Radical restructuring urged to optimise integration opportunities

Drastic, comprehensive and consistent economic restructuring is needed in order to optimise opportunities brought by the strong international integration process in 2016-2020, experts have said.

A report by the Central Institute for Economic Management showed that the master plan on radical overhaul of the economy in 2011-2015 has brought about positive and profound outcomes.

Most remarkable were macro-economic stability, enhanced national safety index and obvious economic recovery trend.

Investment efficiency and productivity have been greatly increased, and the investment and business environment was improved thanks to the promulgation of laws on businesses and investments. Public investment and activities of State-owned enterprises (SOEs) and banks have become more transparent under stricter supervision. The country has moved up the ranking list of world credit ranking agencies.

The equitisation of SOEs has met 90 percent of the plan for 2011-2015. However, the quality of equitisation needs to be further improved when many SOEs sold only a small percentage of stocks to investors, and many strategic investors are not strong enough to push for changing the business administration mechanism.

On the other hand, many SOEs in which the State holds the control stake are slow in withdrawing capital from non-core operations.

Nguyen Tu Anh, head of CIEM’s macro-economic department said while the restructuring’s outcomes are encouraging, they still fall short of expectations because of the State’s strong influence on the distribution of resources.

According to Anh, the restructuring of public investment just stopped at tightening investment rules, failing to impose measures to increase investment efficiency and prevent wastefulness.

He noted that risks of macro-economic instability still exist due to the rapid increase of public debt and the existence of many factors that can drive up public debt.

Sharing this view, Nguyen Xuan Thanh of the Fulbright economics teaching programme said if the Government maintains the budget deficit at the current level will raise the ratio of public debt to GDP to an unsustainable level. He also expressed concern about the monetary policy when credit grew strongly but was not directed into production activities.

CIEM Director Nguyen Dinh Cung noted that the expectation that FTAs will propel reforms in SOEs may not be realized, explaining that the deals only emphasise the equity between Vietnamese SOEs and enterprises of FTA members without mentioning the inequality or “preferential treatment” of SEOs over their private peers.

“The nature of FTAs is to promote more freedom and favourable conditions for businesses, better protection of investors’ rights and interest and fairer competition,” Cung said, stressing that integration means firstly Vietnam has to change the way of thinking and push stronger reforms in the direction of full and modern market economy.

Meanwhile, a senior advisor to the project on assisting Vietnam in restructuring and competitiveness enhancement, Ray Mallon said Vietnam’s reforms are not enough to create a favourable and market-friendly business environment in comparison to other regional countries.

He added that Vietnam’s indexes on business climate and State administration are lower than that of regional countries.

Discussing the directions for restructuring in 2016-2020, CIEM Director Nguyen Dinh Cung voiced his opinion that the country should continue to address issues related to assets and asset ownerhip. He also urged improving State management and the ineffective use of minerals and natural resources as well as human resources.

Fulbright programme’s Nguyen Xuan Thanh also put stress on changing the way of thinking and the role of the State apparatus in economic management. According to him, ministries now perform many functions as policy maker, asset owner and market supervisor at the same time while there is a clash of interests among those functions.

In addition, the equitisation of SOEs should be more drastic with the involvement of more private and foreign investors instead of cross ownership among SOEs.

Garment industry embraces opportunities from new-generation FTA

The Vietnam National Textile and Garment Group (Vinatex) will strive to raise the local content of its products to 60 percent as of 2018, the year when the TPP and the Vietnam-EU FTA are expected to take effect.

Chairman of Vinatex Tran Quang Nghi said only by doing so can the group meet the requirements of these two new-generation FTAs in order to fully benefit from preferential tariffs.

Towards the goal, the group recently put into operation two yarn making factories and a dyeing-weaving plant. A yarn factory in northern Nam Dinh province is scheduled to be launched in the first quarter of this year, while preparations are underway for a yarn-dyeing-weaving complex in the central province of Quang Nam. The complex will supply around 12,000 tonnes of knitted material a year.

Six other garment making plants are also slated to be completed in the first half of this year.

However, managers in the textile and garment sector said it will take some time before the new generation FTAs can actually bring any benefit, as both the TPP and the EV FTA have to wait for parliament approval in member countries and other time-consuming preparation procedures.

Therefore, 2016 will still be a year of many challenges for the sector, more so when 2016 is forecasted as a year of fluctuations in the financial market and the world’s pace of growth.

According to Vinatex General Director Le Tien Truong, except for the US, other major markets such as Europe and Japan show signs of low economic growth, which means global demand will stay at around the same level as in 2015.

In addition, crude oil price is believed will remain low, resulting in low prices of materials such as synthetic fibre. Subsequently, the price of natural fibre is expected to drop to compete.

Therefore, Truong said it is hardly possible that order value will increase in 2016. In such circumstances, the sector’s export value can only be driven by growth in output, which is estimated at 11-12 percent.

Nguyen Xuan Duong, General Director of Hung Yen Garment Company (Hugaco), said the move of other countries in the region to devaluate their domestic currencies has reduced their production costs compared to Vietnam’s. Hence, customers might switch orders to other countries in the region, including Indonesia, Myanmar or even China, he said.

In 2015, Vietnam remained in the top five largest apparel exporters, raking in 27 billion USD, which was 500 million USD short of the target.

General Director Le Tien Truong estimated the sector’s export turnover for this year at 29.5-30 billion USD.

Strong growth expected in resort market this year

The resort market in Vietnam will see feverish investment this year due to its great potential, according to experts.

Nguyen Tran Nam, Chairman of Vietnam Real Estate Association, said the local economy has gained stability and growth in 2015, while the income of locals has also increased. Therefore, there is a demand among the people to own a property, which includes a resort product.

Meanwhile, the local market has launched many resort projects with large scale, synchronous infrastructure and reasonable selling prices, so the projects have attracted numerous local buyers, he said.

Development of the resort market in 2014 and 2015 was to kick-start a new development period in the local resort market because Vietnam has many favourable natural, social and cultural conditions to develop the market, including nice beaches, a long coast and higher income, Nguyen Nam Son, Chairman of Tanzanite International said. Tanzanite is an international real estate development company developing the Hamptons Ho Tram, a luxury resort development in Ho Tram, Vietnam.

Meanwhile, a resort has become a new property product on the local market, and as the income of the Vietnamese increases so does their demand for tourism, he said. Those factors are favourable for the domestic resort market and ensure strong development in the next five to ten years.

Ngo Quoc Dung, Deputy General Director of HB Management, working for the development of New Hoi An City project, said Vietnam is one of the countries with a high number holidays with about 138 days off per year, accounting for 40 percent of total days in a year. Therefore, the local people need at least 690 million nights for accommodation each year.

In addition, Vietnam attracts about seven million foreign visitors with high demand on resort products and high expenditure in tours, he said.

"Those are reasons of strong development of the local resort market in the future, and we will have no worries about lack of demand for resorts," Dung said.

Do Thu Hang, head of research and consultancy at Savills Vietnam's Hanoi branch, agreed that the demand of locals for tourism has increased recently.

"At present, there is a demand from the Vietnamese any time of the year and not just in the summer or the Tet festival," she said.

"High demand and stability of the local economy, as well as an increase in the confidence of buyers, will support the local resort market in developing further in the future because it is in the first stages of development. Therefore, the local resort market will continue positive development this year."

VEF/VNA/VNS/VOV/SGT/SGGP/Dantri/VET/VIR