Enhancing Internal Capacity, Unlocking Resources, and Supporting Businesses to Overcome Challenges

9:46:34 AM | 10/11/2023

Mr. Vuong Dinh Hue, Politburo member and Chairman of the National Assembly, emphasized the importance of building and fostering strong internal resources to cope with external challenges and uncertainties in the context of the COVID-19 pandemic. He made this statement at the Vietnam Socioeconomic Forum 2023 with the theme “Reinforcing internal capacity, generating drivers for growth and sustainable development,” recently held in Hanoi. The forum was co-organized by the National Assembly’s Economic Committee, the Central Economic Commission, the Ho Chi Minh National Academy of Politics and the Vietnam Academy of Social Sciences.

Chairman of the National Assembly Vuong Dinh Hue and other delegates at the Vietnam Socioeconomic Forum 2023

Slow and unsustainable economic recovery

He acknowledged that Vietnam’s growth drivers and industrial manufacturing have faced a slowdown since the fourth quarter of 2022 due to the contraction of major export and import markets and the disruption of many supply chains.

He also pointed out the complex and unpredictable global developments; the persistent consequences of the COVID-19 pandemic; the ongoing Russia-Ukraine conflict; the intensifying superpower competition; the record-high inflation in some major economies; the tightening monetary policies in major economies; the weakening aggregate demand; the increasing protection barriers; and the potential risks from public debt, financial, monetary, banking and real estate markets in some countries.

Vietnam’s economy has maintained its growth momentum and become a bright spot in the “gray picture” of the global economy, despite the challenges posed by the COVID-19 pandemic. The economy has achieved macroeconomic stability, low inflation, improved sovereign credit ratings and international position. In the first eight months of 2023, FDI capital, public investment and services showed positive growth. Total retail revenue of consumer goods and services increased by 10% in the eight-month period. International visitor arrivals were expected to surpass the yearly target (8 million visitors) soon. Some key industrial areas recovered or maintained high growth, led by Hai Phong, Bac Ninh and Ho Chi Minh City.

However, the economy still faced numerous difficulties and challenges. The economic growth rate was only 3.72% in the first six months of 2023, close to the lowest growth in 12 years, putting pressure on GDP growth for the rest of the year. It was extremely difficult for Vietnam to achieve the growth target set for 2023, the 5-year period from 2021 to 2025 and the 10-year strategic period from 2021 to 2030. Many of the key growth drivers of the economy in the first eight months of 2023 showed signs of slowing down, even declining, and faced great external pressures. In particular, merchandise exports continued to drop, down 10% year on year in the first eight months of the year, the largest decline in 12 years. Many key exports, especially phones, electronic components, footwear, apparel and wooden furniture, continued to fall sharply. Major export markets such as China, the U.S., ASEAN, South Korea, the EU and Japan either decreased or increased slightly. The trade surplus widened as imported inputs plummeted, indicating the slowing demand for domestic production inputs. In addition to a sharp drop in world demand, logistics costs and other costs (e.g. labor and inputs) of Vietnam remained high. The slow greening process in some fields made Vietnam’s exports less competitive than other countries, for example textile and garment products. Meanwhile, the economic production capacity was still low, dependent on the import demand for most of the technology, machinery, equipment, components and input materials for production.

The FDI sector plays a significant role in the economy, contributing about 20% of the GDP and accounting for nearly 74% of the total export value. However, FDI inflows are not stable. Registered FDI capital decreased in the first six months of 2023 despite a rebound from large projects from South Korea and Singapore. Attracting FDI is challenging, especially for large-scale, high-tech projects that have high impacts on socioeconomic development. Imports of the FDI sector are shrinking, indicating weak linkages and capacity of domestic production.

Public investment is regarded as an important driver for economic growth in 2023. However, public investment capital disbursement has not met expectations nor created spillover effects on private investment. It has not acted as a key factor in stimulating economic growth. The industrial and construction sectors are no longer the main sources of growth for the economy, in which the manufacturing and processing sector used to be the engine of growth for many years, but it is now declining.

Domestic consumption recovery is not consistent. The service sector currently contributes 79% to GDP growth, becoming one of the most important drivers of growth in 2023. Several service support policies were introduced at the beginning of the year, including interest rate cuts, 2% VAT reduction for some items and base salary increases. Total retail revenue of consumer services maintained growth momentum in the first eight months but signs of slowing down have been observed. The domestic market has not been exploited effectively, with the corporate bond market and the real estate market facing potential risks and difficulties.

