State investment, FDI no longer driving forces for Vietnam economic growth

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Hai Yen 18:07, 2019/10/30

The private sector has become the main contributor to economic growth for the last three quarters.

Impacts from state investment for development and foreign direct investment (FDI) in Vietnam’s economic growth are diminishing, and no longer considered main driving forces, according to Nguyen Dinh Cung, former director of the Hanoi-based Central Institute for Economic Management (CIEM).

Overview of the workshop. Source: Hai Yen.

In the first ten months of 2019, disbursement of public investment funds reached 69.2% of the estimate and was up 5.3% year-on-year, compared to respective 70.3% and 12.1% in the same period last year.

“The progress so far has made it difficult to meet the disbursement target by year-end,” Cung said at a workshop under the program “Australia supports Vietnam’s economic reform” (Aus4Reform), held on October 30 discussing the country’s economic outlook.

CIEM's projection for Vietnam's economy in the 2019 - 2020 period.

CIEM's projections for Vietnam's economy in the 2019 - 2020 period.

Meanwhile, 3,094 new foreign-invested projects have been approved with total commitments of US$12.83 billion year to date, up 25.9% in number of projects and down 14.6% in capital year-on-year.

This indicates the growing trend of downsized FDI projects in Vietnam, Cung said, raising the question of the quality of these projects, particularly given the fact that China-related investment capital accounted for nearly 50% of total registered capital. “With small projects, it is possible that investors are trying to reduce investment risks in Vietnam.”

But more importantly, it equally means the chance of transferring modern technologies or R&D activities, the criteria the Vietnamese government is looking for in attracting FDI, is lower, Cung continued.

In parallel with smaller FDI projects, the additional amount of capital injected into existing FDI projects has also fallen 16.4% year-on-year.

Cung, however, noted foreign indirect investment surged 70.5% year-on-year in the January – October period to US$10.81 billion, meaning the same amount of capital was withdrawn from the economy. “It means nothing if this capital is not reinvested into the economy.”

Cung also expressed concern over the fact that Vietnam’s economic growth remains highly dependent on exports. In the first ten months of 2019, Vietnam recorded a trade surplus of US$7 billion with the US continuing to be the country’s largest export market with a turnover of US$49.9, up 26.6% year-on-year, followed by the European Union with US$34.2 billion, down 1.9%, and China with US$32.5 billion, down 2.9%.

“Vietnam puts itself under great risks by having high export turnover with the US, as the latter would not allow this situation to go on for long,” Cung continued.

Data: CIEM. Graphic: Hai Yen.

Under this circumstance, Cung suggested the private sector be the country’s major force for growth.

Echoing Cung’s view, Nguyen Anh Duong, head of the CIEM’s Macroeconomic Policy Department, said the private sector has become the main contributor for economic growth for the last three quarters.

“In the first ten months, the domestic sector’s exports expanded 16.9%, significantly higher than a 3.9% growth rate of the FDI sector,” Duong continued.

“The ongoing US–China trade war is causing negative impacts on foreign-invested companies, but at the same time gives opportunities for domestic private companies to grow,” Dung asserted.

“Vietnamese enterprises are capable of grasping opportunities from Vietnam’s global economic integration just as the FDI sector did, but the key issue would be more support from the government,” Duong stated.

Former CIEM Director Cung said, for the private sector to thrive, the government has to push for stronger reforms and remove all factors and forces that are restricting Vietnam from turning into a more market-based economy.

“As major central banks in the world are adopting a monetary-easing approach, Vietnam could consider removing credit growth quota for commercial banks, except for weak ones,” Cung suggested.

Additionally, the government should continue to ease restrictions on the corporate bond market to meet huge capital needs of the economy, along with the ongoing effort of simplifying administrative procedures on investment and construction, among others.

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