Key Strategy for Vietnam to Achieve Development Goals

2:43:08 PM | 28/2/2020

Vietnam is drafting a new socioeconomic development plan for the period from 2021 to 2025 and a new socioeconomic development strategy for the period from 2021 to 2030. The strategy and the plan are expected to set ambitious development goals consistent with the country’s remarkable position achieved in recent years.

 

 

However, according to Mr. Donald Lambert, Principal Private Sector Development Specialist, Southeast Asia Department of the Asian Development Bank (ADB), Vietnam will need to adopt new approaches to finance development to realize its ambition.

US$22 billion in need in five years

Mr. Donald Lambert said, Vietnam has achieved substantial progress in the 5-year-ago plan. In 2015, Vietnam was the fifth largest recipient of official development assistance (ODA) and qualified for some of the most concessional assistance from ADB and other donors.

“The story is different now. In 2018, Vietnam's per capita income increased at a compound annual growth rate of 6.3%, making Vietnam one of the fastest growing economies in the world. Vietnam has now firmly established its status as a middle-income country and one of the most attractive destinations for foreign direct investment,” he said.

However, he noted that this success also means that donors will start to allocate grants and other concessional funds to countries with more urgent needs. This has been going on. In 2017, Vietnam “graduated” from the World Bank’s concessional country classification and 18 months later from ADB’s equivalent grouping.

ADB and other donors have been trying to cushion this transition by blending grants with its lending to Vietnam to reduce net borrowing costs. Additionally, in 2019, ADB approved a new pricing policy that provided a temporary benefit to countries, like Vietnam, that are recent graduates from the most concessional assistance. Although it is helpful, these measures are temporary and inherently limited and will not provide the funding paradigm for Vietnam’s next socioeconomic development plan as previously.

Moreover, these funding needs are significant. ADB estimated that Southeast Asia will need to invest on average US$210 billion in infrastructure per year through 2030. Vietnam will require a large portion of this with the Global Infrastructure Hub estimating that Vietnam needs to invest US$110 billion between 2021 and 2025 for infrastructure and to meet the Sustainable Development Goals. Based on historical trends, this leaves a projected US$22 billion funding shortfall.

Mr. Donald Lambert forecast that US$22 billion over five years is a big number but it is not insurmountable. In fact, Vietnam is in a better position than many other countries. While the Philippines, India, and other Asian countries have privately funded a large portion of their infrastructure, the private sector has historically only funded 10% of Vietnam’s infrastructure. That means there is a lot of scope for Vietnam - particularly given its compelling growth story - to attract more infrastructure investment.

Three important strategic recommendations

Given the above situation, Mr. Donald Lambert put forth three strategic recommendations that help Vietnam promote economic growth in the coming years.

The first strategy is to use more catalysts for development assistance. This requires a different mindset. Vietnam is no longer a low-income country, but it is not ready to fund itself through private investment and domestic capital markets. A transition period is needed as Vietnam uses donor assistance to catalyze private investment, and without it, private investment would not come by itself.

Nevertheless, this transition period will require new tools. This includes issuing counter-guarantees to ADB and other development partners so they can use their strong international credit ratings to reduce risks for projects. In addition, Vietnam should also prioritize development assistance to strengthen the financial sector, providing stand-by facilities or other enhancements to make it easier for state-owned enterprises (SOEs) tasked with key projects to access affordable financing, while allowing development partners to issue dong-linked bonds to lower the cost of capital for Vietnamese borrowers. These are all measures that ADB and others have taken in many other middle-income countries. But according to institutions or policies, at present these measures have not yet been applied in Vietnam.

Using development assistance catalytically to attract private investment closely ties to the second priority: Passing a strong law on public-private partnerships (PPP). The National Assembly has already considered a first draft of the bill and hopes to pass a second version in May. Consultations should focus on the key missing ingredients needed to attract international investment.

The final strategic priority is better mobilization of domestic capital. The passage of the new Securities Law in November 2019 was a good step as are recent regulatory changes that encourage companies to turn to the bond market instead of banks to fund long-term obligations.

However, Mr. Donald Lambert said, more is needed. Private pension funds, investment funds, and insurance companies all need to mature so there’s a strong base of demand for corporate bonds. Meanwhile, the main public pension, the Vietnam Social Security (VSS), must firstly be able to prudently manage and secondly start to invest in corporate debt. Vietnam needs to establish a domestic credit rating agency, and the government should actively market this investment opportunity to leading international rating agencies. These steps will help the corporate bond market to evolve, eventually creating opportunities for project bonds, particularly if credit enhancement mechanisms are available for these instruments.

A measured strategy that deploys development assistance catalytically, strengthens the public private partnerships, and makes better use of domestic capital would establish the resource base for Vietnam’s next socioeconomic development plan and beyond.

By Quynh Anh, Vietnam Business Forum