The speakers at the Vietnam Socioeconomic Forum 2023

Maintaining macroeconomic stability and ensuring major balances

Mr. Nguyen Xuan Thang, Politburo member, Director of the Ho Chi Minh National Academy of Politics, and Chairman of the Central Theoretical Council, stressed the importance of maintaining macroeconomic stability and ensuring major balances as a foundation and a condition for the Vietnamese economy to preserve its development achievements, enhance internal capacity and create sustainable growth momentum. He noted that Vietnam, as a highly open economy, has faced many “headwinds” that have changed directions and produced strong external effects for nearly a year, resulting in great pressures on inflation and exchange rates as well as risks of market contraction, supply chain disruption, labor disruption and price fluctuations of strategic commodities.

He suggested that finding practical, feasible and innovative solutions to restore important growth drivers of the economy was necessary to determine the growth scenario in the future. In particular, he emphasized the need to fully evaluate and actively restore domestic consumption. He recognized that some people were still living in hardship, especially redundant workers or residents in regions affected by extreme weather events, natural disasters, storms and floods, even as the pandemic has passed. He also observed that the post-pandemic pent-up demand for consumer goods and services (such as tourism) of the middle class has slowed down as consumers have cautiously balanced their spending amid the stagnant real estate market and the declining stock market.

He recommended that accelerating the recovery of the stock market, bond market and real estate market should be done to generate spillover effects, create positive signals and restore consumer and investor confidence. He argued that confidence ultimately determined how the financial and banking system controlled risks and stabilized the market in sensitive times, not administrative regulations. He added that strengthening the market should be accompanied by creating a favorable and fair environment to encourage all economic entities to participate in healthy production, business and competition.

He highlighted the need to revive investment inflows. He noted that the investment fund from all economic sectors increased in the first half of 2023, with the public investment fund rising the most while the private and FDI investment fund grew much lower than that in the same period of 2022. He pointed out that the public investment disbursement was still very slow despite the availability of funds. The slow public investment has created chain reactions that have restrained private investment.

Moreover, he suggested that fiscal policy should be prioritized, along with targeted monetary and fiscal policies to direct capital flows into major infrastructure projects, national target programs, industries and fields that are likely to recover and develop soon and lead the economy. He also urged to aggressively remove difficulties and restore production and business operations of enterprises. He stressed the importance of effectively implementing these policies and solutions.

Mr. Dao Minh Tu

Permanent Deputy Governor of the State Bank of Vietnam

Monetary policy management has never been as challenging as it is now. Monetary policies of other countries in the world have influenced Vietnam’s monetary policy management, especially after two years of the COVID-19 pandemic and the global production situations.

Interest rate management is the most difficult task in the banking and monetary sectors. Following the direction of the Government and the actual economic situation, the State Bank of Vietnam implemented four policy rate cuts while providing room and liquidity for the market and the economy, especially liquidity for credit institutions to offer low-interest rates.

Credit growth limits are a tool to regulate the economy and generally control credit growth to curb inflation. In 2023, the SBV has significantly expanded and signaled available credit for more businesses. In the coming time, the SBV will continue to maintain such an operating stance. Therefore, it is necessary to find a balance between interest rates and exchange rates and manage them strictly and reasonably. This is also the success of the SBV, to stabilize exchange rates and interest rates to control inflation.

Mr. Jochen Schmittmann

Resident Representative of the International Monetary Fund (IMF) in Vietnam

The COVID-19 pandemic ended and energy prices and food prices dropped significantly. However, according to IMF forecasts, policy tightening of central banks has affected many economic sectors.

Vietnam’s GDP growth slowed to 3.7% in the first months of 2023 but it may recover in the coming time, especially with increased exports and positive signals from the real estate market. However, Vietnam will continue to face disruptions in the global supply chain. Reduced demand for commodities has impacted markets, including the labor market. Therefore, Vietnam needs to have appropriate response solutions, with tighter monetary policies in the near future.

Vietnam needs to implement suitable macro policies to maintain the stability of the financial system. In particular, the State Bank of Vietnam must be very prudent about financial policies, interest rates and the interbank market. At the same time, Vietnam needs to strengthen policy enforcement and clear public investment bottlenecks, especially in land use. Specifically, it is necessary to regain the confidence of both foreign and domestic investors in Vietnam; strengthen business restructuring mechanisms; build a framework for business liquidation and debt settlement measures without going to court.

The next important thing is to have stable and consistent investment laws. To enhance business confidence, it is necessary to invest in electricity and infrastructure, reduce taxes and business costs, and improve governance and application of national databases.

