Wednesday, 21/8/2019
Vietnam economic achievements in 2018 and prospects for 2019
12/4/2019 15:19' Send Print
Illustration photo. Photo: VNA

Outstanding achievements of 2018

1- Economic growth

The economic growth rate of 7.08% was the highest since 2008. To this overall growth, the agriculture, forestry and fishery sector contributed 8.7%; the industry and construction sector: 48.6%; service sector: 42.7%. The quality of growth and economic efficiency were significantly improved, through the following indicators:

- Economic growth gradually saw in-depth change, the total factor productivity (TFP) in GDP growth in 2018 reached 43.5%, the average GDP growth rate in the period of 2016-2018 was 43.3 %, much higher than 33.6% the average in the period of 2011-2015.

- Vietnam's labor productivity significantly increased year after year and Vietnam is a country with a high rate of labor productivity growth in the ASEAN region. Labor productivity of the whole economy at 201 prices of was VND102 million per employee (equivalent to US$4,512), an increase of $346 compared to 2017.

- The Incremental Capital-Output Ratio (ICOR) was improved, from 6.42 in 2016 to 6.11 in 2017 and 5.97 in 2018.

2- Import and export turnover

Export turnover in 2018 stood at $244.7 billion, an increase of 13.8% compared to 2017 (exceeding the target set by the National Assembly and the Government), of which the domestic economic sector bagged $69.2 billion, up by 15.9% compared to 2017, accounting for 28.3% of the total export turnover of the country; the foreign invested sector gained $175.5 billion, up by 12.9%, accounting for 71.7% (down 0.6 percentage points compared to 2017).

Import turnover in 2018 rose to $237.5 billion, up by 11.5% compared to the previous year. Among imported items, 36 had an estimated import turnover of more than $1 billion, accounting for 90.4% of the total turnover, 4 items with import turnover of more than $10 billion.

For the whole 2018, the total import and export turnover set a new record of $482.2 billion. Trade surplus in 2018 stood at $7.2 billion, the highest ever, much higher than $2.1 billion of 2017, and the national target of 3% trade deficit set by the National Assembly.

3- The business sector gained momentum

According to the Business Registration Department, in 2018, 131,275 businesses were newly established with a registered capital of VND1,478,101 billion, an increase of 3.5% in quantity and 14.1% in registered capital. This was the fourth consecutive year with the highest number of newly established businesses and the highest registered capital in history. The ratio of average registered capital per enterprise in 2018 reached VND11.3 billion, up by 10.2% compared to 2017. Total additional registered capital to the economy in 2018 was VND3,886.892 billion, up by 22.8% compared to 2017. Also in 2018, the number of enterprises resuming operation was 34,010, up by 28.6% over 2017. This shows the open legal framework on business environment and drastic solutions taken by the Government to solve difficulties and create a more favorable business and investment environment had positive impacts on investors' confidence, enhancing the participation and contribution of the private sector to economic development. With the “impressive” number of newly established businesses, the size of enterprises, along with the number of enterprises resuming operation, the "vitality" of the business environment and business investment opportunities, the market will certainly be more competitive and this is the driving force for economic development in the new context.

4- Government’s policies and actions in improving the business environment

In 2018, the Government constantly strove to improve the business environment, and competitiveness of Vietnamese businesses. Administrative reform was continued, helping solve difficulties for businesses in accordance with the Government's resolutions, such as Resolution No. 35/NQ-CP, dated 16 May 2016, on business support and development by 2020; Resolution No. 19-2017/ NQ-CP, dated 6 February 2017, on continuing to implement key tasks and solutions to improve the business environment, and national competitiveness in 2017, and orientation towards 2020; Resolution No. 19-2018/NQ-CP, dated 15 May 2018, on the implementation of key tasks and solutions to improve the business environment, and national competitiveness in 2018 and the following years. At the same time, the Government directed the drastic and synchronous implementation of many solutions, especially administrative reform in the areas of tax, customs, social insurance, construction permit, land, access to electricity, establishment, dissolution of enterprises, investment procedures.

