The Vietnamese economy witnessed strong growth throughout the 1990s, as liberal economic reforms instituted from the mid-1980s onwards bore fruit. International trade and investment flows received a substantial boost from the lifting of the US trade embargo in 1994. The economy was hit by the regional financial crisis in 1997–98, although the comparatively underdeveloped financial sector offered a degree of insulation from the full impact of these events. Gross domestic product (GDP) growth between 2005 and 2007 was the highest it had been since the Asian Financial Crisis of the late 1990s, peaking at 8.5% in 2007. A rise in exports and petroleum price hikes were largely responsible for this robust performance. Developments in 2006 included the successful completion of a bilateral trade agreement with the US, followed by the gaining of World Trade Organization (WTO) membership.
The global economic slowdown reduced the country's GDP growth rate to 6.3% in 2008 and to 5.3% in 2009. Vietnam initiated a stimulus package worth $8bn in 2009, with $5.2bn to be used for infrastructure and development projects, $1.6bn for tax breaks for enterprises and individuals, and $400m for social welfare. In early 2009, the government announced that it would inject $1bn to subsidize bank loan interest for businesses. The stimulus package fostered growth in the midst of the worldwide financial crisis, and the country grew at a healthy 6.8% in 2010.
The slowdown reduced GDP growth to 6.3% in 2008, down from 8.5% in 2007, and to 5.3% in 2009. The country’s economy recovered in 2010, growing at a rate of 6.8%. Vietnam has grown rapidly since the Communist Party of Vietnam's (CPV) turned away from central planning in the late 1980s under its Doi Moi policy. It acceded to the WTO in 2007 after years of negotiations, signaling the integration of Vietnam into the global economy. The country's state-owned commercial banks are generally inefficient compared to the smaller joint stock (private and part-private) commercial banks. Talks aimed at establishing a free trade agreement between the European Union (EU) and the Association of Southeast Asian Nations (ASEAN) have broken down; however, the EU has expressed its willingness to recommence negotiations in the future. The frenetic pace of credit expansion is expected to increase the volume of non-performing assets in the country. Vietnam is dependent on its exports, which accounted for around 64% of its GDP in 2010, and the country’s economy is likely to suffer in the medium term due to difficult external conditions.
Current challenges
Inefficient state-owned banks State-owned commercial banks dominate the Vietnamese banking sector. Such institutions are generally inefficient compared to the smaller joint stock (private and part-private) commercial banks, and while the government has injected funds into the former in an attempt to improve their operations, much-needed restructuring has not been undertaken. Consequently, the country's banking system lacks credibility, and does not generally follow the Basel norms. Furthermore, the state-owned commercial banks are not audited by reputed international firms, which create doubts about their future sustainability, especially considering the fact that the government has pushed these banks to lend aggressively. The banking system could collapse if non-performing assets increase.
Default on international loans
The Vietnamese government is coming under increasing pressure due to problems relating to debt repayment by large state-owned enterprises. For example, in December 2010 Vinashin defaulted on the scheduled repayment of a $600m syndicated loan received from international lenders. The government made a decision not to bail out the company (being under no legal obligation to do so), and in adopting this approach has sent out a strong message to other state-owned enterprises. However, the default by Vinashin has severely dented the image of the country in international financial markets. The lenders might have thought Vinashin's structure meant it had an implicit state guarantee. The default is likely to have a negative impact on the country, making it difficult for other state-owned enterprises to borrow in international markets.
Future prospects
Free trade agreement with the EU Vietnamese foreign policy focuses on improving the country’s economic situation through an increase in investment and external trade. Therefore, it follows a pragmatic approach that aims to develop friendly relations with all nations. The Vietnamese government has shown an eagerness to enter into free trade negotiations with a number of countries and regions, which indicates its commitment to a reform agenda. Despite the suspension of negotiations between the ASEAN and the EU, the latter has shown a willingness to make deals with individual countries. Vietnam would gain from a free trade agreement with the EU, which would provide a significant boost to its exporters, as import duties are expected to drop to zero. The EU’s October 2008 announcement that it will negotiate individual agreements with South Asian countries including Vietnam bodes well, as it will open up new markets for the country.
Tight credit conditions
The government is aiming to slow the pace of domestic credit in 2011 to 20%. Domestic credit rose by 28% in 2010 after a significant increase of 45% in 2009. The frenetic pace of credit expansion is expected to increase the volume of non-performing assets in the country, particularly because lending in Vietnam is more due to political allegiances rather than financial viability. The government removed the long-term cap on lending rates in March 2010, which resulted in an increase in the interest rate from 12% to around 19%, leading to a fall in credit offtake. All of these factors indicate that the credit situation in Vietnam is likely to remain tight in the medium term.
Future risks
Downward pressure on the dong Vietnam has witnessed strong demand for the US dollar, which is due to a large trade deficit and high inflation. This has resulted in considerable downward pressure since late 2009, which pushed the State Bank of Vietnam to devalue the country's currency on many occasions. The devaluation of the dong against the US dollar amounted to 5% in November 2009, and in February 2010 a devaluation of 3% took place. The dong was devalued by 8.5% in February 2011, when the official rate fell by 8.5%. Overall, during 2008 to early 2011 the value of the dong fell by more than 18%. Accelerating inflation in the first half of 2011 has put even more pressure on the currency, which could result in the central bank devaluing it further still. Devaluation is likely to make exports expensive, and servicing of debt in foreign currencies would also become more costly. Vietnam’s manufacturing sector could be affected, as it imports intermediate goods that will become more expensive were devaluation to continue apace. The downward pressure of the dong and the subsequent devaluations pose a significant risk to the country in the medium term.
