On the occasion of New Year 2024, Jonathan Pincus, a senior international economist at the United Nations Development Program (UNDP) Vietnam, talks to The Investor about Vietnam's economic prospects for 2024 and ways to improve the country’s business environment.
Could you share your opinion on Vietnam's economic situation in 2023 and prospects for next year?
Vietnam enjoyed a strong recovery from Covid-19 in 2022, when economic growth exceeded 8% and total exports reached a new record. Unfortunately, the growth of world trade slowed markedly in 2023 to less than 1% from nearly 6% last year. This is the main reason that Vietnam was unable to reach its growth targets for 2023. Rising inflation in the U.S. and Europe forced central banks to tighten monetary policy, which had the effect of reducing demand for imports. Consumers were also more cautious because of increasing economic uncertainty about job prospects and the value of their investments.
Falling exports had a knock-on effect on domestic demand, especially through the labor market. Another reason was weakness in the property market, which was mostly caused by monetary tightening and falling demand for new homes. Households and businesses emerged from the pandemic with too much debt, which reduced their ability to borrow to buy properties, and for banks to lend to them. Property developers, already heavily indebted because of the pandemic, could not service their loans. Some of them experienced serious financial distress in 2023.
The government was successful in containing inflation despite rising global energy and food prices, and maintaining a stable exchange rate. Public investment was increased by more than 20%, which helped sustain domestic demand. The financial system was largely stable thanks to prompt action by the central bank. Foreign-exchange reserves rose after a decline in 2022 because of trade surpluses and capital inflows, especially foreign direct investment.
Prospects for next year hinge on prices stabilizing in high-income countries and recovery in global trade volumes. Most forecasts see inflation remaining above 5% in the OECD countries, which would be lower than 2023 but still too high to allow central banks to ease monetary policy. This is the main reason that global growth is not expected to accelerate in 2024. An early return to price stability in the U.S. and Europe would be good news for the world economy. However, if oil prices rise in 2024, or there is continued volatility in energy markets, interest rates are likely to remain high.
Other factors include continued instability in the Chinese property market, and geopolitical risks such as the conflicts in Ukraine and the Middle East and the U.S. presidential elections. A larger Chinese fiscal stimulus package, supporting property developers and heavily-indebted local governments, would lift growth in China and the region as a whole. Although peace in Ukraine and the Middle East still seems a long way off, movement towards negotiated settlements in either conflict would reduce tensions and improve economic prospects.
How do you assess Vietnam's business environment?
Vietnam is one of the fastest growing economies in the world and a main destination for foreign direct investment. Prices are relatively stable, Vietnamese workers are fast-learners, literate and hard-working and the country is politically stable and generally regarded as a safe place to live. Vietnam is regularly listed at the top of regional business environment rankings.
The main challenge with respect to the business environment is the inconsistency that businesses face when it comes to government rules and regulations. Coordination between agencies, and between central and provincial governments, is often lacking. Businesspeople often comment that new rules issued by an agency or ministry contradict existing rules, and that untangling conflicting rules can take months or even years. There is no way to get a quick decision on which rules will be enforced.
Conflicting rules and regulations also affect government departments. Officials are sometimes reluctant to make decisions because they are not sure which rules to follow. This slows down the process of investment approval and can derail good projects.
Aside from the lack of consistency in rulemaking, businesses complain that many regulations do not make sense. Although introduced with good intentions, to solve real problems, they result in unexpected outcomes because they are not well designed.
There have been many efforts over the years to streamline government regulations, to make them more consistent and less burdensome on businesse. In August, Prime Minister Pham Minh Chinh introduced an administrative reform measure to simplify more than 400 administrative procedures relating to business activities. A working group on administrative reform was created, led by Deputy Prime Minister Tran Luu Quang.
An often-cited problem is the low level of corporate disclosure and the absence of financial transparency in Vietnamese companies. Companies listed on the stock exchange are required to file annual reports, but the quality and reliability of these reports varies. Unlisted companies rarely publish reports of any kind. Poor standards of disclosure have held back the formation of financial markets in Vietnam, especially secondary markets for corporate bonds. Undisclosed cross shareholding and connected lending by commercial banks are another source of financial instability.