Hopes for strong economic reforms in Vietnam are fading after the U.S. withdrawal from the Trans-Pacific Partnership (TPP), according to the Vietnam Economic Report 2016 published in Hanoi on March 16.

The report points out the economic problems which Vietnam needs to solve, according to local media.

Economists forecast the global economy from now to 2018 would be more volatile and unpredictable. Rising trade protection, potential risk of trade wars and uncertainties brought by U.S. President Donald Trump’s policies may cause upheavals worldwide.

Old growth model slow to change

Professor Ngo Thang Loi from the National Economics University (NEU), co-editor of the Vietnam Economic Report 2016, said the economy had yet to solve major challenges: the old growth model based on capital, natural resources and cheap labor, low productivity, and exclusion from the world’s fourth industrial revolution. This is why Vietnam can hardly achieve and maintain fast and sustainable growth.

The country is taking part in many new-generation FTAs, including the TPP that is expected to provide a great impetus for reforms.

However, President Trump withdrew America from the TPP, which would have accounted for around 40% of the world’s gross domestic product. Therefore, Vietnam now sees less pressure to reform institutions, said Loi.

The research team from NEU, the Central Economic Committee and the Committee on Economic Affairs of the National Assembly predicted the U.S. Federal Reserve might further hike interest rates. This would make it hard to significantly lower Vietnam dong interest rates given the need to prevent any exchange rate volatility.

Can Van Luc, a finance and banking expert, said that as Vietnam’s internal problems had not been resolved, external factors had been striking their blow, forcing the country to handle two situations in one policy.

He explained that the Fed rate hike would have adverse impact on Vietnam’s foreign exchange and interest rate policies, and at the same time, the Trump administration’s policy change would lure U.S. corporations back to America.

Comprehensive FDI assessment

FDI enterprises are still mainly operating in the fields that rely on natural resources and cheap labor, creating low added value for the economy, with limited positive contributions to scientific and technological improvements. Therefore, the Vietnam Economic Report 2016 says it is now time to do a comprehensive assessment of FDI on opportunity costs, similar effects and policies in the coming time.

The report underscores the links between FDI enterprises and domestic firms remain weak. Meanwhile, the surge in imports and low added value make Vietnam a place with market advantages instead of competitive advantages over other countries.

Notably, some manufacturing activities with foreign involvement are one of the key factors for environmental pollution. A number of foreign investors have taken advantage of lax environmental regulations to relocate polluting industries to Vietnam.

After the severe environmental pollution caused by Formosa, the Government has made certain changes in thinking and laid down stricter rules on FDI attraction in order to drive this capital flow into the industries with high added value and less pollution, fostering  sustainable economic development. However, in the coming time, issues related to the environment will be considered more carefully before an FDI project gets approved.

Despite such concerns, Tran Tho Dat, head of NEU, said the FDI sector is performing better than the local economic sector.

In 2016, the FDI sector generated a trade surplus of US$23.7 billion, well above US$17.1 billion in 2015. Meanwhile, the local economic sector caused a trade deficit of US$21.1 billion last year, up from US$20.1 billion a year earlier.

Currently, the FDI sector accounts for over 23% of the overall investment in the country, over 70% of industrial manufacturing value, and some two-thirds of export turnover.

Nguyen Thuong Lang, also from NEU, predicted Vietnam would attract around US$118 billion between 2017 and 2025, including US$13 billion this year alone. By the end of 2025, the total accumulated FDI amount would reach US$335 billion, he said.

SGT