Vietnam growth rate remains impressive
Published: 22 November 2011
Inflation still a challenge for the long term
Vietnam joined the World Trade Organisation in January 2007 and transformed from a heavily indebted country to a low-middle-income one in 2010. After opening up the country’s economy to foreign investors, its GDP grew by 7.3 per cent on average from 2001 to 2010.
While Vietnam survived the global slowdown of 2008-09 quite well relative to its neighbours with GDP growing by 6.8 per cent in 2010, Vietnam has experienced persistently high inflation this year, which has caused investors to question its management of the economy.
Here, Trinh D Nguyen, Economist in HSBC Global Research, discusses conditions in the country.
How would you describe the current situation in Vietnam?
In comparison to its regional and global counterparts, Vietnam’s growth rate remains impressive and we expect it to grow 5.8 per cent year-on-year in 2011. Domestic demand and robust exports continue to drive the economy forward.
However, persistently high inflation continues to challenge Vietnam’s long-term growth outlook, especially in the face of widening trade deficits and heightened global risks. For the past 10 months, headline inflation rose on average 18.6 per cent y-o-y, and food prices, which make up about 40 per cent of the CPI basket, increased on average a staggering 26.7 per cent y-o-y. Vietnam’s persistent inflation can be traced back to the late introduction of tightening measures as well as supply and demand shocks.
Tightening measures that the central bank took earlier this year quickly started to bite.
Tightening measures that the central bank took earlier this year quickly started to bite. Interest rates rose to over 20 per cent, increasing the cost of debt and significantly slowing activity, especially in the property market. In addition, smaller banks have faced high overnight interest rates due to limited liquidity. Meanwhile, historically high inflation has also dampened confidence in the dong and inadvertently increased the demand for US dollars and gold.
Vietnam’s uniquely high price pressures relative to its neighbours point to internal factors acting to stoke inflationary pressures. High credit growth from 2007-2010 coupled with inefficiencies in the economy have created monetary, demand and supply shocks that push up prices.
While the stubbornly high inflation issue is one that merits immediate attention from policymakers, it is merely symptomatic of the bottlenecks in the economy caused by structural inefficiencies. Whether Vietnam can live up to its potential and capitalise on its demographic and geographical advantages will very much depend on the timeliness of the solutions to these structural challenges.
How much does interest from foreign investors push developments in Vietnam and what are its major selling points to potential investors?
Vietnam is a country that is of significant interest to investors, as it benefits from a young demographic that is highly literate, as well as close geographical proximity to large markets. Its labour force is very industrious and entrepreneurial, with wages competitively lower than countries such as China and Thailand. Vietnam also has a burgeoning young population of 90 million people, which makes it a very attractive market for investors looking for emerging markets.
Vietnam’s stable political environment provides it with a competitive edge.
Vietnam continues to attract strong FDI inflows, especially from Asian countries. For example, the appreciation of the yen, which hurts Japanese exports, and the Thai flood tragedy, which disrupted supply chains, would definitely arouse some interest from Japanese investors seeking to diversify their supply chains and investments. Additionally, Vietnam’s stable political environment provides it with a competitive edge.
Is Vietnam’s current high inflation rate likely to be a great influence on foreign investors?
While inflation has peaked in August, investors will watch closely to see if Vietnam will address its structural issues. It appears that some progress is taking place. The 13th National Assembly session is focusing on three key issues: reforming public investment, state-owned enterprises; and the financial system.
Whether the Vietnamese government can restore investors’ confidence in its management of the economy will depend on how these reforms will be carried out. Inflation is expected to average 11.2 per cent in 2012.
Infrastructure is a major focus for development in Vietnam. Is it difficult to source funds for infrastructure projects and are many under way?
Vietnam has experienced sustained GDP and population growth in the past decade, but it has not adequately invested in infrastructure projects to meet the growing demands of its population. Roads and electricity are two areas of concern for Vietnam.
According to the Organisation for Economic Cooperation and Development, Vietnam would need around USD15 billion to USD16 billion a year to develop essential infrastructure systems. The Ministry of Planning and Investment's available capital satisfies only 50-60 per cent of this demand. Vietnam’s infrastructure ranks 90 out of 142 while Indonesia and Thailand rank 76 and 42, respectively.
However, Vietnam has been making noteworthy efforts to attract investments and the government has made infrastructure a priority investment area. Vietnam’s Ministry of Planning and Investments has released a list of 60 urban infrastructure projects to be implemented between 2009 and 2016. The total estimated investment required for the projects is USD12 billion. The projects range from new water and sanitation infrastructure to new roads and traffic systems, and will take place in 15 provinces around the country. Notably, the Asian Development Bank recently approved a USD293 million loan to develop a Hanoi metro line.
What are the most common misconceptions people have about investing or doing business in the country?
Vietnam is ranked 98 out of 183 countries in the World Bank’s ‘Ease of Doing Business’ index for 2012 compared with 90 in 2011. This indicator does in some way reflect the initial difficulties of doing business, registering property, paying taxes, and getting credit. However, it is equally true that many businesses already in the country would not want to be anywhere else.
Vietnam (will) benefit from the energy and entrepreneurial spirit of its youth as well as strong domestic demand.
The legal framework can do with further refinement but the government is willing to listen to foreigners and other interest groups. Decision-making in Vietnam is generally through consensus building and, for many westerners, this is slightly different from their usual training.
What changes do you expect to see in Vietnam over the next half-dozen years?
Over the next five years, Vietnam will focus on reforms in areas that are hindering growth. Reforms of public investment, state-owned enterprises, and the financial system will be the government’s focus.
Vietnam will also target human capital development, in particular education reforms to supply students with skills that are demanded by firms. Reforms will also take place to improve Vietnam’s investment climate. Some projects are already under way such as Project 30, which aims to reduce bureaucratic red tape by 30 per cent.
Vietnam has favourable demographics with a population that is expected to grow from around 90 million currently to 110 million by 2035 with around half the population under 35. This will allow Vietnam to benefit from the energy and entrepreneurial spirit of its youth as well as strong domestic demand.
However, Vietnam's main challenge is to increase competitiveness beyond cheap labour as its wages will eventually push so high that it will lose its competitiveness to other countries. Investment is required in skills development, technology and related industries to allow it to move up the value chain.
Trinh Nguyen
Trinh Nguyen joined HSBC in August 2011, primarily covering the economies of the Philippines and Vietnam.
Previously, she worked as a consultant for the World Bank Group researching foreign direct investment and skills development in Washington DC. She holds an MA in International Affairs and International Economics from Johns Hopkins University.
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