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|Andrew Jeffries, country director for Vietnam of the Asian Development Bank|
These figures of strong and steady growth are made possible by Vietnam’s successful containment of COVID-19. Inflation will be under control, despite an expected rise to 3.8 per cent this year and 4 per cent in 2022 due to rising global oil prices on the global economic recovery and increased domestic consumption.
The drivers of this growth will be industry, driven by export-oriented manufacturing; increased private and public investment given accommodative fiscal and monetary measures; and expanding trade, thanks to the faster-than-expected recoveries in China and the US, as well as Vietnam’s participation in 15 major free trade agreements involving all advanced economies.
In the short term, the major downside risks are the pandemic re-emerging from new coronavirus variants and delays in the government’s vaccination plan. A faltering global COVID-19 vaccine rollout could have an immediate impact on Vietnam being able to return to its strong pre-pandemic growth path given the country’s reliance on external demand.
The revival of domestic private investment may also heighten the risk of asset bubbles if credit is not channelled to productive sectors. In the medium and long term, main challenges facing Vietnam include climate change impact, unfinished reforms (for example, financial sector and state-owned enterprise reform), and low labour productivity.
The government has responded swiftly to the COVID-19 economic impacts, which was supported by strong fundamentals and has been instrumental in ensuring the economy’s resilience. The accommodative monetary policy through key interest rate cuts together with the implementation of credit package and fiscal support measures have provided breathing space to affected businesses, including small- and medium-sized enterprises.
However, the credit support has been mainly arranged and provided by the commercial banks. The bulk of the increases in liabilities have been shouldered by the commercial banks, but they still have to apply required lending standards, especially when the balance sheets of affected firms are being deteriorated. Without risk sharing by the government, banks may have been reluctant to provide more loans to affected firms.
There has not been sufficient fiscal support from the government. The support was mainly in the form of deferral of taxes and land rental, and size of the support remained modest, as compared with other countries (with fiscal support of up to 15-20 per cent of GDP, like in France, the UK, or Singapore). For some businesses that were heavily affected by COVID-19 with revenue deterioration and no profit, deferral of VAT and corporate income tax have less impact than the tax cuts.
The State Bank of Vietnam has instructed banks to extend implementation of credit support measures to the end of 2021. The government was also allowed to extend deferral of taxes and land rental to further reduce the shock’s impacts and support economic recovery. The long-term economic recovery is being fleshed out by the government.
Among others, the emerging long-term economic priorities after COVID-19 are the imperatives to build an economy which is resilient to internal and external shocks which have become more frequent in recent decades; broad-based and can help reduce disruptive impacts from external crises; and digitally able to strengthen economic competitiveness.
An ADB study suggests that there is a huge impact of COVID-19 on income and poverty of Vietnamese households. For example, the impact of the pandemic will reduce household per-capita income on average by 9.8 per cent, and the poorest income group will suffer a 10.2 per cent income drop, while the poverty rate of households in the poorest income quintile will rise by 40 per cent. There will be an additional 1.7 million poor people due to the pandemic, and those living in rural, remote areas, and ethnic minority people will be more severely affected.
Cash transfer as per the government’s Resolution No. 42/NQ-CP released in April 2020 on measures to support those who are facing hardship due to COVID-19 should be a short-term solution to over income shock. A more sustainable long-term strategy should be to help the poor and vulnerable to diversify their livelihoods through – for example, short-term vocational training and improved access to microfinance for establishing new businesses.
First and foremost, Vietnam needs to continue with strong measures to contain the pandemic. We all know that Vietnam was one of the fastest-growing economies in the world last year because of several factors.
However, one of the most important factors is that the government has contained the pandemic very well compared to elsewhere. The current wave is causing certain concerns, but the government has excellent records in tracing and containing the previous outbreaks. We do believe that this latest outbreak will also be contained as quickly and effectively as earlier ones.
