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Viet Nam Economic Overview in 2015: Issues and forecast in 2016
5/4/2016 15:10' Send Print
Manufacture of electronic components in Ho Chi Minh City. Photo: VNA

Viet Nam's economy in 2015 and the issues during the implementation of the Socio-economic Development Plan – in the period of 2011-2015

Key figures

The year of 2015 marked the recovery of Viet Nam's economy; many economic target were achieved, showing the efforts, and the determination of the Government in 2015 in particular and the 5-year plan (2011-2015) in general.

Total domestic product (GDP) rose to 6.68%. This was the highest growth rate since 2011 and higher than plan (6.2%). The growth rate increased gradually, higher quarter after quarter and higher than the previous years (2012 was 5.25%; 2013: 5.47%; 2014: 5.98%) which showed that the stable growth of the economy. On an average, the GDP in 5 years from 2011 to 2015 grew by 5.88% which fell short of plan ( 6.5%-7%) and lower than the average GDP of the 2006 to 2010 period (7%).

High GDP in 2015 was conducive to on growth of industrial production, including processing and manufacturing growth. The index of industrial production (IIP), since the beginning of the year to the end of November rose to 9.7%, higher than the same period last year (7.6%). Some products increased over the previous year, such as cars went up by nearly 60%; television over 50%; mobile phones by nearly 40%; footwear and leather by nearly 20%; and rolled steel by nearly 20%. Many local industrial production index rose sharply over the same period of 2014 thanks to foreign direct investment (FDI), such as that of Thai Nguyen increased over 110%, Quang Nam nearly 35%, Hai Phong by over 15%, Da Nang nearly 15%, and Hai Duong over 10%. In 2015, the country's IIP index rose 9.8%. This is the highest rate in the past 5 years, an important factor contributing to economic growth inViet Nam in 2015 (in 2014 increased by 5.9%; 2013: 7.6%).

Purchasing power and total demand of the economy continued to improve. Total retail sales of goods and services rose to 9.7% as compared with the same period of 2014. Excluding price factors, the total retail sales was 9% higher than the same period of previous years (2014: up 6.3%, 2013: up by 5.5%).

Promotion and discounts were deployed in different localities pushed up the consumption power of the people. The management of trade and policy on price stabilization of essential commodities were implemented timely and effective by all levels and branches. Sales of retail goods and services of accommodation, catering, tourism also increased about 6%-10% over the same period of 2014.

Export turnover of Viet Nam in 2015 was estimated at US$ 162 billion, an rise of 8.1% over the same period in 2014 (US$ 150 billion, up 13.6% over the same period). Notably, the domestic sector reached US$ 45 billion, down nearly 2.5% over the same period of 2014 (2014: US$ 48.4 billion, up 10.4% over the same period of 2013; 2012 up 1.2%; 2013: 16.7%). Foreign invested sector (including crude oil) reached US$ 110 billion, up 15% over 2014 (15.2%). Thus, exports did not achieve its objective of US$ 165 billion. This is also the lowest export growth in the past 5 years.

The main exports saw a good growth: Phones and components increased by nearly 30%; textiles by 10%; electronics, computers and components by nearly 40%; leather footwear by over 16%.

However, some export commodities fell sharply over the same period, crude oil production declined in both volume and value; coal output decreased by 75% and coal turnover dropped by 65%. Although rice exports increased by 5% decrease in turnover but also about 5%; rubber rose more than 5% and 15% reduction in turnover.

Import turnover was estimated to reach US$165 billion in 2015, an increase of approximately 12% compared to 2014 (in 2014 import turnover reached US$ 148 billion, up 12.1% compared to 2013). The trade deficit was about US$ 3.2 billion. Trade deficits remain below 5% compared to exports.

Social investment capital was estimated at about VND 1,340 trillion, up 10% compared to 2014 (in 2014, it was 11.5% compared to 2013).

Since 2014, the National Assembly enacted the Law on Investment, renovating and managing investment under the medium-term plan, reducing public investment, reducing State capital’s ratio and heightening effective use of State investment. Domestic and international resources for development investment were mobilized and better used.

