Vietnam Economy 2016: Focus on improving micro-economy

In 2016, Vietnam's economy needs to move from a period of macroeconomic stability to structural and micro-economic reforms to promote economic growth.

Mining industry in Vietnam. Photo: Investment

Funny scenario

As predicted, capital flowsinvestForeign direct investment (FDI) into Vietnam has increased since the first month of the year, with an increase of 157.9% compared to the same period last year. The amount of disbursed capital has also increased significantly, 23% compared to the same period.

In the Macroeconomic Research Report for the fourth quarter and the whole year of 2015 of the Central Institute for Economic Management (CIEM) just announced yesterday afternoon (January 28), this trend is and will continue to be the main trend in both FDI and domestic private capital flows due to investment prospects and a more open business environment.

“The most important thing is that we see economic growth going hand in hand with improved confidence among the business community and investors,” said Nguyen Dinh Cung, Director of CIEM. The investment capital to GDP ratio has increased continuously, from 30.6% in the first quarter of 2015 to 34.1% in the fourth quarter of 2015. On the positive side, investment activities in 2015 recorded a strong change from the domestic private sector and the FDI sector, with increases of 13% and 19.9%, respectively. In the fourth quarter of 2015 alone, investment from the domestic private and residential sectors increased by nearly 17.9% compared to the same period in 2014, while the corresponding increase of FDI enterprises was up to 36.7%.

This is the reason why CIEM experts believe that Vietnam entered 2016 with much optimism. In fact, there is not much hesitation about this belief, as by the end of 2015, the macro economy was stable and increasingly consolidated. Economic growth recovered quickly and continuously through the quarters, at the same time showing room for further improvement.

In particular, a new executive apparatus will soon be established, helping Vietnam realize its socio-economic development goals associated with reforms in the 2016-2020 period, as mentioned by CIEM economic experts.

And the worries

However, Mr. Cung is still not really assured when he believes that the achievements in macroeconomic stability in recent times are only the initial foundation.

“Vietnam needs to urgently carry out more extensive reforms in the macroeconomic foundation and legal system to further facilitate production and business activities,” Mr. Cung said, mentioning that the world economic context is not necessarily favorable for the rapid recovery of the Vietnamese economy. That is, the world economy is recovering more slowly than expected, especially the trend of capital withdrawal from emerging markets such as China, Brazil, etc.

We must also mention the changes that economic analysts are calling "the transition to a new normal for the BRIC countries", especially China, which are essentially profound economic and social structural changes that will affect the world economy, including Vietnam.

Meanwhile, economic growth in 2015 returned but has not really recovered. “Behind that growth is a relatively high increase due to industry and construction, of which the mining industry contributes a significant proportion. The qualitative factor is unclear, still leaning towards quantity. Low inflation is mainly due to the fact that demand has not recovered and external prices have decreased,” Mr. Cung analyzed.

However, what businesses expect most in 2015 is a reduction in bank interest rates, increasing access to cheap capital sources when inflation is low but not as expected.

“We call this the government’s “debt” to businesses. With such low inflation, businesses should have the right to enjoy lower interest rates than they do now to take advantage of the opportunity to recover,” said Mr. Cung.

The reason analyzed is that bad debt has not yet left the economy and the deficit is too high, forcing the Government to mobilize bonds, increasing the demand and price of scarce capital. Of course, the consequences that businesses have to bear are increased capital costs, production costs and reduced competitiveness.

CIEM experts are also concerned about agriculture. Difficulties in prices, the decline of the world market and the backward and slow-to-change production methods of Vietnamese agriculture are pushing the sector once considered “the support of the Vietnamese economy in times of crisis” into a precarious position.

“Even without strong changes, this will be an area with many worrying problems,” Mr. Cung said.

The message that policy priorities need to continue to focus on improving the microeconomic foundation and reforming economic institutions for a modern market economy is repeatedly emphasized in the Report.

Specifically, Vietnam needs to proactively and substantially promote the process of improving the business environment, simplifying administrative procedures, reducing costs, liberalizing markets, facilitating business, encouraging and improving technological capacity associated with sustainable productivity growth – even before these requirements become official commitments under international economic integration treaties.

According to Investment