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Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia
Viet Nam Fast growth in 2003 was supported by strong investment and private consumption. This robust performance will continue in 2003-2004, though the country will likely perform below its potential. To reach this potential, it faces a long reform agenda that should be tackled while the economic climate is favorable. Economic Assessment Vigorous growth of 7.1% was recorded in 2003, with both consumption and investment making strong contributions on the demand side. Domestic demand grew by 9.4%, and total investment by 15.8%. Private consumption contributed 4.8 percentage points to GDP growth and gross fixed capital formation 4.7 percentage points. The strong domestic demand also pushed up imports, such that net exports subtracted 3.0 percentage points from growth. On the supply side, a robust 9.6% growth performance by the industry sector, which covers mining, manufacturing, utilities, and construction, provided impetus for economic expansion (Figure 2.13). The performance of the agriculture and fisheries sector improved in 2003, to 3.1% growth, largely because of higher export prices for coffee and rubber, and an expansion of the fisheries subsector. The price of major export products, including coffee and rubber, rose by 8.9%. The outbreak of SARS in the country and in the region more widely hurt services, particularly in April and May, though they rebounded in the second half of the year. The net result was that the services sector grew by 6.8% in 2003, only slightly higher than in 2002, and contributed 2.8 percentage points to growth. The country performed well on social issues. The Viet Nam Development Goals-the localized version of the Millennium Development Goals-showed a steady improvement in social indicators, such as education enrollment and infant mortality. Likewise, the unemployment rate in urban areas has been declining in recent years, from 6.9% of the labor force in 1998 to about 5.8% in 2003. However, underemployment in rural areas remains high. The minimum wage was raised by 38% (about $19 a month) in 2003. Data from the 2002 household survey indicated that 28.9% of the population had expenditures below the General Statistics Office estimated poverty line, down from 58.0% in 1993. This implies that about 20 million people were lifted out of poverty in less than a decade. The broad improvement in living standards was largely the result of job creation by the private sector and further commercialization of agriculture. The rural poverty rate fell to about 36% in 2002 from about 45% in 1998, and the urban poverty rate to 6.6% from 9.0%. Poverty in the Mekong Delta area showed the sharpest drop, from about 37% in 1998 to about 23%, while poverty in the Central Highlands remained the highest, at about 52%. Demographically, a worrying situation has emerged whereby the food poverty incidence-the proportion of the population living below the Government’s food poverty line of D1,372,774 (roughly $87) per person per year in 2002-of ethnic minorities, accounting for 41.5% of the population, has not improved, and their general poverty rate is high at 69.3%. In addition, Viet Nam has shown some weaknesses in its public health system, as seen in the outbreaks of SARS, avian flu, and a possible increase in HIV/AIDS. Total government revenues in 2003, including grants, rose by 11.8% on the back of (i) stronger tax revenues, both from the corporate sector and from VAT, and (ii) the higher price of crude oil. VAT contributed about 29% of total tax revenues (which constituted 83.5% of total government revenues), followed by corporate income tax (28%), and trade taxes (21%). Government expenditures, including current, capital, and onlending expenditures, rose at the higher rate of 16.1%, in part because of increased wages and pensions and the cost of various government-financed reforms. Thus the budget deficit in 2003, including capital expenditures and onlending but excluding grants, widened to 4.8% of GDP from 3.8% in 2002. Monetary aggregates expanded in response to the growth in GDP, strong demand for credit, and further monetization of the economy. Broad money supply (M2) rose by 21.0% in 2003, compared with 17.6% growth in 2002. Net domestic credit grew by 26.2% in 2003. Interest rates and the currency against the dollar were stable, though. Viet Nam’s CPI rose by 4.0% in 2003, within the Government’s target of 4-5%, after an episode of mild deflation in 2000-2001. Higher prices were recorded mainly for pharmaceutical products, building materials, and education-related expenses. In 2003, the top exports were crude oil (19.0% of total exports by value), textiles and garments (18.3%), footwear (11.2%), seafood (11.0%), rice (4.0%), and coffee (2.4%), which together accounted for two thirds of total exports. Exports of crude oil rose by 15.5%, with most of the increase attributable to higher prices, as oil production volume increased by just 1.7%. Exports of textiles and garments rose by 31.9%, mainly to the US, as firms tried to maximize shipments ahead of the imposition, in September 2003, of US quotas. The US has become one of the biggest markets for Viet Nam’s exports, accounting for some 21% of all exports. Total exports of $19.26 billion were exceeded by imports of $22.64 billion, widening the trade deficit to $3.38 billion in 2003 from $1.30 billion in 2002. The strong growth in imports was the result of higher demand from industry for capital goods and intermediate goods, including construction materials, and of preparations for the Southeast Asian Games that were hosted by Viet Nam in December 2003. A liberalization of import restrictions also spurred inward shipments. The current account deficit in 2003 is estimated at $2.1 billion, equivalent to 5.8% of GDP, or double that in the previous year. The deficit is manageable because of foreign exchange inflows from official development assistance (ODA), FDI, and remittances from overseas Vietnamese. The net FDI inflow for 2003 was $622 million, and remittances rose to an estimated $2.6 billion from $2.0 billion in 2002. The ratio of external debt to GDP was around 38.7% and debt service in relation to the total value of exports was 8.3%, similar to the level in 2002. Gross international reserves, including gold, are estimated at $4.7 billion, equivalent to about 2.5 months of imports.