Agriculture, forestry and fishery in the past year met with difficult due to both natural and social factors, such as drought, fierce competition in export market, lower export prices, especially rice, products of industrial plants. Seafood export market remained difficult. The agriculture - forestry - fishery growth stood only 2.4% as compared to 3.44% in 2014. However, agriculture, forestry and fishery maintained stable development.

Macroeconomy was basically stable, inflation dropped to the lowest level in 10 years

Consumer price index (CPI) rose by 0.07% in November 2015 as compared to October 2015 and increased by 0.58% over December 2014. In December 2015, CPI rose only slightly to approximately 0.02% as compared to November, and as such, the consumer price index rose only 0.63% in 2015 as compared to December 2014. This was the lowest increase in 10 years. Inflation in 2015 was projected to increase by only 1.8% over the same period. CPI went up slightly mainly due to the economy's aggregate demand rose slightly, while supply soared significantly. Many agricultural products, seafood exports were channeled to domestic market; many consumer products were imported with or without quota pushed up supply to the market. Oil and petrol prices fell continuously which made service prices followed suit.

Credit to the economy improved. The growth rate of total credit outstanding was higher than the growth rate of total deposits. Deposit and lending rates were stable. The VND/USD exchange rate tended to increase, but still remained within its permitted margins. The total credit outstanding across the economy by November 2015 reached 14.47% (9.55% increase over the same period of 2014). It was estimated at 18% in 2015. This was a high rate in recent years. However it should be noted that credit for production and trade accounted for nearly 50%, the rest was invested in infrastructure, and real estate.

The total state budget revenue from January to the end of December was estimated at nearly VND 810.000 billion, equivalent to 88% of the yearly estimate, of which domestic revenue was VND 60,000 billion, equivalent to 93.7% of the yearly estimate. Oil revenue reached nearly VND 60.000 billion, equivalent to 63% of the yearly estimate.

The total state budget expenditures by December 2015 was estimated at VND 1,064,000 billion, equivalent to 92% of the yearly estimate. Of which, development investment accounted for VND 162,000 billion, equivalent to 83%; expenditure on socio-economic development, defense, security, and public administration was estimated at VND 680,000 billion, equivalent to 90% of the total estimate. The balance of budget revenue and expenditure remained a difficult task, expenditures from the state budget for administrative apparatus was still high, approximately VND 179,7000 billion higher than revenue.

The year 2015, the last and key year of the 5 year plan (2011-2015). It is possible to confirm that Viet Nam's economy has gradually got out of the crisis and is recovering more clearly. GDP growth reached the highest level in the past 8 years. Macroeconomics is stabilizing, monetary and fiscal policy has contributed effectively to stabilize macroeconomy. Export is increasing while the world market is rising up slowly; new markets are formed; the economy's total demand increases; inflation is running low.

Those are important achievements of Viet Nam's economy. However, there remain difficulties and challenges which need high political will and time to implement sustainable development goals.

Emerging issues of Viet Nam's economy

The economic sector structure in 2015 was improved, narrowing the area of agriculture, forestry and fishery products from 21% to 19%, expanding industrial construction sector (about 39%) and recovering the service sector (41%). Though sector restructuring was slowly but in the right direction.

However, sector development was not stable, and it is important that the structure is developing in a backward economic growth model, relying on cheap labor which mainly work on subcontracts and exploitation of natural resources, and exporting raw materials.

The danger of falling behind other countries in the region of Viet Nam's economy. Viet Nam has a slower growth rate than those of other countries, such as Myanmar, Cambodia, the Philippines, and Laos. Their economies have increased steadily at a higher level than same period).

In 1990, GDP per capita of Viet Nam was lower than the world average of about US$ 4000, after more than 20 years, when Viet Nam's GDP per capita reached US$ 2,000, the world’s GDP has surpassed US$10,000, 2 times higher. That also means that “economic strength” of the country has not improved much, even though the population has doubled. That's not to mention the lagging behind of infrastructure, quality of human resources, science and technology, institution, and labor productivity.

