[Vnbiz] Pitfalls of Vietnam's economic growth

[Tai Phan]

  B U S I N E S S

    Monday December 31, 2007

Pitfalls of Vietnam's economic growth

*By CHEAH KING YOONG*

EVEN though Vietnam's prospects look promising for now, there are potential
risks and challenges that could adversely impact its economy, going forward.


Growth of the economy is highly dependant on external stimulus. Although the
country has witnessed strong domestic consumption growth in recent years,
Vietnam's economy has continued to be driven by high external trade and
increased foreign direct investment (FDI).

The country's total trades are now equivalent to about 150% of gross
domestic product (GDP), which is the second highest in the region, after
Malaysia.

Besides that, Vietnam has been one of the largest recipients of FDI in the
world relative to the size of its GDP. Therefore, the country is
particularly vulnerable to the unexpected global economic slowdown and
unanticipated outflows of funds from the emerging markets.

*Inflation:* In contrast with the early phase of economic growth in China,
Vietnam's economic growth continues to be haunted by the high inflation
rate.

The consumer price index (CPI) for November surged 10% year-on-year, which
is the highest rise since 1996. This brings the 11-month inflation to a 10
year high of 9.5%, surpassing the economic growth estimated at 8.5% for this
year and hindering the government's target to keep the inflation rate below
the real GDP growth.

Inflation is expected to surge further in the coming months with the recent
government's decision to hike the petroleum price by 15% to VND13,000 per
litre in late November.

*Infrastructure limitations:* Although Vietnam is the prime beneficiary of
the "China plus one" strategy, the absence of good infrastructure could
potentially obstruct the country's economic growth. The World Bank has
estimated that Vietnam would need to invest US$5bil annually in
infrastructure development during 2006-2010.

One of the most pressing issues would be a potentially serious power
shortage, where the national electricity system may not be able to cope with
the increased power consumption in the near future. Vietnam is estimated to
lack 4.3-10.3 billion kWh of power from 2007 to 2009.

*Trade deficit: *Unlike* *many export-oriented Asian economies, Vietnam has
been running a trade deficit.

In the first 11 eleven months of the year, Vietnam registered a trade
deficit of US$10.5bil compared with US$5.1bil in 2006. The 11-month trade
deficit also surpasses Ministry of Industry and Trade's (MOIT) estimates of
trade deficit at $10bil this year.

Although most of the growth in the trade deficit is from purchases of
intermediate goods and capital equipment, critics have argued that many
imported items were semi-finished products, which would not bring high-added
production value.

At present, Vietnam has sufficient sources of foreign currency inflows such
as FDI, overseas remittance and Official Development Assistance (ODA) to
offset the trade deficits. Nonetheless, persistently high deficits could
hinder the economic growth over the long term.

MOIT estimated that the country would not have a trade deficit by 2010.
However, this estimation appeared to be too optimistic in view of the
present large trade deficit.

Although World Trade Organisation accession will support export growth,
falling tariff barriers will also make imports increasingly affordable
compared with domestic products, so that net exports will have a negative
contribution to growth in the medium term.

*Budget deficit:* The government has continued to operate at a budget
deficit for many years. Although the deficit figure is expected to come
below 4% of GDP in 2007, there is still substantial off-budget spending in
Vietnam, which was approved directly by the Prime Minister and is primarily
dispatched by the Vietnam Development Bank.

According to the IMF, off-budget activities could add 3% to 5% of GDP to the
deficit, which could turn Vietnam from a low-deficit country to one of the
highest deficit countries in the region.

On the other hand, collection from oil remains the main source of fiscal
revenue to finance government spending which is hugely vulnerable to the
volatility in global crude oil prices.

Furthermore, lower import tariffs to comply with WTO obligations will lead
to a reduction in customs tax collections, which typically accounts for more
than 10% of fiscal revenue. All these factors could expose the country to a
potential fiscal crunch.

*The need for a more skilled workforce:* The domestic supply of skilled
labour continues to be a constant challenge. One of the reasons behind the
lack of skilled labour is that the education system is not up to the task
with generally out-of-date curricula, which does not meet the present
working requirements.

To ensure sufficient supply of skilled labour, the government has supported
the setting up of vocational training centres to sharpen labour skills. It
has also encouraged Vietnamese staying overseas to return and help develop
the country.

*FDI committed and FDI implemented:* New commitments of FDI have continued
to rise, reaching US$11.3bil in the first ten months of the year,
representing a 36% rise compared with the corresponding period last year.

However, actual FDI spending is expected to lag commitments where
disbursements are unlikely to surpass US$5bil in 2007. The low level of FDI
utilisation, which is only around half of commitments, indicates the gap
between investors' expectation and reality.

The government has to consistently improve the country's legal system and
governance framework such as bureaucracy and red tape.

In a recent survey by the World Bank and International Finance Corp, Vietnam
ranked 91 out of 178 economies in terms of ease of doing business, whereas
China ranked 83 and Thailand 15. Vietnam must be able to compete with its
neighbour if it is to continue to attract FDIs and to ensure high FDI
utilisation.

Nonetheless, recent developments have indicated that the economic growth of
Vietnam will continue to remain strong over the next few years, despite some
of the risks mentioned above.
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