Policy Developments The next 2 years are the last of the 5-year socioeconomic development plan (2001-2005), in which the Government aims to achieve 7.5-8.0% GDP growth. In an attempt to ensure this, it has announced as its top priority regional as well as international economic integration. It is also focusing on quality of investment, governance and public administration, and competitiveness. The Government aims to keep the fiscal deficit at below 5.0% of GDP and inflation at a rate lower than 5.0%. It has said that it will maintain a more market-based flexible exchange rate system, remove the remaining quantitative import restrictions, and reduce tariffs. To enhance revenues and to encourage the growth of the enterprise sector, some streamlining of tax rates has been introduced. The corporate tax rate for both domestic and foreign-invested enterprises has been unified at 28% with effect from January 2004. Previously, the tax rates were 32% and 25%, respectively. A supplementary tax on domestic enterprises and a profit remittance tax for foreign-invested enterprises have been abolished. Exemptions from VAT have been reduced and the number of VAT rates cut to two (5% and 10%). The Government introduced a special consumption tax on automobiles in December 2003. Policy reforms have been initiated to develop the nascent equity market. In August 2003, the Government approved a plan envisaging market capitalization of 2-3% of GDP by 2005 and about 10% by 2010. A decree on securities and the stock markets will come into effect in the second quarter of 2004 to offer easier listing conditions, including provisions for securities investment funds. Efforts are being made to develop the bond market to address the problem of raising medium- to long-term finance for development. A measure of some success in this area was seen in the Government’s issuance of bonds worth $160 million for education and $578 million for infrastructure projects, in 2003. On the trade front, tariffs on 700 imported items from ASEAN members were reduced further from July 2003 as part of the implementation of AFTA commitments, with the ultimate target of achieving 0-5% tariffs on ASEAN imports by 2006. Viet Nam, moving to comply with its commitments under the Bilateral Trade Agreement with the US, is likely to introduce changes to its trade laws, regulations, and administrative procedures. This will help the nation align its trade procedures and practices with global standards, which also will pave the way for WTO accession in 2005. The sixth and seventh sessions of a working party on the country’s accession to WTO were held in 2003 and three more sessions are scheduled for 2004. The Government also signed a trade and investment agreement with Japan, which includes a provision for most-favored-nation treatment for trade and investment. In the SOE sector, the equitization program, under which the state retains about 50% of its share holdings and sells the rest to employees and the private sector, has fallen behind schedule, and financial support to SOEs has not yet been reduced. A Prime Minister’s directive in April 2003 called on SOEs to raise their efficiency and merge or close if they incur chronic losses. More rapid and effective reforms in the SOE sector are fundamental for ensuring fiscal sustainability, maintaining economic growth and reducing poverty, facilitating a smooth integration into the global markets and WTO, and for Viet Nam’s transition to a market economy. SOCBs are still weak in their operational and financial performance in such areas as credit decisions, resolution of NPLs (totaling about $1.5 billion as of 2000), and transparent financial reporting. The SOCBs have, in recent years, established asset management companies, but these are only serving as centers for the sale of mortgaged assets attached to NPLs. The target for the full resolution of NPLs of the SOCBs is 2006, which would also facilitate the process of SOCBs’ international integration. Since the NPLs are a common and interrelated problem of both SOEs and SOCBs, a new state-owned debt trading and management company became operational in February 2004. Formerly, this task had been carried out by an administrative agency, but it was time consuming and progress was slow. The new company is expected to focus in 2004 on 20 SOEs that have bad debts and frozen assets worth from D5 billion (approximately $318,000) and will expand its operations in 2005. The Government added a new chapter on large-scale infrastructure in its Comprehensive Poverty Reduction and Growth Strategy (CPRGS). To deepen the CPRGS implementation process, efforts are being made to integrate the CPRGS with local and