To achieve the 2024 growth target in a challenging, uncertain environment, Vietnam must resolve the paradox of "excessive money and lackluster capital" in the economy, said Tran Dinh Thien, former director of the Vietnam Institute of Economics.
By end-2023, about VND1,500 trillion ($60.96 billion) had been pumped into the economy through bank credit channels, and interest rates are at their lowest level of the past 20 years, according to the State Bank of Vietnam (SBV). What does this mean for the country as it pursues the 6-6.5% growth target set for this year by the National Assembly?
Last year’s credit growth of 13.5% was close to the target set at the beginning of the year; and lower lending interest rates are an important step forward. In fact, however, interest rates have only reduced for new loans, not for old ones. The old loans are so enormous that we can’t say when businesses will be able to repay them. At the same time, the economy must place special emphasis on continuing low interest rates for a long period of time, on par with other economies, to facilitate recovery by people and businesses and support economic growth in the future, not just 2024.
Vietnamese businesses have endured higher interest rates versus international and regional competitors for many years. Now is the time for Vietnam to put them in a fairly competitive position, otherwise Vietnamese businesses will continue to face growth challenges and fail to compete.
However, the "excessive money and lackluster capital" paradox does not simply refer to credit growth or the amount of money pumped into the economy. Vietnam has made efforts to pump massive amounts money into the economy, via the very strong channel of "public investment." But money is not the only capital. Money only represents "capacity to convert cash into capital" or "potential capital." To actually turn money into capital is another challenge, similar to the transformation of a "caterpillar" into a "butterfly", a difficult and risky process.
The government has allocated massive money for "public investment" but this remains in the treasury and is not yet fully disbursed, creating a backlog that impedes economic growth. Businesses have received money but have not been able to use it yet, so they have to deposit "capital” in banks to earn some interest and avoid an idling status. Caterpillars cannot turn into butterflies yet, and this is a risky situation.
Next, capital in the banks is also idle. Banks are under pressure to pump cash into the economy by decreasing interest rates to very low levels. But too many businesses are "exhausted" and have neither the capacity to absorb capital nor meet eligibility conditions to receive loans from banks. So banks have unmoved capital while the amount of money deposited in banks remains at record highs. This is the paradox of "excessive money and lackluster capital." – that there is plenty of money in the system that is not being used because businesses cannot access it and are exhausted. Businesses are starved for capital and the economy is "immobilized," but banks are afraid of risks and do not intend to lend, making the situation worse.
How can we solve this paradox?
To change this situation, it is not enough to simply "pump" money into the economy, the way it has been done for a long time. There are a few key points that must be addressed.
Firstly, the Land Law must be updated quickly with a focus on recognizing and respecting property rights in line with the market economy. This means land prices must follow the "market price" and not the current "speculative prices" formula. Only when land cost is considered a capital cost can the economy’s most important resource market operate normally, reducing risks and increasing motivation for businesses and the banking system.
Secondly, Vietnam must make efforts to restructure and develop a balanced and healthy financial and capital market system, ensuring transparency. Currently, we rely too much on short-term lending activities, leading to risks for the banking system and difficulties in developing the capital markets. High risk leads to high interest rates. Thus restructuring the capital market must be a priority, ensuring that the corporate bond and stock markets operate well. Along with aligning the Land Law with market development, harmonious growth of the corporate bond, stock and credit markets will create a solid foundation for sustainable growth.
Third, public investment, which is a very large source of capital, is capable of solving basic problems by creating table-turning projects. When we look at the development status of the Southern Key Economic Region, it is evident that public investment plays a vital role.
In general, if a large amount of money is still in the treasury, if there is no breakthrough direction and innovative spirit, it will be difficult to create opportunities to support economic growth. By improving the three factors, liquidity of the economy can recover and improve. When the domestic sector is able to coordinate better with the foreign direct investment (FDI) sector, they can grow together and stabilize the economy. In 2023, Vietnam was among economies recording relatively high growth. However, enterprises may continue to be in difficult situations. As many as 172,600 firms left the market in 2023, an increase of 20.5% compared to 2022.
What should be our development orientation, going forward?
A key element is the weak performance of many Vietnamese enterprises. Vietnam must pay special attention to their health, prioritizing institutions and policies needed to revive Vietnamese businesses, creating conditions and opportunities for them to grow.
Currently, the number of large Vietnamese enterprises that can reach out to the world is very small. In general, businesses are still attracted to speculative activities, forcing those with capital to speculate as well. Therefore, it is necessary to change the resource allocation structure. The incentive system must change in the direction of supporting production and reducing speculation.
Vietnam needs to target a breakthrough policy that will facilitate other firms to emulate the achievements of companies like VinFast, FPT and Viettel. There is a sense of responsibility to the country. Businesses aiming for that big goal need to be supported and facilitated instead of being doubted and subjected to criticism.
Basically, the financial market structure remains a main bottleneck, along with issues of public investment disbursement and reforms that orient FDI in high-tech fields towards lasting development. It is expected that the economic reform process of 2023 will speed up in 2024.
It is necessary to push individuals to become more proactive and promote willingness to change. It can be seen that Vietnam has made progress. The determination to truly innovate must be there among leadership at all levels. Vietnam has an outdated policy which often ends up in fining businesses instead of encouraging and rewarding innovation.