Asia Briefing: Vietnam struggles to grow even as its exports rise

H anoi, capital of Vietnam, for years was one of the economic success stories of Asia, but lately it has been struggling to deal with sluggish economic growth, while at the same time tackling corruption and bad debt.

Gross domestic product (GDP) in the second quarter to the end of June rose
5 per cent from the same period last year, slightly faster than in the first quarter, and the government is forecasting 5.5 per cent growth in the full year.

That would be the first time the economy has expanded less than 6 per cent for three straight years since 1988, according to International Monetary Fund data. "Production and business in the country are still facing difficulties, domestic market demand remains weak," the General Statistics Office said in a report.

Bad debt also weighed on the economy – the central bank estimated bad debt at 7.8 per cent of outstanding loans at the end of last year.

There is also pressure to force state-owned companies to become more efficient, and deal with a flood of bankruptcies, as well as slow retail and credit growth.

Prime minister Nguyen Tan Dung last month ordered state agencies to start working on 2014 economic targets, and the country will strive for growth of 6 per cent next year.

He also issued a personal apology to the National Assembly for mismanagement of the economy, the Financial Times reported, which is the second time in the past few months he has had to say sorry, after he apologised in November for his handling of Vietnam Shipbuilding Industry Group, or Vinashin, the state-run firm he championed and that almost collapsed under €3 billion of debt that year.

Against this background of growing public unhappiness about failure to rein in corruption and dissatisfaction with Mr Dung’s administration, the government is working on various options to get the economy moving.

Earlier this month, the Hanoi stock exchange said it planned to introduce new bond instruments, such as futures, related indexes and cross-currency repurchase agreements to boost trading in the market, and this news came as the government ramped up debt sales to a record this year.

The Hanoi Stock Exchange has consulted with experts on the plans and will submit a proposal to the ministry of finance for implementation in 2014, deputy general director Nguyen Thi Hoang Lan said in an interview with Bloomberg.

The bourse is now “deeply studying” the feasibility of the plans and the submission will be done as early as the end of the year, she said.

Vietnam's central bank has cut its refinancing rate eight times since the beginning of last year to spur lending, and the government has set up the Vietnam Asset Management Corporation (VAMC) to buy bad debt from banks in return for special bonds to help boost lending.

Vietnam plans to boost debt sales by more than 6 per cent to 150 trillion dong (€5.4 billion) this year as falling property prices and slowing bank lending supports demand, Tran Minh Hang, deputy head of the State Treasury, said earlier this year.

The National Assembly voted last month to reduce corporate income tax from 25 per cent to 22 per cent, while the rate for companies with fewer than 200 employees and total revenue of less than 20 billion dong (€719,000) was lowered to 20 per cent.

While the tax breaks are aimed at boosting investment and lifting the economy, it may make raising revenue more difficult for the government.

There are positive signs in terms of trade. Exports in the first half rose 16.1 per cent to €47.38 billion from the same period a year earlier, while imports climbed 17.4 per cent to €48.49 billion to give a trade deficit.

The European Union plans to recognise Vietnam's market economy next year, which should give its international trade standing a boost.

The ASEAN Business Outlook Survey conducted by AmCham Singapore and the US Chamber of Commerce shows Vietnam remains one of the most popular destinations for expansion in the southeast Asian region. Vietnam has benefited from a switch out of China in traditional labour-intensive manufacturing exports, such as garments and footwear manufacture and these sectors continue to grow, while hi-tech exports such as mobile phones and components, computers, electronics and accessories, as well as car parts were the largest and fastest-growing export commodities last year.

Exports of mobile phones and accessories are expected to exceed €13.75 billion this year, overtaking garments as the country’s most lucrative export items.

According to the World Bank, in the 10 years between 2002 and 2012, the share of low-value manufacturing exports (garments and footwear) fell from 27 per cent to 20 per cent, while high-value export items, negligible in 2002, now account for more than a fifth of Vietnam's exports.