provincial planning processes. The Government has also indicated that it will improve the quality of public investment through better screening of projects and through strengthening of project management capabilities. Progress has been made in improving governance and public administration, particularly in the delivery of public services, by simplifying procedures. The Government published a decree on local associations, including business, social, and benevolent groups. This provides a legal basis for nongovernment organizations for the first time. In addition, Viet Nam signed the UN Convention against Corruption in December 2003 in Mexico, and a decree on the accountability of heads of government agencies has been drafted. The trial of a prominent gang leader and legal action against some senior government officials suggest that the Government is serious in curbing crime and corruption. To improve the business environment further, the Government brought out new amendments to the Land Law. In force from April 2004, the amended law provides a uniform land administration regime, ensures clearer administrative procedures, levels the playing field between foreign and domestic land users, and breaks the current dual-pricing system involving government and market-determined prices. However, foreign investors still cannot use their land use rights for mortgages from offshore lenders. In general, investors’ perceptions of the country have become more favorable. The annual business sentiment survey carried out by Viet Nam Business Forum suggested a significant improvement in the operating environment. Furthermore, the World Economic Forum upgraded Viet Nam’s position in terms of growth and business competitiveness indexes, to just above those of the Philippines. Outlook for 2004-2005 While Viet Nam has made impressive progress in achieving both rapid economic expansion and poverty reduction in recent years, comparisons with other East Asian and Southeast Asian countries during their high-growth periods suggest that Viet Nam’s GDP growth rates could be yet higher. The country is relatively well endowed in terms of natural resources, enterprising people, and a favorable geographic location. The chances of further growth stem from using these opportunities more efficiently and improving the efficiency of the existing capital stock. Given the improvements in the business environment and the recovery of external demand, GDP growth is projected to improve somewhat to 7.5% in 2004 and to 7.6% in 2005. This will be underpinned by strong domestic demand, forecast to increase by 10.1% in 2004 and by 8.1% in 2005, and by annual export growth of 12.0%. The Government is expected to maintain an expansionary, but manageable, fiscal stance to cover the cost of increases in salaries and pensions of civil servants, as well as the cost of reforms. This fiscal position will also help keep domestic demand strong. In addition, business sentiment has improved, and the private sector, both domestic and foreign, is likely to respond positively, resulting in additional investment inflows. ODA inflows also have been rising; the total pledge by donor partners for 2004 is $2.8 billion. The level of gross investment will likely be maintained at about 35% of GDP in both 2004 and 2005. Export growth will provide a further boost to manufacturing and buttress consumption, particularly through better prices for major primary agricultural products. However, strong domestic demand and further export growth will push up imports as well-particularly imports of plant and machinery, petroleum products, industrial intermediates, and construction materials. Trade deficits in excess of $4 billion are likely in both 2004 and 2005, in a sharp swing from trade surpluses recorded a few years ago. On the supply side, the industry and services sectors will be the main sources of expansion, respectively accounting for about 3.8 and 3.0 percentage points of GDP growth in 2004. In terms of value added, the former sector is expected to grow by 9.8% in 2004 and by 9.9% in 2005, with manufacturing expected to strengthen slightly to 11.5% growth, driven by exports. Similarly, value added of power and utilities and of construction will grow by around 11% in 2004 and 2005, supported by a government emphasis on large-infrastructure development. Value added in the services sector is expected to accelerate slightly to 7.4% in 2004, led by wholesale and retail trade (9.0%), hotels and restaurants (8.0%), and transport and tourism (8.0%). Agriculture will maintain growth of around 3.3%, with strong contributions from fisheries and higher export prices of coffee and rubber. Inflation is expected to be