Institutional reforms prove key to capital attraction

During a roundtable talk on the implications of bilateral and multilateral trade agreements on capital inflow to Vietnam last Friday, courtesy of StoxPlus, an associate of Nikkei Inc. and QUICK Corp. (Japan), Vo Tri Thanh, deputy director of the Central Institute for Economic Management (CIEM), noted that in between 2001-2011, Vietnam’s economy suffered from both structural problems, namely the low quality of growth, and macro-economic instability, as the entire economy became less resilient to external factors.

“Vietnam, however, has had important policy changes from 2011- 2012, and the government has begun to focus on macro-economic stabilisation, including monetary tightening and policies that prevent dollarisation,” stressed Thanh.

The government has also initiated programmes to restructure the economy, aimed at greater efficiency in the financial, banking, state-owned enterprise (SOE), and public investment sectors.

In addition, Vietnam has taken the initiative toward international economic integration, in order to draw in large foreign capital inflows from diverse international participants, through the signing of many bilateral and multilateral free trade agreements (FTAs), as well as the Regional Comprehensive Economic Partnership Agreement (RCEP), strengthening links to many countries and regions. The negotiations of the important Trans-Pacific Partnership (TPP) are also nearing completion.

Vietnam has set its growth target at 6.5-7 per cent per year for the 2016-2020 period, while inflation is forecast at 5 per cent, per year.

“The key to achieving such targets is to regain confidence in the private sector and foreign investors,” noted Thanh, adding that success would depend on the country’s institutional reforms and improvement in the business environment, with reference to the amendments to the Investment and Enterprises laws, the new legal framework for public-private partnership (PPP), macro-economic stabilisation, and structural reforms in the SOE, financial, and public investment sector.

“More importantly, it really depends on the effectiveness of the integration process and the FTAs themselves,” added Thanh.

In 2015 alone, Vietnam has successfully signed two FTAs with South Korea and the Eurasian Economic Union. At this year’s end, the ASEAN Economic Community (AEC) will officially be formed, and Vietnam will then become part of a single marketplace in the region.

“These FTAs, together with the others that the government has signed, will be the catalyst for export and investment expansion, and further institutional reforms, in terms of improvement to the local business environment,” said Thanh, adding that new investment opportunities would come in many sectors in Vietnam, including consumption goods, infrastructure development, and logistics, as well as emerging new sectors such as the “green”, IT, and creative industries.

Citing the Vietnam-South Korea FTA as the clearest example revealing observable impacts on capital flows to Vietnam, StoxPlus CEO Nguyen Quang Thuan said that this FTA had helped eliminate an additional 771 tariff lines between the two countries, which then benefited Vietnam’s exports, such as garments, textiles, and agricultural products to South Korea, and imports like electronic components, trucks, and passenger automobile parts from South Korea.

Thuan said the merger and acquisition activities from South Korea in the local property and financial markets in 2015, for instance, had led to essential deals between Shinhan Investment and local Nam An Securities, or Lotte and Diamond Plaza.

“It is our observation that FTAs have a very significant impact to capital flows, where tariffs are removed and coupled with the recent ease of the foreign ownership threshold,” said Thuan.

These FTAs will have significant impacts on the Vietnamese economy as a whole, and Vietnam must take advantage of new opportunities, mitigate the negative impacts, and manage risks arising from the implementation of these FTAs.