Dependence on exports
The global economic slowdown reduced GDP growth to 6.3% in 2008, down from 8.5% in 2007, and to 5.3% in 2009. The Vietnamese economy recovered in 2010 to register a growth rate of 6.8%. The economies of the US, Japan, and the EU, which together receive 60% of Vietnam’s exports, are not in great shape. Vietnam is dependent on its exports, which accounted for around 64% of its GDP in 2010. If the economies of the US, Europe, and Japan do not improve, the country’s economy is likely to suffer in the medium term.
Fiscal situation
In June 2011 the Ministry of Finance stated that Vietnam had a budget deficit of VND27.78tn ($1.33bn) during January and June 2011, which is less than the VND30.65tn deficit recorded one year previously. Vietnam’s budget deficit was estimated to be around VND68.6tn ($3.52bn) for 2010, which constituted 5.8% of GDP. The country's budget deficit was less than the National Assembly’s full-year estimate of 6.2%. The budget deficit for 2009 was around 8% of GDP. The fiscal deficit was recorded at 5.5% in 2007 and at 4.7% in 2008. In January 2010 the government took action to bolster its fiscal position byissuing only its second international sovereign bond, in the form of a 10-year $1bn bond. The bond issue was fully subscribed, indicating that the government is not facing any major difficulties when it comes to accessing international debt markets. However, the bond issue was tendered at a yield of 6.95%, higher than other comparable issues by Indonesia and the Philippines.
The country consistently witnessed a current account deficit during 2002–08. The current account deficit increased from $0.3bn in 2006 to around $7bn in 2007 (or from 0.5% to 10.3% as a percentage of GDP), before climbing further to $12.7bn in 2008 (which is 15.5% of the country’s GDP). Vietnam had a current account deficit of around $2bn in 2010, which was lower than the estimated figure of $4bn.
Meanwhile, the country’s trade deficit was around $17.9bn for 2010, higher than the figure of $12.3bn recorded in 2009.
The country’s external debt increased from $27.8bn as of December 31, 2009 to $33.4bn as of December 31, 2010.
According to the United Nation Conference on Trade and Development, foreign direct investment inflows into the country dropped from $8bn in 2008 to $4.5bn in 2009.
Exports and imports
Vietnam had recorded increased exports every year since 2003 until the global economic crisis led to a decline in 2009. The country’s exports came down to $59.5bn in 2009, from $67bn in 2008. Exports recovered in 2010 to reach $62.2bn. Similarly, imports came down from $85bn in 2008 to $72bn in 2009, before recovering to $80bn in 2010. Total trade in the country dropped from $152bn in 2008 to $131.4bn in 2009, before recovering to $142.4bn in 2010. Vietnam’s major exports include crude oil, marine products, rice, coffee, rubber, tea, garments, and shoes. In 2010 Vietnam's major export partners were the US (which accounted for 20% of Vietnamese exports), Japan (10.7%), China (9.8%), and South Korea (4.3%). Vietnam’s major imports include machinery and equipment, petroleum products, fertilizer, steel products, raw cotton, grain, cement, and motorcycles. In 2010 Vietnam's major import partners were China (which accounted for 23.8% of Vietnamese imports), South Korea (11.6%), Japan (10,8%), Taiwan (8.4%), Thailand (6.7%), and Singapore (4.9%).
Inflation
The country recorded inflation of 7.5% in 2006, which rose to 8.1% in 2007 before reaching a staggering 23.1% in 2008. This upward trend was due to an increase in the cost of foodstuffs in the first half of 2008. As a result of declining food and fuel prices, inflation came down to 6.8% in 2009; however, rising oil and food prices increased inflation to 9.4% in 2010. Inflation reached 22% in July 2011, a figure which poses a serious threat to Vietnam’s economy. The government has to restore macroeconomic stability, and must remain committed to slowing down lending growth.
Environmental impact
Industrial production in Vietnam has increased at an extremely fast pace. However, the enterprises responsible have poor environmental records due to the obsolete equipment they use and their inadequate treatment of wastewater and air emissions. Many industrial pollutants have the potential to do considerable damage to the health of the country’s citizens. For instance, Vedan (Vietnam) Enterprise Corp., a unit of Taiwan's Vedan Group, makes monosodium glutamate. The company was caught illegally discharging untreated wastewater from its monosodium glutamate factory in Dong Nai province into Thi Vai River in 2008, affecting individuals living along the river. It agreed to pay a VND218.9bn ($11.5m) fine as compensation for the environmental damage it caused to three provinces in South Vietnam. The government of Vietnam introduced a penalty for water pollution in early 2007; however, enforcement continues to be erratic.
The Ho Chi Minh City authorities agreed to spend around VND54bn ($2.77m) from its budget to protect the water quality of a section of the Dong Nai River basin in 2011. The money will be used to build automatic monitors of water quality, and to increase supervision of water discharge into the river by industrial parks, residential localities, and trading facilities. Currently, wastewater from domestic usage has reached nearly 1.2 million cubic meters, which is released into the environment every day. The city authorities plan to build a total of nine large wastewater treatment facilities by 2020, in order to reduce the direct release of wastewater.