Although the investment environment and business of Viet Nam has progressed, it is not attractive enough to investors; the improvement of the competitiveness of each sector, products and national competitiveness remain weak. The business environment of Viet Nam is slowly improved; Little progress is made in the rank of business environment (in 2013: 72/189; 2014: 78/189). In which, many areas were rated low, such as paying taxes (173/189); protecting investors (117/189); resolving insolvency (104/189); and getting electricity (135/189). The situation has improved somewhat from 2014 to the present when the government has taken an international practice approach and created favorable priority for production-business by the promulgating resolutions 2014 and 2015.

Viet Nam’s competitiveness has changed and improved, but still at a low level. According to the Report the Global Competitiveness Index (CGI), the competitiveness index of Viet Nam over the years is volatile and has improved recently, in 2015, it was 56/140, achieving 4.3/7 points.

Other indexes of Viet Nam are low, institution ranked 85/140, achieving 3.7/7 points; financial market development: 84/140; training and post-primary education: 95/140; infrastructure: 76/140; business level: 100/140.

The process of restructuring, equitization of state-owned corporation in the period of 2011-2015 was slower than requirements, and difficult to be completed by the end of 2015. State-owned enterprises’ business performance of public enterprises is not on par with their resources; competitiveness is low; the state capital grew strongly but revenue, profits, submission to the state budget, and the rate of return on capital rose disproportionately.

The State-owned enterprises currently use 70% of land and 70% of official development assistance (ODA) in production and business, 60% of the economy’s credit, employ 14% of labor, 70% of them are professionally trained, although owners’ capital increases, it contributes only about 33% of GDP and 22% of the state revenue and tend to go down.

The state-owned enterprise restructuring has fallen short of requirements. From 2011 to 2015, 531 enterprises were planned to be restructured. For 2 years from 2014 to 2015 the number was 432 enterprises. From 2011 to August 2015, 337 out of 531 enterprises equitized (in 2011: 12 enterprises; in 2012: 13 enterprises; 2013: 74 enterprises; 2014: 143 enterprises; from the beginning of 2015 to December 2015: 95 enterprises). The process for approval of restructuring scheme was slow; it took a long time for enterprises’ dissolution and bankruptcy, in many cases it took more than 10 years. After equitisation, business administration still shows many drawbacks with no substantive renovation and competitiveness remains weak. Equitization of some businesses are not substantive, shares are mostly internally owned, and the State is still the key holder. There is no separation of production, business and public service. Management capacity of a number of officials, managers of state enterprises are poor which results in loss of capital and assets, high bad debts, and continuous losses.

Development dynamism of the economy poses many issues: In recent years, especially from 2013, the domestic economy has faced many difficulties; domestic economic growth has been high and tends to downturn; the domestic export sector has continued to decline; the trade deficit has gone up sharply. Localization ratio in the industry has been at low level (around 10%). The private economic sector has also met with difficulties and has not yet become the driving force for development. This is a very important issue of Viet Nam's economy, especially during deep integration into the world, the formation of the ASEAN community, implementation of bilateral and multilateral agreements. The construction of domestic economy is even more demanding.

Meanwhile, the number of enterprises with foreign direct investment (FDI) has increased rapidly. Though their contribution to growth has not high (about 20%), their contribution to export has accounted for over 70% of total turnover from 2014 to 2015. Viet Nam's GDP growth has mainly based on the growth of the manufacturing industry (in 2015, the growth rate was 9.7%); but the growth of this sector has mainly based on FDI enterprises (more than 65%).

The policy on development and calling for FDI was justified. FDI has contributed to economic development, improving the economic structure, but the value-added contribution to growth has still been at low level. Price changes are still difficult to control for Viet Nam agency over FDI enterprises. In recent years, the incremental capital output ratio (ICOR) of FDI has gone up abruptly (if calculated according to the criteria of assets, it rose to 8.5 and according to investment criteria, it rose up to 13 after participating in the World Trade Organization-WTO), which is very worrying.

In addition, the issue of public debt, bad debt of the economy; balance between accumulation and consumption; fiscal policy, balance of annual budget revenues and expenditure are the emerging problems in the process of economic development in the period of 2011-2015.

Viet Nam Economic Forecast 2016

World economy forecast

Entering 2016, the world economy is forecast to rebound to 3.6% growth after the growth fall in 2015 (from 3.4% in 2014 to 3.1% in 2015). In particular, the growth of developing economies was 2.3% (compared with 2% in 2015); of emerging economies and developing countries was 4.8% (compared to 4% in 2015). World commodity trade in 2016 is forecast to be higher than in 2015 (3.9% versus 3%).

