Identifying difficulties

Dr Vu Nhu Thang, head of the National Institute for Finance (NIF), says despite the global economic downturn, Vietnam maintained an annual GDP growth rate of 6.8-7 percent between 2006 and 2010, and mobilised a considerable amount of domestic and foreign capital to raise total social investment to 43 percent of the country’s GDP.

However, the senior expert warns that the national economy is facing many challenges like slow economic restructuring, modest industrial growth (accounting for 41 percent of GDP), and high trade deficit estimated at 20 percent of total export earnings.

Notably, Thang says the capital-based growth model has revealed weaknesses. The capital mobilisation rate is higher than the saving rate; budget overspending remains high at about 5.7 percent of GDP; foreign investment attraction shows signs of instability; some foreign investment projects are crawling along; industrial and high-tech investments do not live up to expectations; while high foreign exchange and loan interest rates place the burden on businesses.

In addition, it is difficult to mobilise capital from the stock and bond markets, as well as from the international capital market, says the expert.

International economic experts share the view that although Vietnam has quickly recovered from the recent global economic meltdown, it is faced with difficulties in mobilising capital for development, including low retail sales, unclear monetary policies and high trade deficit.

Dr Dang Ngoc Tu, an NIF official, proposes synchronous financial and monetary solutions to develop the capital market. Accordingly, Vietnam should lower inflation to a level that matches the foreign exchange rate mechanism, slash lending interest rates, stop unhealthy competition between banks and apply flexible foreign exchange rates.

For financial solutions, he says Vietnam has no alternative but to reduce the budget deficit, increase taxes, reform social welfare system, cut capital construction investment sourced from the State and encourage private investment.

According to Tu, it is necessary to closely monitor the financial and property markets to avoid price manipulation. The focus will be on controlling the flow of capital in order to increase the safety of the banking system and stabilise market prices of essential commodities, while speeding up the restructuring of State-owned businesses.

ReuBen Tucker, ANZ’s Global Head of Bond Origination, proposes that Vietnam develop typical diagrams of its capital market detailing the interest rates of business, bank and government bonds so as to shape yield curves, making it easier for investors to select and decide on investment plans.

Phung Thi Thu Huong, head of ANZ Vietnam’s Capital Market Department, maintains that to make the corporate bond market a success, it is crucial to develop government, secondary and derivative bond markets which should be evaluated by prestigious credit organisations. Notably, Huong says, there should be regulations on the transparency of information to win lenders’ trust.

Sorting out capital resources

The Foreign Investment Agency under the Ministry of Planning and Investment reports that in the past 10 months Vietnam has attracted 861 foreign direct investment (FDI) projects capitalised at US$8.9 billion, equivalent to 70 percent of the registered amount in the same period last year. Investors in more than 260 other existing projects have decided to raise the level of capitalisation to US$2.4 billion, up 138 percent from a year ago. 

However, domestic and foreign specialists argue such figures are impressive but how to use capital resources effectively is another matter in relation to project quality, production technology, environmental impact and the use of labour force.

Prof. Hanjorg Herr from Berlin School of Economics and Law warns that not all FDI inflows are positive and that some of them might cause the real estate market to bubble, leading to economic instability. He cites the Asian economic and financial crisis in 1997 as a consequence of a large influx of investment into the real estate market. He suggests not expanding or attracting too much FDI capital into this type of market. 

Sharing this view, Dr Nguyen Dinh Cung, Deputy Director of the Central Institute for Economic Management, says Vietnam should develop mechanisms for selecting, screening and monitoring FDI sources, with a particular focus on real estate projects. If these policies violate Vietnam’s commitments to the World Trade Organisation, appropriate technical barriers should be taken into account to ensure feasible FDI projects are selected and WTO commitments are respected. 

Weighing up and down the current situation, Prof. Hanjorg Herr suggests that Vietnam draw up a strategy for developing an external economy based on four steps.

First of all, the country should lower the value of its currency (VND) aimed at using the foreign exchange rate as a global tool for protecting domestic industry, balancing current accounts, and stimulating domestic development.

Second, FDI should be sorted out carefully to encourage ‘positive’ sources and prevent ‘negative’ sources to avoid unwanted risks when investors suddenly withdraw capital or suspend projects.

Third, proactive industrial policies should be devised by increasing the added value of export items and reducing the import of consumer goods through foreign exchange rate and import tariff mechanisms. It is necessary to integrate FDI into long-term industrial development strategies.

Last but not least, he recommends that Vietnam should establish a central-level economic council to formulate consistent and long-term industrial policies, monitor development trends and correct errors.