Joining Forces for Economic Recovery

11:18:10 AM | 4/17/2020

The Prime Minister of Vietnam has put forth four principal contents to mitigate the impact of the economic downturn amid the Covid-19 epidemic outbreak: Removing business difficulties, promoting public investment, supporting people, and ensuring social security.

Anticipating bad developments

According to a report by the Ministry of Planning and Investment, Vietnam's economic growth reached 3.82% in the first quarter of 2020 – the lowest in 10 years; service sectors were hardest-hit by the Covid-19 epidemic, growing just 3.27%, lowest in the same period from 2011 to 2020.

In this context, more companies accepted to leave the market, clearly showing the trend that they prefer waiting for better prospects and “hibernating”. In the first quarter, nearly 34,900 businesses withdrew from the market, while 12,200 halted operations and waited for dissolution procedures. About 10% shrank their output. Some industries and sectors such as tourism, accommodation and restaurants reported reductions by 70-80%.

The Ministry of Planning and Investment forecast that if the epidemic continues, over 250,000 workers will be fired and 1.5-2 million workers will be laid off in the second quarter. In case of a stronger outbreak, 400,000 workers will be sacked and about 3 million workers will face layoffs in the quarter.

The chance of recession is forecast to be even worse than the financial crisis in 2008. Resolved to revive the economy, Vietnam has launched support packages, focusing on four principal contents: Removing business difficulties, promoting public investment, supporting people and ensuring social security.

Four major support packages

To support businesses to cope with emerging difficulties, the Government has introduced two solutions on fiscal and credit policies. Firstly, the VND300 trillion (nearly US$13 billion) monetary package helps capital-short companies to extend debt payment terms to continue operations. Secondly, Decree 41 extends the payment deadline for value added tax, corporate income, personal income tax and land rent with the value of VND180 trillion (roughly US$8 billion).

Reforming administrative procedures is a particularly important measure to create an enabling business environment, complete the legal framework, and reduce costs for people and businesses. The Ministry of Finance is also planning a package to reduce fees and charges worth VND40 trillion. The ministry will allocate and guarantee resources for epidemic prevention and control.

Stressing the importance in private investment and FDI attraction, the Prime Minister has instructed all levels and sectors to pay attention to developing major centers and driving areas and plan FDI attraction to catch up with investment flows shifted towards Southeast Asian countries, including Vietnam. In particular, the nearly VND700 trillion (US$30 billion) public investment package will also be quickly executed and strictly controlled so as not to delay the disbursement and transfer investment fund to other projects.

With respect to social security, the Government has launched a VND62 trillion (US$2.7 billion) package and requested the Ministry of Public Security, local agencies and big cities to work out specific plans and solutions to ensure order and security, fight against burglary and commodity speculation, manage migration, and suppress hostile forces.

Business support launched

How to enforce government support policies effectively and equitably is really important. Ministries and sectors need to have specific guidelines for enterprises to access support packages.

A representative from the Vietnam National Textile and Garment Group (Vinatex) also said that the degree of tax extension and reduction in support packages is not significant because textile exports are not imposed VAT. The delayed payment of land rents will not produce considerable impacts because its share is low to overall costs. For labor-intensive companies such as textile and footwear producers, the most important support policy is postponing social insurance, union dues and unemployment insurance because these costs account for 34% of wage funds, and approximately 20% of corporate expenses.

Recently, the Vietnam Beer, Wine and Beverage Association proposed this because businesses in this sector are not entitled to tax and land rent delayed payment.

Dr. Vu Tien Loc, President of the Vietnam Chamber of Commerce and Industry (VCCI), raised concerns that policies, particularly Directive 11 and Directive 16 of the Prime Minister, are slow and inconsistent among localities.

He analyzed that bailout scenarios should be taken into consideration in the current context of the epidemic. Accordingly, the two most important tools of the Government are fiscal and credit policies and other measures play a supporting role. But if the epidemic lasts longer, corporate solvency is threatened and the risk of closure and dissolution is heightened, the bailout scenario will be launched. The core of business rescue is loosening fiscal and monetary policies while increasing public investment and spending. The government should even consider purchasing debts of large-scale corporations to avoid chain collapse.

Dr. Loc said that an important direction both to stimulate demand and lay a foundation for the next development stage is to increase public investment, and focus on future infrastructure such as information technology, telecommunications and digital transformation.

The support is also necessarily selective, he said. No matter how the epidemic evolves, some companies will go bankrupt. This is a natural but harsh selection. Therefore, policies should support only prospective businesses temporarily hurt by the epidemic, not rescue uncompetitive ones.

By Huong Ly, Vietnam Business Forum