Given the Government's efforts, in the World Bank Group Flagship Report Doing Business in 2018 Vietnam was ranked 69 among 190 economies with 66.77 points on a 100-point scale, one level lower than 2017, but many criteria were improved, such as business establishment, construction permit, access to electricity, tax payment, contract execution.

5- Outstanding highlights in innovation

Competent authorities developed and promulgated legal framework for startup innovation. The Law on Small and Medium-sized Enterprises in 2017, the Law on Technology Transfer in 2017, and underlaw protocols and circulars demonstrated the determination of functional agencies in promoting the development of creative startup ecosystem in Vietnam. This is not possible without the support and assistance of large corporations, banks, domestic and international investors. By the end of 2018, Vietnam had 3,000 startup innovation businesses, nearly doubling the 2015 figures. With the strong development of innovative startup ecosystems, by 2020 Vietnam will have one million businesses, of which 5,000 will be innovative startup businesses. The Global Innovation Index 2018 showed Vietnam improved position, ranking 45 among 126 countries and economies, up by 2 spots compared to 2017, 14 spots higher than 2016.

6- Improvement in foreign investment attraction

In 2018, 3,046 new foreign direct investment projects were licensed with a registered capital of $17,976.2 million, an increase of 17.6% in number of projects and a decrease of 15.5% in registered capital compared with the same period of 2017. Besides, 1,169 licensed projects from previous years adjusted their investment capital with an additional amount of $7,596.7 million, 9.7% less than that of 2017. Thus, the total newly registered and additional registered capital in 2018 reached $25,572.9 million, decreasing by 13.9% compared to the same period of 2017. Foreign direct investment capital in 2018 was estimated to reach US$19.1 billion, an increase of 9.1% compared to 2017.

7- Inflation was under control

The Consumer Price Index (CPI) in December 2018 dropped by 0.25% compared to the previous month; the average CPI in 2018 rose by 3.54% compared to 2017, falling short of the target set by the National Assembly; CPI in December 2018 was up by 2.98% compared to December 2017. The inflation rate in December 2018 increased by 0.09% over the previous month and 1.7% compared to the same period of 2017. The average basic inflation in 2018 increased by 1.48% compared to the average of 2017.

Growth prospects and risks for the economy in 2019

Building on the positive growth of 2018, the economy in 2019 continues to benefit from the driving forces of the economy, namely:

- There are advantages in the world economy that positively support Vietnam's growth: positive growth prospects of the world economy, especially the US economy; the process of international economic integration is still accelerating.

- Business environment has increasingly been improved, especially the strong reform of business conditions, and changes in administrative procedures. The Government has been striving to facilitate an enabling environment for businesses.

- Vietnam has stepped up its economic integration; many important trade agreements signed over the past time are going to take effect. Sixteen free trade agreements (FTAs) have been negotiated and signed or under negotiation; ten FTAs have come into effect. Vietnam's consumer market has increasingly expanded, creating opportunities for increasing demands for Vietnamese goods.

The National Center for Socio-Economic Information and Forecast developed two scenarios for Vietnam's economic growth in 2019 (see Table 1). In which, the base scenario is the most likely scenario.

Risks for the economy in 2019 include:

1- External risks

First, increased contradictions in US-China trade relations bring challenges and risks to the Vietnamese economy.

If the US-China trade war escalates and expands to include other countries, countries with small and open economies will face high risks because their growth, employment, and investment depend on the size of their trade with the world. Moreover, the case of Vietnam is relatively special in the US-China trade war. The US is Vietnam's largest export market, while China is the largest importer of Vietnam. In many products, Vietnam is an intermediary of value chains, which means it imports inputs from China to produce, process and assemble products and export them to the US. And so, the recent tensions between the two "giant" economies will put Vietnam's economy at a high risk, negatively impacting the goal of rapid and sustainable growth.

Second, the "yellow vest" movement in France gives a warning on the sensitivity of tax increase to social stability.

