HANOI - Investor concerns about Vietnam's economic direction and technocratic
stewardship, mounting even before the onset of global economic turbulence, are
intensifying as the outlook for the country's crucial export and tourism
sectors worsens.
Questions are being raised as to whether the country's leadership will stay the
course of its ambitious economic reform program amid the hardening global
conditions or revert to more protectionism, as it did after a brief period of
liberalization in the early 1990s.
Prime Minister Nguyen Tan Dung, viewed widely as a champion of economic reform,
has acknowledged the troubles the country
faces. At a year-end financial sector overview meeting, Dung said Vietnam had
witnessed a "sharp decline" in economic growth in the fourth quarter, driven by
narrowing production, falling exports and slowing tourism receipts.
After four years when gross domestic product increased by an 8% average, the
government believes the growth rate in 2008 slipped to between 6.5% and 6%. A
recent survey by the Vietnam Business Forum, a trade group, showed that 73% of
254 participating enterprises believed the current global financial crisis had
already impacted adversely on their operations. They also believed that
Vietnam's overall business environment in 2008 was less favorable compared with
recent years.
Economists believe growth will slow to around 5% this year. Slower growth is
expected to hit manufacturing, leading to layoffs in foreign-invested factories
that had already been a potent source of social unrest in recent years due to
worker complaints about conditions and wages. How the government manages this
challenge will be crucial to Vietnam's reform momentum and foreign investors'
sentiment, analysts say.
Dung and his economic lieutenants will also be hard-pressed to ensure
macroeconomic and financial stability amid the global downturn. The currency
and stock market both fell sharply last year, with the main Vietnam Stock Index
falling 66%. The government must redouble its structural reform efforts,
especially in relation to overhauling loss-making state enterprises and the
still backward banking sector, if the markets are to recover, analysts said.
Vietnam, which acceded to the World Trade Organization in January 2007 and has
since implemented various market-oriented reforms to pave the way for more
foreign participation in the economy, has learned the hard way that greater
linkage to the global trading order can import volatility. The spike in global
commodity prices sparked rapid inflation in the local economy, which was up
20.7% year-on-year in December, widened the country's trade deficit and put
downward pressure on the local currency.
Global developments have put Vietnam's economic management under a critical
lens. Some analysts say those inflationary pressures were initially exacerbated
by rigid monetary policies and poorly targeted public investment. The
government eventually reacted by reversing course and inflation came off with
the collapse in global commodity prices, including oil, in the latter half of
the year. But the initial policy confusion resurrected questions about the
government's technocratic capabilities in managing an increasingly
market-oriented economy.
In line with global trends, the central bank cut its benchmark interest rate
twice in December to 8.5% to stimulate growth in the wake of global weakness.
Meanwhile, all credit institutions and banks in Vietnam have been asked to
lower their lending rates to 12.75% and the central bank has cut its compulsory
reserve requirement for local currency deposits to 5% from 6% at commercial
joint stock banks, joint venture banks, finance companies and branches of
foreign banks.
Dung also recently announced a US$1 billion stimulus package to invigorate the
economy and cushion the impact of the global crisis. Measures aim at revving up
stagnant domestic production and exports, sparking weakening consumption and at
improving social security, especially in caring for the poor. He has also
launched administrative reforms and tax cuts, though some analysts fear the
measures could provide an unjustified economic lifeline to perennial
loss-making state enterprises.
Questions are being raised as to whether the government can afford its fiscal
spending, particularly in light of passed and proposed tax cuts and the
expected fall in export revenues. Dung's cabinet has proposed to cut the
corporate income tax to 25% from 28% and income taxes for small and
medium-sized enterprises by 30%.
Dung has proposed an additional 30% cut in corporate taxes in 2009 and
proposals have been broached to postpone to July implementation of a new
personal income tax law originally intended to come into effect this month.
Calls have been made for selective inward-looking policies, including a ramping
up of state-funded projects, disbursement of capital from government bonds to
the public health and education sectors, and provision of low-cost housing for
the poor.
