The recent Tet holiday is likely to be remembered for some years to come. A government statement suggested that cities and provinces shelve their traditional fireworks displays and allocate the funds they planned to send skywards to poverty alleviation efforts. 

Officials in Hanoi donated the capital’s fireworks fund of VND12 billion ($532,800) to help victims of last year’s record floods. While appreciating the gesture, many Hanoians wonder why a special feature of Tet has been sacrificed given that their taxes were inefficiently spent on 12 industry and trade projects, at a cost a thousand times higher than any fireworks display.

2016 realities

At the time of writing, winter is yet to truly hit Hanoi and the north. There is a saying in Vietnam, that a warm Tet is a Tet of the poor. 

While the country has done very well in reducing poverty and limiting inequality, which often accompanies growth, its economic growth since 2008 has been slower than in the two preceding decades and it has failed to match the per capita income growth seen in the region’s most successful economies experiencing a similar stage of development.

Still, Vietnam has been acknowledged for its ability to maintain macro-economic stability in an environment that is challenging due to slow global growth. 

Last year was a good example. Defying a regional slowdown, economic growth came in at 6.21 per cent, helped by a manufacturing and building boom. 

And while growth was down on the 6.7 per cent recorded in 2015 - the first time growth has slowed since 2012 - it is still looked upon as a success given the many unfavorable trends and a spate of natural and man-made disasters.

In the early months of last year, the Mekong Delta, the country’s rice bowl, suffered the worst drought and saltwater intrusion for nearly a century. 

Toxic chemicals were dumped into the sea in April by a steel mill in north-central Ha Tinh province owned by a unit of Taiwan’s Formosa Plastics Group, devastating the region’s fishing and tourism industries. 

The impact of natural disasters on farming shaved 1 percentage point off GDP and caused VND18.3 trillion ($813 million) in damage, with the Formosa Plastics incident shaving 0.3 percentage points off GDP, according to the General Statistics Office (GSO).

Though the worst seems to have passed, confirmed by third and fourth quarter GDP growth of 6.6 per cent and 6.8 per cent, respectively, the risk is that the country has moved from being slightly vulnerable to very vulnerable to external shocks. 

Vietnam could be “sowing the seeds of the next crisis” with loose monetary policy, according to Capital Economics.

“A credit boom on the scale that Vietnam is experiencing is not sustainable over the long term,” according to senior Asia economist Mr. Gareth Leather, and another spike in non-performing loans looks “inevitable”.

Private sector credit expanded by an estimated 18.71 per cent in 2016, up slightly on the 17.26 per cent recorded in 2015, and was in line with State Bank of Vietnam targets. 

While the central bank believes higher lending is being fueled by stronger demand and better business conditions, any rise in credit growth may renew concerns associated with previous periods of macro-economic instability and high inflation, according to S&P Global Ratings. 

Bad debts also continue to pose problems for authorities. The ratio of non-performing loans to outstanding loans (the NPL ratio) has gradually fallen and stood at 2.46 per cent as at the end of November, as the Vietnam Asset Management Company (VAMC) has purchased underperforming assets from banks. Still, the underlying credit and associated impairment risks have not been fully eliminated. 

Private Sector Credit Growth (% y-o-y)

And it’s not the only thing working against Vietnam. 

The country’s exports saw average growth of 12 to 14 per cent from 2000 to 2015, but the figure came in at just 8.6 per cent in 2016, according to the GSO. 

The export boost expected to come from the TPP is now unlikely, given that US President Donald Trump has vowed the US will not take part in the deal. 

Mr. Deepali Bhargava, Asia Economist at Credit Suisse, said the shift in US policy poses three risks to Vietnam’s economy. 

First, the country’s currency is likely to depreciate by 4 to 5 per cent next year. Second, a slowdown in global investment is likely to weigh down trade. And finally, there is a risk that reforms may be delayed because of the demise of the TPP. 

Moving forward

In the midst of all this, the industrial sector remains a bright spot, with construction, manufacturing and electricity generation standing out. Industrial production grew at an average of 7.5 per cent in 2016 while the service sector expanded 7 per cent. 

Double-digit growth in manufacturing production, which accounts for 75 per cent of total industrial production, helped offset another steep fall in mining and quarrying output. 

Companies setting up plants in Vietnam, such as Samsung Electronics, are transforming the country into a manufacturing hub for electronics goods, including smartphones.

From a trade deficit of $3.5 billion in 2015, Vietnam returned to a trade surplus of $2.68 billion in 2016. 

Wage cost competitiveness is the key reason it’s attracting capital away from countries with worsening demographic transitions in East Asia. 

Institutional reforms have also contributed to making Vietnam more foreign investor friendly. 

Revised investment and enterprise laws have cut the time needed to establish a new business, while lower corporate income tax rates and streamlined payments are also positives.

The foreign direct investment (FDI) sector continues to lift Vietnam upwards, with it making a contribution of more than 20 per cent to GDP growth since 2010. 

Last year, disbursed FDI rose 9 per cent to a record $15.8 billion and committed FDI increased 7.1 per cent, to $24.4 billion. 

The Foreign Investment Agency at the Ministry of Planning and Investment announced that 2,547 FDI enterprises bought stakes of more than 50 per cent in Vietnamese companies or in conditional investment sectors last year, totaling $3.425 billion.

Core inflation was kept stable, at 1.87 per cent, contributing significantly to curbing the consumer price index (CPI) at below the 5 per cent limit set by the central bank.

 December’s CPI jumped 4.74 per cent year-on-year from 4.5 per cent previously, but was due to a one-off hike in the cost of healthcare and education. 