The French Government’s fuel price hike triggered protests in Paris in early December 2018. The fuel price hike to protect the environment and balance the budget has put more burden on the poor in France. Although the French government announced a halt to its plan to raise fuel prices to ease protesters' rage, protests and tensions have continued. The situation of France has had direct and indirect effects as well as lessons-learnt for our country. First, the French economy is a big economy in Europe, so the affected French economy will have impacts on the European economy in general and on the import of goods from our country. Second, the continuous increase in oil prices will affect the poor more than the rich.

Third, the US Federal Reserve interest rate hike may affect our country's export turnover and VND exchange rate at a certain level.

On 19 December 2016, the US Federal Reserve (FED) met and raised interest rates by 0.25 percentage points. Thus, this was the fourth time in 2018 and the 9th time since December 2015 that FED raised interest rates for fear that US inflation exceeding 2% target and the US job market has been developing relatively well. With this interest rate hike, the US economic growth is forecast to decline (but not significantly) and this may affect our country's exports (but may be not much). Beside possible impact on Vietnam’s export turnover, the FED's interest rate rise may affect the exchange rate between VND and USD or EUR.

2- Limitations of the economy

First, room for fiscal policy remains limited, not enough to response to negative shocks from outside.


The largest part of the budget expenditure is the recurrent expenditure, including spending on the apparatus and people. Although the Party and State have made efforts to streamline and reorganize the apparatus, but the number of permanent employees in 2018 was still higher than 2017. And so, the recurrent spending in the total budget expenditure can hardly be lower. In order to reduce budget deficit, the Government needs to raise revenues which is very difficult in the coming time. Fiscal policy (through taxes and budget spending) is considered an important tool to respond to external shocks. As budget spending has not yet decreased, budget revenue cannot increase strongly and dramatically, budget deficit has not reduced significantly, the space for fiscal policy to respond to the changes of the economy will be limited.

Second, room for monetary policy is no longer large.

The room to boost monetary policy to promote growth or respond to internal and external shocks is not really large due to a number of reasons:

First, the monetary policy can hardly expand to reduce interest rates to reduce costs for loans to businesses, help businesses expand production because the current high interest rates are not entirely due to monetary policy restriction or loose, but due to other factors such as bad debt. Therefore, implementing loose monetary policy does not only reduce interest rates but may also increase bad debts and activate the increase of interest rates further.

Second, monetary policy expansion to support rapid growth will put the economy at risk of inflation. Therefore, the expanded monetary policy will create inflation risks for the economy.

Third, a large number of policy have been promulgated. However, they overlap, contradict, hinder each other, and policy implementation is poor.

According to the review of the Prime Minister's Working Group, there are too many policies while the implementation of policies is very poor. A large number of policies does not only create problems as mentioned above but is also a fertile land for interest groups to gain benefit, the interest groups (at the ministry, sector or local level) will only implement policies that are beneficial to them.

Policy recommendations

To achieve the goal of rapid and sustainable economic growth in the coming years, the Government needs to implement the following groups of solutions:

1- Macroeconomic stability

Consolidation and stabilization of the macro economy must be considered a top priority of the Government in 2019. With the aim of stabilizing the macroeconomy, the Government must:

First, direct monetary policy to reduce inflation below 4% and ensures liquidity in the financial market.

The State Bank of Vietnam must continue monitoring FED's moves and developments in the US-China trade war, interest rate increase of some central banks around the world in order to react and adjust monetary policy, exchange rate policy accordingly.

Second, direct the fiscal policy to further reduce budget deficit by raising revenue and decreasing spending.

Raising budget revenue by minimizing revenue losses, “shutting loop-holes” in the budget collection process so that tax payments from businesses and people directly go into the state budget instead of “leaking.” Regarding the state budget expenditure, the Government needs to strictly control budget spending, especially in recurrent expenditures and investments in projects.

2- Promoting policy implementation

First, review policies to identify which policies are good but not implemented, which policies do not closely follow reality and which policies contradict the others to take measures and settle problems.