However, that recovery is uncertain due to risks to the growth of emerging economies and developing countries. World commodity prices are forecast to reduce at a lower rate than that in 2015, due to the economic growth of China and other emerging economies.

The price of crude oil, the most important raw materials will have sudden changes. Iran, after the US lifted the embargo, will increase mining output and therefore oil export to the world market will go up; the US government has lifted the ban on export of oil because US oil productivity has increased sharply thanks to shale-oil exploitation technology; OPEC countries maintain their productivity and will not reduce their outputs in the near future; while the world economy’s slow growth will lead to supply far exceeds the demand for oil. Oil prices will stay low in the coming period, especially in 2016 (forecast at around 40 USD/barrel) and as such will have strong impact in some countries with revenues mainly from petroleum.

Forecasts of economic growth in Viet Nam

Some forecast figures of Viet Nam’s economy in 2016

GDP growth is forecast at 6.7%-6.8%.

Basic inflation is forecast at about 3%.

Exports increase slightly compared to 2015 due to trade agreements and increase in world trade in goods in 2016. Export turnover is forecast to increase by 10%.

Imports also rise faster than in 2015 due to increase of foreign investment which demands for imported machinery and equipment. Import turnover is forecast at 14%.

Trade deficits over the total export turnover is forecast at 5%.

In terms of economic growth: long-term growth will be improved, because:

• Export market expand due to concluded trade agreements (1).

• Increased investment, especially foreign investment in order to grasp the opportunities offered by the Agreement on the Trans-Pacific Partnership (TPP).

• The implementation of the new legislations related to improving business environment, such as the Enterprise Law and the amended Investment Law and solutions to improve the business environment in line with Resolution 19/NQ-CP have helped improve overall productivity of the economy (the year 2015 was the second consecutive year, Viet Nam’s competitiveness and business conditions were improved).

However, short-term growth declines due to the fact that the two dynamics of growth in 2015 including investment and private consumption will slow down due to rising interest rates (limiting private investment) and inflation (limiting private consumption). In fact, in 2015, lending rates compared to 2014 did not nominally increase but go up in real terms (after deducting inflation). Compared with GDP, the real lending rates are high (almost double).

These two trends (long-term and short-term growth) show that in 2016 it is unlikely that the growth rate will be higher than 6.7%.

In terms of macro-economic stability

• Inflation: Inflation in 2015 was the lowest in 10 years. Low inflation was mainly due to world commodity prices fell sharply, having direct impact on domestic consumer prices and indirect production costs.

In 2016, inflation will continue at low level due to world commodity prices continue to decline while total domestic demand sees no abrupt change.

• Interest rate: The interest rate comes under pressure due to: 1. Inflation increase; 2. Demand for credit increases in both private and the state sector. Indeed, government bonds interest rate rose up remarkably from March 2015, and had no sign of decline in the last months of the year. Meanwhile, the monetary policy should maintain a reasonable interest rates to avoid impact on exchange rate stability as well as the needs to establish contingency for banking risks.

• The exchange rate can be stabilized due to the likely improved balance of payments, thanks to: 1. Indirect investment inViet Nam grow from multiple sources, such as investing in the stock market when the percentage of foreign ownership goes up, sale of shares of state-owned enterprises, trading activities, and bank mergers and acquisitions (M&A). The National Financial Supervisory Commission forecast that, foreign indirect investment in 2016 can reach US$ 3.5 billion; 2. Issuance of US$ 3 billion of government bonds to international capital markets. However, be aware of the psychological impact on the market when the US Federal Reserve (Fed) raises interest rates and China adjusts the exchange rate of the yuan (this possibility is high because in 2015 although the yuan’s nominal depreciation stood at 4% against the dollar, it still rose higher compared to 2014). Beside, it is necessary to take into account the need to adjust the exchange rate to support production and export of the domestic economy, especially agriculture.


This article was published on the Communist Review, No 879 (January 2016)

Le Dinh An, PhD.Former Director of the National Center for Socio-Economic Information and Forecast