Mid-2008 Vietnam Business Forum:Disappointing Business Environment

Unstable signs in the economy like inflation and increasing trade deficit, affecting business performance, are the main contents put on debate at the Mid-2008 Vietnam Business Forum on June 2 in Hanoi. This is the annual event before the mid-year Consultative Group Meeting, to be held June 5 and 6 in Sapa, Lao Cai.

 

Martin Rama, WB’s Acting National Director in Vietnam, said donors all felt excited at the growth of Vietnam’s economy – one of the bright points in the global map in terms of growth in the past six months. However, worries about inflation and the trade deficit are currently drawing a lot of attention.

 

In addition, the world economy is full of difficulties with the impact of the global credit crunch and daily changes in rice and oil prices that increase pressure and prolong the inflationary situation in Vietnam.

 

“In the end of February and early March, the Government took unique measures to cool the overheating growth, trade deficit and inflation. Some measures have shown to be successful. Yet, Vietnam still has many things to do. Especially, it needs stable financial remedies with strong reform of the State Bank, removing barriers to foreign investment in business, upgrading infrastructure, and regulating the electricity market,” said Martin. He also confirmed that Vietnam, as six months ago, was showing a sturdy growth index and labour force, GDP of US$70 million, foreign investors’ capital account of US$24 billion, and was making further progress in economic reform. “With such great potential, Vietnam will succeed if it implements good policies,” he reaffirmed.

 

According to Sin Foong Wong, IFC’s Director in Vietnam, investors still believe in Vietnam’s economic growth, however, it should continue reforms to boost economic development. “At this Forum, a lot of issues about taxation, commitment conformity as a WTO member, human resources and training are of interest to many donors,” said Mr Wong.

 

At the Forum, the Japanese Trade Promotion Organisation (Jetro) reported that most costs were on the rise, particularly labour cost, industrial land price, office and housing rent, according to its survey of 30 cities in ASEAN. In Vietnam, office rent has gone up considerably. Hanoi becomes the fifth most expensive city in the region in terms of office rent, and housing price is extremely high to foreigners in Ho Chi Minh City. Vietnam’s transport freight remains much higher than the average level in the region. Vietnam’s biggest advantage is the low labour cost.

 

However, Jetro also confirmed that these factors were not what Japanese companies consider most carefully. Japanese producers in Vietnam tend to expand business to the highest level with manufacturing companies (92.6 per cent) and non-manufacturing companies (88 per cent). None of them plan to narrow their scale or move out of Vietnam. For producing companies, their plans mainly focus on increasing investment and diversifying products. For non-producing companies, their plans are market development and investment intensification. In the next 5-10 years, Japanese companies will stick with their assessment of Vietnam as the best place for production in Asia with targeted industries like electric appliance – electronics, electric components and spare parts, metallic products and common machinery.

 

It is important to note, however, that Japanese investors feel less satisfied with Vietnam’s business environment than before, though they and other investors from neighbouring countries put much expectation on Vietnam and a lot of companies already existing in Vietnam wish to expand their operation. In Jetro’s survey, the satisfaction rate has fallen from 75.4 per cent in 2006 (the highest rate in the region) to 41.7 per cent (the fifth rank out of six ASEAN members), which is the largest regression among surveyed countries and regions. The reason is that Vietnam lags behind other ASEAN members in providing businesses the ability to buy domestic materials and components, less developed infrastructure, and slow improvement in electricity, transport and telecommunication services.

 

 

It is thought that the current situation of the stock market can slow down the progress of privatisation, but we suggest the Government be confident in the sustainability and aim of privatisation, and avoid further delay. Eurocham thinks that the Government should study and accelerate the speed of privatisation, as well as make public the itinerary and plans of privatised companies. We find that banking and telecommunications are crucial areas where the majority of international giants show interest in participating during the process of privatisation.

Furthermore, the restructure of state-owned capital is of the utmost importance. We feel worried about what is being called “priorities given to state-run corporations” and its negative impact on economic competitiveness. Experiences from other countries prove that state-owned capital plays a significant role, but it only becomes effective for the economy’s development when it does not set foot in the private sector. When looking into diversification of enterprise components, what is noteworthy is that most of them continue to grasp considerable capital proportions allocated outside their main economic fields.

 

Although facing some economic difficulties, Vietnam remains an attractive destination for foreign investment. US companies are looking forward to utilising new investment opportunities in the goods and service sector in Vietnam. Still, Vietnam should take urgent moves in the financial sector. The weakness in some financial regulations will not only threaten domestic finance but also erode foreign investors’ confidence. This bad situation is accompanied by the property bubble. Therefore, Vietnam should take decisive actions to control the problem as it may hold back long-term competitiveness.

Salary inflation is another big concern of US enterprises operating in Vietnam. Reform policies which help more closely approach overseas skilled labour force not only contribute to curbing inflation in salary and wage, but reinforce training and technological transfer to Vietnam and facilitate investment in high technology.

 

Many Auscham members have reflected their problems while trying to abide by the codes as they are not sure about these codes or do not know how to find them. They expect to obey the laws but wonder about the correct style. This again relates to communication between the Government and enterprises. Auscham believes that a better information system, in which necessary information can be searched more easily, will bring more encouraging results for all related parties. In addition to communication, members who have access to the laws, think it is hard to understand and obey these regulations. The laws should be clearly defined to guarantee that companies can conform to them in the right way.

 

Producing members of Auscham expressed their concern about the management of import and export tariffs. They expect to receive tariff guidance and management which make tariffs more practical and efficient for concerned parties.

 

A lot of permits are granted to private universities, colleges and vocational training institutions which lack practical capability. The shortage of land, capital, human resources and technology is common. The social policy is correct and needs more enthusiasm from state administrative bodies and specific supporting mechanisms, as it is a special business. The Government should also study solutions to merge small public schools and to privatise public schools to combine the superiority of private management and infrastructure and intellectual assets of public schools. It is necessary to concentrate on building technology schools which have real research and development ability, persistently learn from the world’s experiences and applying this directly to businesses’ demand. Foreign and private investment is drastically rising but the scarcity of human resources is a big barrier; investors can not wait or take on the job of reforming the out-of-date and sluggish system of education and training in Vietnam. The current situation calls for thorough educational reform to consolidate the national intellectual foundation.