Second, assign responsibilities to each ministry and sector in policy development and implementation. Each ministry and branch has a division to evaluate the result of implementation of each solution and policy. If any policy contradicts other regulations and policies, the Prime Minister may assign or direct the settlement and removal of obstacles.

Third, in the process of policy development, interaction between the planning agency, the implementation apparatus and the beneficiaries or subjects of impact is needed. The multidimensional approach in policy making makes policies enacted in a practical and highly feasible manner, and implemented quickly and effectively.

3- Limiting causes to social tensions

Currently, there are two causes which are likely to create the biggest social unrest in our country. They are environmental taxes on oil and gas and BOT toll booths. Therefore, businesses or people can only react more negatively through non-economic methods and not by reducing consumption of these items.

In order to reduce the possibility of social tensions caused by oil and gas prices and collecting BOT fees, the Government must:

First, be transparency in using environmental taxes for environmental purposes (as the name of tax) and in bidding for BOT projects, in setting prices, revenue and spending related BOT project.

Second, collect opinions of experienced scientists, managers (through seminars, discussions, various exchange forums) for reasonable changes in operation, tax adjustment, oil and gas prices and BOT projects.

Third, set up mechanism to listen to those affected, so that their voices can reach competent policymakers. Then, the authorities must create a dialogue space to improve the situation before making changes in policy.

4- Improve the sustainable business environment

To accelerate the improvement of the business environment in the coming time, it is necessary to:

First, continue to simplify administrative procedures, cut down the number of licenses and remove unnecessary investment and business procedures. While developing specific criteria to classify which procedures to be cut, and to retain, it is possible to assign agencies such as the Vietnam Chamber of Commerce and Industry (VCCI ) to set up a list of administrative procedures that need to be removed and then hand back to relevant ministries and sectors for settlement and handling.

Second, supervise ministries and agencies to substantially cut down on business registration procedures. Cutting down administrative procedures and licenses without reducing business’ cost of joining the economy, operating costs and even the cost of escaping the economy is only nominal and ineffective.

Third, set up different channels to listen fully, comprehensively and honestly to the voice of the business community. There should be specific regulations for local authorities to periodically meet with the business community, listen to their difficulties and obstacles, expectations; make specific commitments, and clear roadmap to solve problems for businesses. This way will partly limit the situation of "hot top, and cold under."

5- Enhancing innovation in the digital economy

Industrial Revolution 4.0 has fundamentally changes industries and professions and posing problems for countries to adapt and solve negative impacts on the economy. At the same time, Industrial Revolution 4.0 has also brought about opportunities for countries, including Vietnam to rise up and bring the economy towards a new development based on science and technology. In the immediate future, it is necessary to improve the legal system for the digital economy; perfect the ecosystem for startups, national innovation and build a national innovation center. The center consists of components of the innovation ecosystem in one or several selected areas in an environment suitable for the development of the ecosystems. The prerequisite is that these centers must be a very good business environment with competitive policies to attract companies to come and place their headquarters and attracts talents. In addition, the centers must to be a place where companies of different sizes can access to necessary resources and market. In Vietnam, the National Innovation Center can select the following areas: 1. Acting as an innovation factor for smart production and product development for future factories with increasingly high automation. 2. Being a place for application and development of products and services for smart cities with a sustainable environment. 3. Being a place to develop digital communication. 4. Being a place to develop cybersecurity applications for both government agencies as well as companies, businesses, and people.

                                                       Table 1

No

Norm

Unit

                   2019

1

Economic Growth (GDP)

%

Scenario 1

Scenario 2

(Baseline Scenario)

 

Economic Growth (GDP)

%

6,9

7,12

2

Inflation

 

 

 

 

CPI

(Annul average)

%

4

4,5

   Source: General Statistics Office and NCIF forecast in December 2018

------------------------

This article was published in the Communist Review, No. 916 (February 2019)

Assoc. Prof. Bui Quang TuanDirector of Vietnam Institute of Economics, Vietnam Academy of Social Sciences