Vietnam has surfed 2011 with slower economic growth, high inflation and foreign direct investment downturn challenges. Warrick Cleine, CEO of KPMG Vietnam and Cambodia, tells VIR’s Song Ngoc how the Vietnamese government will address such challenges in the coming New Year.
Vietnam set a growth target of 6-6.5 per cent in 2012. What are the fundamental and structural issues that need to be tackled for Vietnam to maintain this healthy growth?
Economic growth in Vietnam, especially in challenging economic times, depends on a vibrant and healthy business sector. A major feature of Vietnam’s economy is the co-existence of state and private companies.
Structurally, it is important that these two vital sectors operate on a level playing field, so this is one area that will need to be addressed over time if economic growth is to be maintained. This means equal access to capital, credit, land and other concessions.
The government has announced the further equitisation of state assets, which may be interesting for investors, but equally important is that existing and continuing state-owned enterprises are managed professionally, for the benefit of their shareholders, and with an eye to generating wealth for Vietnam.
The private sector is continuing to face serious profitability constraints, and this will in turn constrain economic growth if it is allowed to continue. There is no one cause of profitability pressure in the past year, but high interest rates on corporate borrowing, increasing labour costs, imported inflation, and poor management and corporate governance are typical themes.
Some of these issues are able to be influenced by government policy, but some require long term solutions such as upskilling Vietnamese management and encouraging the corporate sector to pursue world-class standards of strategic planning, corporate governance and financial management.
The Vietnamese government’s priority in 2012 is to continue reining in high inflation. What can the government do to strengthen the dong at the same time?
Some of Vietnam’s inflation is imported, which is very hard for the government to control. This applies for example to oil, raw material and food prices, which flow directly into the cost of good and services consumed in Vietnam. Other factors such as credit growth or spending by the state sector are well known and understood by Vietnam’s policy makers.
In relation to the currency, this is a matter of confidence as well as monetary policy. Restoring or maintaining confidence in the currency will follow from the implementation of a sound macroeconomic policy, which includes fiscal policy, controlling inflation and encouraging economic growth.
Registered foreign direct investment (FDI) in Vietnam slowed down this year. Are there any signs for the capital inflows to pick up in 2012?
There is not a single CEO in the world who is not motivated by reducing their cost of manufacturing or delivering services, or who is not in pursuit of new growth markets. Vietnam measures up well on both fronts, and for this reason there is some basis to be confident that FDI will continue.
Companies are attracted by Vietnam’s lower cost and productive labour force, and the growing consumer market creates opportunities in consumer goods, retail, financial services and property, for example. Of course, these same factors are exciting for Vietnam’s entrepreneurs, also, and ensuring these factors remain will attract both domestic and foreign capital to Vietnam.
Having said that, the economic situation in Europe and the US is very challenging, and it would be naive to think this will not impact on Vietnam’s FDI environment. Companies from these parts of the world are historically large investors in Vietnam, and if their home businesses suffer we can expect this to flow into their investment decisions abroad.
Constrained credit availability in Europe will itself give rise to pressure on capex and investment plans. Weakness in the developed world will also impact on business results of companies in Asia who are profiting from selling to, or manufacturing for, wealthier markets, and many of these companies are major investors in Vietnam.
We are also seeing Vietnam’s “capital competitors” such as Indonesia, the Philippines, Thailand, or even India and China, introduce policies to attract FDI in response to this environment, and Vietnam will need to do the same to maintain competitiveness.
Vietnam’s growth model is based on its main pillars of natural resources, cheap labour and easy investment. Which growth model should Vietnam target when restructuring the economy?
Like any country or company, Vietnam needs to identify and emphasise its natural competitive advantages. These seem to revolve around cost and productivity of labour, and efficient production of food and commodities, for example.
These are compelling national advantages, and should not be neglected on the path of economic reform. In the long run, though, Vietnam will continue to deliver higher living standards to its people, and this in turn will put pressure on labour costs due to higher salaries.
We need to ensure that the benefits of economic success from the current economic advantages are reinvested in areas that will support a modern and prosperous economy, such as infrastructure, education and domestic savings, and are not squandered.