Secondly, Vietnam should reset the growth momentum to achieve green recovery in the medium-term and green growth in the long-term, given the daunting impact of climate change in the decades to come. Two major priorities for Vietnam for “greening the growth” include cutting the greenhouse gas emissions as committed in the Nationally Determined Contributions; and tackling mounting wastes from industry, agriculture, services, and consumption.
Thirdly, strengthening institutional efficiency is the key to unlocking the private sector’s potential to support growth. Accomplishing unfinished business reforms (for instance, financial sector reform and state-owned company reform), improving the quality, transparency, and enforcement of laws and regulations, and simplifying business conditions are all critical to improve institutional efficiency for private sector development.
Next, it is important for Vietnam to take most of the benefits of the free trade agreements that the country participates in. The country became a more attractive investment destination due to the shift in the global supply chain, and Vietnam has controlled the pandemic better than many other economies.
Favourable conditions need to be created for Vietnamese enterprises to participate more deeply in the supply chains of foreign-invested enterprises in Vietnam. In addition, it is very important to promote vocational training to have a high-quality and skilled workforce meeting the increasing demands of the labour market. I know that these are the priorities of the government’s agenda.
Also, Vietnam grows very fast and needs much more infrastructure. Vietnam is considered as one of the countries with the highest logistics costs in the region, with about 20 per cent of GDP. In the medium and long term, priority should be given to infrastructure development and logistics cost reduction to improve Vietnam’s competitiveness.
Lastly, promoting digital transformation is important to improve productivity by investing in education, technology, and innovation. The Fourth Industrial Revolution is still in its early stages in Vietnam. Taking this opportunity to make breakthroughs, Vietnam can become a digital economy in the future.
At the policy level, the Party and the government determined that digital transformation is the key to proactively catching up with Industry 4.0. We observed that agencies and departments are established to handle the digital transformation in conjunction with modern work arrangements and especially employers’ responsibilities to reskill employees.
Nakajima Takeo - Director, JETRO Hanoi Office
The Japanese business community welcomes initiatives of the Vietnamese government to help businesses.
Extending the duration for payment of VAT and corporate income tax will be immensely helpful. Last year, a JETRO survey revealed that 20 per cent of Japanese businesses wanted financial support from the administration. However, more companies also wanted a “business as usual” policy if possible. 90 per cent of the respondents hoped for the early lifting of international flight and immigration restrictions. They also complained that visa and work permits are more difficult to obtain.
To promote foreign investment and grow the Vietnamese economy, allowing the entry of businesspeople in the country is indispensable. However, we understand that the COVID-19 situation is difficult to predict and that it is not easy to open the borders.
Ywert Visser - International sales manager, Paul Mueller Company
We propose one non-fiscal support measure that could help us. Vietnam is continuously improving the regulatory framework and making it easier for companies to complete admin procedures. We notice that sometimes the transition between the old and new regulation is very fast and recommend that a longer grace period be allowed.
For example, Decree No.152/2020/ND-CP on foreign workers came into effect in February. Some of our employees had work and resident permits expiring shortly afterwards. It took a while to understand the new requirements and we had to resubmit documents several times to the relevant government agencies.
We believe a grace period (for example six months) where applications can be made both using new and old regulations would be helpful for companies to adapt.
Phan Dung Khanh - Investment director, Maybank Kim Eng Securities
I highly appreciate the assistance from the local government to extend tax timelines. This is not the first time that the government proposed an extension of tax and land rent to help vulnerable businesses to weather the storm. Providing tax relief to the people and companies that are most affected, until the emergency abates, is welcome.
While we’re still in the wait-and-see approach for mass vaccination, Decree 52 on tax extension plays a significant role in supporting businesses and individuals to maintain production, thus contributing to hitting the economic growth target for 2021.
However, the overall budgetary revenue for 2021 will not reduce because the extension will not push deadlines over to next year. While the current situation is still unpredictable, the activities of the business community have been seriously impeded.