The Vietnamese economy was a shade better in Q2 2013, but not what it used to be. The few bright spots, such as growth in exports and growing inflows of FDI, reveal challenges upon closer examination.
The Vietnamese economy was a shade better in Q2 2013, but not what it used to be—it is still expected to register one of the lowest rates of annual growth in 14 years. The situation is driven in part by global factors, but more so by the sluggish pace of domestic economic reforms. Slow reforms have significantly affected the country’s banking sector, which remains mired in bad debt and wary of lending, thus hindering economic growth. The few bright spots that Vietnam appears to enjoy, such as double-digit growth in exports and growing inflows of foreign direct investment (FDI), also reveal challenges upon closer examination.
Growth subdued by domestic and external hurdles
Vietnam registered real GDP growth of 5.0 percent year over year in Q2 2013, just a small increase over the first quarter’s growth of 4.8 percent, driven by a slightly better performance in manufacturing and services. On a half-yearly basis, real GDP growth for the first half of 2013 was 4.9 percent year over year, a touch better than the 4.4 percent in the first half of 2012. However, the improvement does not signal any sharp pickup in the near term, with the International Monetary Fund now projecting full-year growth for 2013 at 5.3 percent, lower than its initial estimate of 5.8 percent and far lower than the previous decade’s average of 7. 2 percent.
Growth has been affected in part by slowing domestic consumption expenditure, with real consumption for the first half of 2013 expanding only 4.9 percent, against 6.7 percent for the first half of 2012. July and August do not appear to have ushered in any marked improvement on this front, with persistently high rates of inflation eating into purchasing power. Consumption also has likely been hit by credit constraints. Lending conditions remain tight as the banking sector remains burdened with substantial amounts of bad debt. Total credit by commercial banks grew a mere 3–5 percent year over year in the first half of 2013, compared to the State Bank of Vietnam’s (SBV) target of 12 percent for this year.
Adding to Vietnam’s growth hurdles, exports have also decelerated. Exports for the first seven months of this year grew 14.3 percent year over year, compared to 19 percent in the same period last year. The loss in pace was due mainly to an 8 percent decline in agro-fishery exports (15–19 percent of total exports) and a 15.6 percent fall in exports of coal, crude oil, and oil products (8–11 percent of total exports). Agro exports were hit by various factors, including bad weather, farmers withholding stock for better global prices, and soft demand from slowdown-hit Western markets. In addition, coal exports have been affected by policies to divert fuel to meet local energy needs, while oil exports were hurt by a fall in global prices.
Meanwhile, a steep rise in imports has substantially worsened Vietnam’s trade deficit, which reached $733 million in the first seven months of 2013—13 times the value for the same period last year. A double-digit rise in the imports of raw materials such as chemicals, fabrics, and electronic and telephone components, which sustain Vietnam’s export industries, has widened the deficit.
Industry and foreign investment face challenges
Weakness in the mining and quarrying sector, especially in coal and crude oil extraction, restricted the growth of Vietnam’s industrial production index for the first eight months of 2013 to 5.3 percent year over year. Coal extraction fell 3.4 percent, while other mining and quarrying operations shrank 6.4 percent. This is in contrast to the manufacturing and utilities sectors, which expanded 6–9 percent.
Rising land and labor costs, skill shortages, as well as infrastructure and policy challenges have hampered investments.
On the investments front, while realized FDI for the first seven months of 2013 grew a comfortable 6.4 percent year over year, the overall trend has been highly volatile in recent years. Of even greater concern is the wide gap between registered and realized FDI. From 2008 to the first half of 2013, FDI worth $143.9 billion has been registered in Vietnam, but realized FDI stands at only $59.7 billion, or 41.5 percent of the amount registered. Rising land and labor costs, skill shortages, as well as infrastructure and policy challenges have hampered investments. In such a scenario, the government’s spending on “investment development,” which includes “capital construction,” actually declined 7 percent year over year in the first seven months of 2013.
Monetary and fiscal easing to spur growth
To boost the economy, the SBV reduced the key interest rate in May 2013 by 100 basis points to 7 percent. This was the central bank’s seventh rate cut totaling 800 basis points since January 2012. At the same time, the government has sought to provide fiscal stimulus by increasing its spending by 6.4 percent year over year for the first seven months of 2013. In particular, the outlay for socioeconomic development and defense (71 percent of total fiscal expenditure) grew 11. 6 percent.
However, the loose monetary and fiscal policy appears to have stoked a price rise, with inflation averaging 7.4 percent in July and August 2013, the highest in 12 months, and exceeding the SBV’s target range of 6.0–6.5 percent. As a result, further rate cuts may be off the table in the near term. In addition, the government fiscal deficit has widened 11.5 percent year over year, to 101.9 trillion Vietnamese dong, in the first seven months of 2013.
Still a long road ahead for structural reforms
In an attempt to aid the struggling banking sector and boost lending, the state-owned Vietnam Asset Management Company (VAMC) was put into action in July 2013 to absorb banks’ bad debts for a fixed time period. The VAMC plans to acquire $474 million worth of bad debt by October as it begins to address the country’s bad-loan problem worth $5 billion. However, the VAMC is only a first and already overdue step, with further banking reforms related to bad debt reporting and provisioning delayed until June 2014.
Little headway has been made on restructuring state-owned enterprises (SOEs), which are estimated to account for nearly half of the banking sector’s bad debts. As part of its 2011–15 SOE restructuring plans, the government intends to divest its stake in several SOEs, and intends for SOEs to exit from noncore (and risky) operations such as real estate. But with shares sold in only 12 of the 93 divestitures targeted for 2012, much remains to be accomplished.