Dr. Tran Dinh Thien

Former Chairman of the Vietnam Institute of Economics

The Vietnamese economy faces major challenges in maintaining its growth momentum. The economy has suffered from a long-term decline of its growth drivers and contradictions in its development process: Enterprises are resilient and enduring but slow to grow and hard to mature; the economy is “thirsty for capital” but hardly absorbs it; GDP growth is high but inflation is low; and inflation is low but interest rates are high. These obstacles prevent resources from being transformed into “driving forces for development”, resulting in a weak, vulnerable and unsustainable economy.

To unlock resources in the market economy, it is necessary to limit the resource allocation based on “give and take” and administrative etiquette; and prioritize the development of markets, especially “input” markets, to establish a market-based competitive distribution of resources. The more synchronized the input markets are, the more effective the development is.

Besides, it is necessary to ensure smooth infrastructure, open mechanisms and smart operation. These are principled conclusions but they are, in fact, directly aimed at solving core problems of the Vietnamese economy in terms of creating motivation and unleashing development capacity.

It is well-founded to judge that the key issue of Vietnam’s economy today is how to unlock resources to create a new strong driver for growth and development. To solve that task, the main priority is to develop markets in the right direction and in the right way; and build a smart, market-based and responsible development administration.

Mr. Dau Anh Tuan

Deputy General Secretary, Director of Legal Department, Vietnam Chamber of Commerce and Industry (VCCI)

Vietnamese businesses face various barriers and difficulties in their development. The quality of infrastructure is improving but it has not yet met the economic development needs. Vietnam ranks low in overall infrastructure quality, roads, ports, air transport, and electricity supply compared to China, India, Indonesia, Malaysia or Thailand.

Furthermore, access to basic production and business resources is not very convenient. Labor quality, access to land and informal charges are other challenges for many companies.

Moreover, high production and business costs reduce competitiveness and capital accumulation of the Vietnamese economy compared to other countries in the region, especially in attracting investment and creating jobs.

Legal quality and enforcement need to be further improved. Businesses suggested some solutions to enhance legal quality and predictability such as increasing consultations and feedback, especially for circulars, master plans and detailed plans. Non-retroactivity principle should be applied more widely, especially to investment projects and constructions that started before new regulations were enforced.

Notably, domestic manufacturers have not developed strongly and lack effective support mechanisms. Domestic private companies are still at a disadvantage compared to transnational firms. State agencies require Vietnamese businesses to comply strictly with regulations on online services while cross-border service providers do not meet these regulations. This creates inequality in business, and causes domestic companies to incur increased costs, prolonged time, and added effort to do business.

Ms. Le Hong Thuy Tien

General Director of Imex Pan Pacific Group

Vietnamese businesses faced various difficulties in 2021-2022, such as disrupted supply chains, social distancing, high inflation, increased gasoline prices and increased transportation costs. In 2023, they also suffered from slowing global trade growth, mass order cancellations and declined sales. Therefore, they need breakthrough mechanisms and policies to strengthen internal resources and overcome hardships.

In response to this situation, they want to have specific solutions on tax, finance, and interest support policies for different groups of businesses. Independent agencies are needed to evaluate business support to make more effective adjustments. At the same time, it is important to remove barriers for businesses, review unworkable regulations and avoid setting higher standards than the region or the world or higher than reality to prevent wasting corporate resources.

Regarding tourism development policies, there is a need to consider special policies on tourism stimulus such as applying trade policies in non-tariff zones, building and setting up discount sales centers in non-tariff zones and duty-free shops along the street, and allowing the “dual price” policy on duty-free goods.

Regarding policies for financial centers, there are many benefits of establishing financial centers in Vietnam such as attracting capital funds and developing related industries. Therefore, a related policy is recommended to enable Ho Chi Minh City to launch a financial center. It is not that businesses want to “grow slowly” but the lack of sustained strategic policies and mechanisms hinder genuine companies from investing in research and learning ways to grow and mature steadily.

Dr. To Trung Thanh

National Economics University

Administrative procedures and access to support packages are one of the biggest obstacles for businesses today. Therefore, it is necessary to reform, transparently handle subjects and reduce procedures to facilitate access to the support package for enterprises.

To provide the support policy for companies in need, the policy needs to be rationalized and refined in both subjects and scale. Small and medium-sized enterprises (SMEs) face difficulties in accessing support. They have a small business scale, low accounting standards and few collateral assets. On the other hand, banks cannot lower their credit standards. Therefore, specific solutions are needed for SMEs. Regarding industries, because the policy room is being gradually narrowed, it is necessary to focus policies on pervasive industries to use resources effectively.

By Anh Mai, Vietnam Business Forum