No overtly protectionist measures have been raised so far, though some analysts
fear conservative elements in the communist party may seek to tighten
regulations on foreign capital and investments if the economy dives even deeper
this year. Foreign investors, meanwhile, have offered up different
prescriptions for handling the global crisis.
Alain Cany, chairman of the European Chamber of Commerce in Hanoi and former
chief executive officer of HSBC's Vietnam operations, recently said inflation
was no longer the biggest problem and the government had to quickly boost
production to offset the impact of global economic weakening.
Shogo Ishii, assistant director of the Asia and Pacific Department of the
International Monetary Fund, said the short-term economic outlook for Vietnam
is challenging, whilst the medium-term outlook remains favorable as long as the
government sustains economic reform momentum. Domestic vulnerabilities had been
compounded by the global turmoil.
"Maintaining the momentum of reforms is important not only for sustaining
Vietnam's impressive progress towards becoming a fully-fledged emerging
economy, but also for bolstering investor confidence to go through this
difficult period," said Ishii.
Representatives from 29 bilateral donors, 19 multilateral agencies and around
600 international non-governmental organizations gathered recently for a
bi-annual Consultative Group meeting with Vietnamese officials. Nearly all of
the international representatives strongly recommended in the wake of the
crisis that the government maintain its stated commitment to boosting living
standards through wide-ranging economic, legal and administrative reforms.
Dung's government has to date received high marks from foreign investors for
staying the reform course in tough economic times. Most agree there is still
much work to be done, particularly in reining in official corruption. Many here
fear foreign enterprises could be targeted by wayward officials as revenue and
tax takes decline in the months ahead.
Those perceptions are taking a growing toll on the aid-dependent country.
Japan, the largest provider of overseas development aid (ODA) to Vietnam with
over US$1.1 billion in disbursements last year, has suspended new aid until a
corruption scandal is resolved and effective safeguards against future
corruption are implemented. Former executives of a Japanese consultancy
testified in a Japanese court that they had bribed a Vietnamese official
overseeing a road construction project in Ho Chi Minh City that was 65% funded
through the Japan Bank for International Cooperation.
Japan has withdrawn its financial commitments to three big construction
projects worth an estimated $700 million, including a mass-transit system for
Hanoi. Aid funds for three other projects related to the current corruption
scandal have also been halted.
"Corruption remains one of the biggest challenges to progress in Vietnam," said
Michael Pease, chairman of the American Chamber of Commerce. "It is crucial
that real efforts are made to crack down on corruption, to walk the talk. The
world has been waiting for Vietnam to deliver on promises made, now is the time
to deliver."
Multilateral lenders, including the World Bank and Asian Development Bank
(ADB), however, have both pledged to provide Vietnam with higher ODA assistance
next year, despite recent corruption scandals. The World Bank has said it plans
to increase its commitment to Vietnam by over 50% this year, raising its loans
and grants to $1.66 billion from $1.1 billion. The ADB last year topped
Vietnam's list of donor organizations, with $1.35 billion in disbursements,
accounting for 25% of the total $5.4 billion ODA pledged. This year the ADB
plans to provide $1.5 billion.
Whether private sector foreign investment will follow that course is
questionable with the financial collapse and corporate troubles in the US and
Europe. From January 2006 to November 2008, foreign direct investment
commitments amounted to $93.3 billion in Vietnam; only $22.6 billion of that
capital was actually disbursed. That gap can in part be explained by a still
cumbersome bureaucracy, vague regulations, lagging infrastructure development
and the lack of official transparency.
The mounting global crisis has raised concerns that foreign investors will
begin to repatriate funds once earmarked for Vietnam and that the gap between
registered and actually disbursed FDI will widen further this year and perhaps
in years ahead. Those falling flows will present perhaps the biggest test yet
to Dung's market-oriented reform drive and his ability to keep at bay
conservative calls for more economic nationalism.
Karl D John is chairman of TCK Group (www.tckgroup.org), a Vietnam-based
investment consulting group. He has more than a decade of involvement with
Vietnam and lives in Hanoi.
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road,
Hua Hin, Prachuab Kirikhan, Thailand 77110
