Modern mindset for economic growth

Global economic instabilities and fluctuations have had an impact on Vietnam. How would you evaluate the current situation for local businesses?

The prolonged political and economic instabilities have significantly affected Vietnam’s economy, directly impacting export delivery times and increasing transportation costs. As a result, GDP growth in 2023 was only 5 per cent, falling short of the National Assembly (NA)’s target of 6.5 per cent. Inflation stood at 3.25 per cent, meeting the legislature’s target, and credit growth was 13.5 per cent, while the real estate and financial markets faced crises and exports were down 4.6 per cent.

The situation has improved in the first half of 2024. Specifically, GDP growth reached a respectable 6.42 per cent, with significant contributions from the industrial and tourism sectors. CPI was up 4.08 per cent, core inflation 2.75 per cent, and exports by 14.5 per cent. The real estate and construction sectors, however, are still facing difficulties.

Regarding businesses performance, a recent survey by the Vietnam Chamber of Commerce and Industry (VCCI) revealed a challenging environment for private enterprises. Among the 10,000 private enterprises surveyed across Vietnam’s 63 cities and provinces about their plans to expand business in the near future, only about 27 per cent confirmed they would continue to do so. This is the lowest figure since VCCI began its Provincial Competitiveness Index (PCI) survey in 2005, even lower than the 34-35 per cent reported in 2012-2013 when Vietnam’s economy faced the dual impact of the global financial crisis and domestic macro-economic instabilities. Even during the Covid period the rate stood at 35-37 per cent.

In contrast to domestic enterprises, the proportion of FDI enterprises planning to expand their business scale was high last year. Registered FDI capital in the first half of this year was $15 billion, with $10 billion disbursed. It therefore seems that dark and bright colors are interspersed in the picture of Vietnam’s economy.

Overall, the economy appears quite positive, with strong GDP growth and good export performance. However, the worrying aspect is the actual capacity of the domestic private sector.

FDI enterprises can relocate their entire factories to another country if their profit margins in the host country are low and costs rise. Foreign investment can come quickly but can also leave quickly. The crucial factor is the intrinsic capacity of the domestic private sector, which is an extremely important indicator. Unfortunately, the published statistics and analyses about the “health” of the domestic private sector are sparse and not in-depth. This is a significant shortcoming.

What can we expect in the near future?

From VCCI’s viewpoint, the policy impact is substantial. First is the government’s effort. In 2024, for the first time, it reissued Resolution No. 02/NQ-CP on improving the business environment. This aims to create pressure and inspire reform among ministries, sectors, and local authorities.

Resolution No. 02 represents a new mindset from the government, focusing on continuous reform with goals benchmarked against ASEAN countries. Competing with leading regional countries in administrative procedure reform is a very positive mindset. In 2023, a general Resolution No. 02 was issued, but there seemed to be less emphasis on improving the business environment and administrative reform. Therefore, the reissuance of Resolution No. 02 this year is a positive sign.

Furthermore, just a few days ago, the Prime Minister established a task force to review the challenges and obstacles, which he will personally lead. This demonstrates his strong determination to address business difficulties. Additionally, thanks to the efforts from the government,  the NA passed amended laws such as the Land Law, the Law on Real Estate Business, and the Law on Housing, which will come into effect earlier than expected, on August 1, while the amended Law on Credit Institutions took effect more earlier, from July 1.

The government has also been working at full capacity in the past three or four months to discuss and issue decrees guiding these laws. Given the real estate market’s stagnation and many important national projects relating to land use, the early implementation of the Land Law, the Law on Housing, and the Law on Real Estate Business will help resolve many market challenges.

What new policies do you think will impact economic growth in the time to come?

Given the anticipated challenges in 2024, the government and relevant ministries are focusing on continued support for businesses. One key policy is the 2 per cent VAT reduction under Resolution No. 43 for economic and social recovery and development, which has been effective since the Covid-19 period and remains greatly appreciated by businesses.

Policies like reducing registration fees for domestically assembled or manufactured vehicles and extending tax deadlines for automobile manufacturing will also continue to be implemented. These measures have been in place for several years and will still stimulate domestic production in 2024, though their impact may not be as strong as in 2022.

Moreover, the amended Law on Credit Institutions, which tightens safety criteria and credit concentration, will require banks to adjust their business operations. In the long term, this will foster robust growth due to a safer, more transparent banking system, although it may slightly affect credit supply in the short term.

Renewable energy is another sector that will impact growth and attract investment in Vietnam. Large corporations’ decisions to extend investments or place orders with manufacturers in Vietnam are significantly influenced by this policy. They need certifications for reducing greenhouse gas emissions to access important markets like the EU and secure major customers and low-interest loans. Thankfully, after a long period of deliberation, the direct power purchase agreement (DPPA) decree has been issued. Though a bit late, it is expected to provide a significant boost.

Businesses have major demand for renewable energy certificates to participate in the value chain for exporting goods to developed countries. If the mechanism is issued late or is too narrowly scoped, it will negatively impact exports and investment attraction.

The decree on rooftop solar power is still under discussion, with hopes for issuance soon. Clean energy is crucial for investment, growth, and green transition. One of Vietnam’s weaknesses is the relatively slow issuance of the legal framework for this.

Another long-term issue affecting investment in Vietnam is the Global Minimum Tax, which will take effect in 2024. Additionally, the Decree on the Investment Support Fund has just been appraised by the Ministry of Justice, and many FDI businesses are interested in this for their next investment decisions.

The Law on Electronic Transactions and Digital Government, including public services and digitized procedures for citizens, is progressing, but business procedures are not yet significantly reformed.

Customs procedures and specialized inspections have not seen significant innovation this year. The national single-window portal occasionally experiences issues, and many ministries have yet to connect their public services online.

Dispute resolution in commercial business remains challenging, with few positive changes. The number and content of cases where arbitration awards are annulled or unrecognized are quite high, at about ten-times more than in other countries. This affects the trust and integrity of the business environment, causing concern among investors.