These two categories together contributed 3.2 percentage points to headline inflation and accounted for more than 70 per cent of increasing prices. This suggests that when the effects of these one-off factors wear off, inflation is likely to become benign. 

But the same cannot be said about public debt. Many measures of debt are set to approach or exceed prudential thresholds. 

Unlike inflation, they are not driven by temporary factors and therefore are unlikely to recede any time soon. 

In fact, Vietnam’s spectacular modernization and growth have been accompanied by an even quicker rise in its public debt. Minister of Finance Dinh Tien Dung was quoted in local media in November as saying that “public debt in the past five years has climbed 18.4 per cent on average and three times faster than economic growth.”

According to the Finance and Budget Commission, all of Vietnam’s public debt indicators, including the public debt-to-GDP ratio, government revenue, and debt service-to-GDP ratio, are set to approach or exceed permitted levels. Debt service-to-government revenue hit 27.4 per cent in 2015, above the 25 per cent limit, while the fiscal deficit was estimated to have expanded to about 6.5 per cent of GDP in 2015.  

Against this backdrop, the National Assembly (NA) has approved a government resolution to raise the upper limit of government debt to 54 per cent of GDP, from 50 per cent previously. 

The legislature also set a revenue target of VND6.846 trillion ($306.51 billion) for the next five years, while leaving the public and foreign debt ceilings unchanged at 65 per cent and 50 per cent of GDP, respectively. 

The revision comes on the heels of declining revenue, especially due to lower crude oil prices. Official figures show that oil revenue made up 30 per cent of Vietnam’s State budget in 2005 and 20 per cent in 2010, but just 10 per cent in 2015. 

Bright prospects, but caution needed

Given the existing circumstances, there are no real threats to Vietnam’s 6.7 per cent growth target this year. 

Both Capital Economics and Credit Suisse believe 2017 will be another solid year for the economy, with the former nominating growth of 7 per cent and the latter 6.2 per cent.

There are still many headwinds for the government to be concerned about, however. First and foremost is preparing for a future without the TPP. 

Even though Prime Minister Nguyen Xuan Phuc has reaffirmed that Vietnam will continue to move forward with or without the deal, the TPP was to bring more than just an economic boost. It was also to act as a stimulus to reform the country’s economic policies, including those relating to State-owned enterprises (SOEs). 

Close relationships between political and business elites and a highly bureaucratic environment still prevail in Vietnam, hampering entrepreneurship. 

Reforms anticipated to stem from the TPP would have fostered a more conducive business environment. 

But the end of the deal would almost certainly see Vietnam’s private sector, especially its small and medium-sized enterprises, continue to struggle against State-run conglomerates with priority access to capital, land and investment information.

Secondly, being an export-driven and FDI-oriented country is a double-edged sword for Vietnam. 

Though FDI inflows are forecast to continue coming in large sums, most have been tied to expectations surrounding the TPP. 

And while exports rely heavily on specific FDI enterprises, the technology absorption and enhancement of human capital that Vietnam was supposed to acquire from FDI inflows are nowhere to be found. 

Vietnam’s workforce is largely engaged in the final assembly of products for export, which are primarily low value-added and labor-intensive and use low-level technologies.

Thirdly, the banking sector is not out of the woods just yet despite clear improvements being seen. 

“Banks’ credit risks remain extremely high, reflecting high private sector debt, low income levels, legacy stressed assets, and rudimentary underwriting standards,” according to S&P Global Ratings. 

As part of banking reforms, ten selected banks will pilot the Basel II accounting standards this year, while five weak banks will undergo treatment by the SBV, including three “zero dong” banks: VNCB, OceanBank, and GP Bank, and two others: DongA Bank and Sacombank. 

Plans has been submitted and are awaiting Politburo approval, with the option of allowing unsalvageable banks to be declared bankrupt or merged with larger banks.

Fourthly, enhancing expenditure efficiency will be vital for sustaining long-term economic growth. 

In Vietnam’s case, rising public debt isn’t necessarily a bad thing. 

Given rapid growth, there is certainly a need for continued investment in infrastructure to sustain the heady pace of economy expansion. 

However, “when you have the combination of high debt and a slightly declining working-age population, you need to be very careful with your macro-economic stability,” Ms. Christine Lagarde, Managing Director of the International Monetary Fund, was quoted as telling foreign media. 

With Vietnam’s total outstanding public debt estimated at 64.98 per cent of GDP in 2016 and inching towards the ceiling of 65 per cent, “you should be very careful with the revenue you generate and how you spend it,” she added. 

Finally, reforms around public finance not only include more effective management of public funds and better management of debt, but also the speedy equitization of SOEs.

 Habeco, Sabeco, and Vinamilk are the three semi-private conglomerates that were set to undergo equitization in 2016 but outcomes fell well short of expectations. 

While the government is determined to make it happen, and has also become more “open-minded” about foreign investors becoming involved in equitization, serious bidders still find the Vietnamese sales method discouraging. 

“They [the government] set a price without any serious idea about who is interested,” Executive Chairman of Dragon Capital, Mr. Dominic Scriven, told VET. 

“That has made it difficult to sell things and maybe the government needs to learn from its experience.”

In the medium term, the outlook remains positive, but there is still much to do. 

“Robust export growth and an acceleration in private consumption due to a recovery in farm incomes should offset the lackluster government spending and a likely slowdown in credit growth”, according to Mr. Bhargava. 

“But easing macro-economic vulnerabilities and sustaining higher medium-term growth would need a bolder implementation of structural, fiscal and banking sector reforms.” 

VN Economic Times