around 4.5% in both 2004 and 2005. The implementation of AFTA commitments and preparations for WTO accession are likely to reduce the cost of imports as tariffs are reduced. A further lowering of telecommunications charges and other administration costs (after the reductions in 2003) will help keep nonfood prices down. However, the continued rise in prices of building materials, including steel, as well as pharmaceuticals will have a partially offsetting impact. The 2004-2005 outlook is not free from risks, namely the trade deficit, uncertainty over market access, the fiscal deficit, rapid credit expansion, and possible public health scares. Export growth targets are $21.6 billion in 2004 and $24.2 billion in 2005. However, the price of crude oil may stabilize at a lower rate of around $24-26 a barrel. In addition, Viet Nam is likely to face difficulties in accessing the US market for its garments and seafood exports: the export of textiles and garments in 2004 will be capped at $1.7 billion by quota, while seafood products, including shrimp, are likely to face antidumping measures. In general, Viet Nam has strong potential to expand its exports because it has only small shares of major export markets. In 2002, the country’s share of imports to the US was 0.21%, to Japan 0.75%, and to the EU 0.18%, suggesting scope for further expansion. In addition, the PRC is potentially a big market for Viet Nam’s exports of natural resources such as crude oil, rice, and tropical agricultural products. Per capita manufactured export value is just $55, which is far below that of Thailand ($733), PRC ($178), and Indonesia ($142). The Government eliminated a 30% foreign exchange surrender requirement in April 2003 to encourage exports, and established a special export promotion program to help meet export targets and reduce the trade deficit. The current account deficit is likely to stand at around 5.7% of GDP in both 2004 and 2005. FDI, ODA, and remittances from Vietnamese living abroad will finance the deficit. To contain the widening fiscal deficit, the Government will have to broaden its tax base, strengthen its tax administration, and tighten lending to SOEs. At the aggregate level, revenue performance looks quite impressive compared with other East and Southeast Asian countries-for example, the revenue-to-GDP ratio is about 23%, higher than the average of 19.7% in Indonesia, Malaysia, Singapore, and Thailand, and 15.7% in the PRC. However, the revenue base is heavily dependent on the state sector, which accounted for about 80% of corporate income tax, 60% of VAT, and 74% of excise duty in 2002. The personal income tax rate rises to 50%, compared with 28% for corporate taxes, resulting in low tax compliance. Personal income tax collections totaled just 0.4% of GDP in 2003. While inflation risks are modest and manageable in 2004-2005, credit expansion-largely driven by growing investment requirements-is a concern. Over 1998-2002, the average annual domestic credit growth rate was 29.4%, higher than that of the PRC (about 16% in 1995-2002), Indonesia (18.6% in 1975-1995), and Thailand (15.9% in 1982-1996) when these countries had periods of high growth. Over 2000-2002, the share of SOCB and development assistance fund credit (in both local and foreign currencies) going to SOEs ranged between 46% and 50%, equivalent to about 22-25% of GDP. Such a high rate of credit expansion imposes a heavy burden on the state-owned financial intermediaries in their credit risk management. Given that most SOCBs have limited capability in credit risk assessment, the rapid credit growth could lead to misallocation of resources, resulting eventually in a high rate of NPLs. This also could impair national growth performance-particularly when capital productivity remains low-and worsen the fiscal deficit. In recent years the frequency of public health problems including SARS, avian flu, and HIV/AIDS has increased, with social and economic implications. These incidences call for more serious government attention to public health (and animal health), which may require additional public spending over the medium term.
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The sector’s share of GDP was 38.7% in 2003, but it contributed 3.6 percentage points to GDP growth. Within industry, the nonstate subsector grew by 18.7%. The continuing strong development of the private sector generally is a result of the improved business environment. Over the past 4 years, an average of 19,000 private enterprises have been registered every year, thus raising to 26.7% the share of private sector capital in total investment in 2003.
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