Quality improvements give wings to industry

Vietnam’s total factor productivity has been increasing at an astounding rate, Photo: Le Toan

Last Wednesday, Eric Sidgwick woke up early to go to the Hilton Hanoi Opera Hotel to launch the Asian Development Outlook 2018 Update, a flagship publication which has been prepared for months by the Asian Development Bank (ADB).

Arriving to Vietnam to work as the country director of the ADB for Vietnam in September 2015, the veteran senior economist has seen that the Vietnamese economy has been growing strongly, going from 6.68 per cent in 2015 and 6.21 per cent in 2016 to 6.81 per cent last year.

“Vietnam is set to continue its strong economic performance, with GDP growth forecast to rise to 6.9 per cent this year, before easing back to 6.8 per cent in 2019,” Sidgwick said optimistically at the launch. “These rates are very high for the region.”

The ADB forecast is higher than the government’s GDP target of 6.7 per cent this year.

The Ministry of Planning and Investment (MPI) last week affirmed that, based on positive economic developments since early this year and the months ahead, the economy will grow by 6.7 per cent or more this year.

“The economy’s scale will be about $240.5 billion, with a per-capita GDP of $2,540, up $155 compared to 2017,” said an MPI report on the country’s socioeconomic development for 2018 and orientations for 2019.

Soaring production

The agro-forestry-fishery, industry and construction, and service sectors continue on an uptrend this year. Specifically, while the agro-forestry-fishery sector is expected to grow by a two-year record 3.31 per cent, the service sector is projected to climb by 7.35 per cent, and the industrial and construction sector is forecast to grow by 7.59 per cent, according to the MPI’s report.

“Notably, in the industrial and construction sector, processing and manufacturing will see spectacular consecutive growth at double digits – about 12.46 per cent,” said Minister of Planning and Investment Nguyen Chi Dung.

“The processing and manufacturing segment will become a key driving force for the whole industrial and construction sector. It is also the key contributor to the economy’s growth this year, offsetting the reduction in mining and boosting the country’s initiative to renew its growth model, which will reduce dependence on the exploitation of minerals and natural resources,” Minister Dung said.

According to the MPI, the processing and manufacturing sector, which accounts for nearly 80 per cent of Vietnam’s industrial growth, has been growing strongly over the past few years, at 8.7 per cent in 2014, 10.6 per cent in 2015, 11.9 per cent in 2016, and 14.4 per cent in 2017.

The General Statistics Office (GSO) last week reported that in the first nine months of this year, thanks to the increased production of the business community in Vietnam, the index of industrial production (IIP) climbed to the highest nine-month level since 2012, by 10.6 per cent on-year.

Breaking down this 10.6 per-cent rise, the manufacturing and processing sector produced the highest climb with 12.9 per cent, contributing to 9.9 per cent of the IIP growth. Meanwhile, the production and distribution of electricity rose by 9.7 per cent, far higher than the 8.9 per cent recorded in the same period last year.

Nguyen Doan Toan, Deputy Chairman of the Hanoi People’s Committee, last week reported that the city’s economy grew by 7.17 per cent during the first nine months of this year, far higher than the 6.87 per cent seen in the same period last year. The city’s IIP increased by 7.4 per cent, up from 6.7 per cent in the corresponding period last year. It is expected that the rate will be 7.8 per cent this year.

“Industrial production is largely driving the city’s growth,” Toan said. “It is expected that the city’s economy will grow by 7.35-7.45 per cent this year, and at least 7.5 per cent in 2019.”

Meanwhile, Ho Chi Minh City reported that its economy grew by 7.89 per cent in the first nine months, and the rate is expected to be 8.3 per cent for the whole year. The key reason also lies in strong industrial production.

One of the key reasons behind the MPI’s optimism about the uptrend of industrial production was that in 2018, many major industrial projects have and will come into operation, including projects by Samsung, Formosa, PetroVietnam’s Binh Son Refining and Petrochemical JSC, and Nghi Son Refinery and Petrochemical Plant.

For example, in the first half of this year, Samsung Display Vietnam (SDV) in the northern province of Bac Ninh achieved an export turnover of $3.7 billion and revenue of $6.6 billion. Since its establishment in late 2014, the manufacturer, which produces OLED screens for phones, tablets, and watches, has disbursed $6.3 billion out of its total committed $6.5 billion. The remaining $200 million is disbursed during this third quarter, much earlier than the company’s initial schedule of 2022.

According to the ADB, the industrial sector, with a focus on processing and manufacturing, is taking the lead in the Vietnamese economy.

“The economic performance is broad-based, driven by vigorous manufacturing expansion, bumper agriculture production, the robust performance of the services sector, resilient domestic consumption, and strong investment fuelled by foreign direct investment (FDI) and domestic enterprises,” Sidgwick said.

In the first nine months of this year, the number of newly established enterprises operating in the processing and manufacturing sector was over 13,000.

Improved growth quality

“I would also like to stress that the economy is growing more sustainably, with the quality of economic growth improved,” Minister Dung said.

Recently, the prime minister ordered not to increase the exports of crude oil just to achieve high economic growth. In fact, the country’s crude oil output has been decreasing annually, from 16.6 million tonnes in 2015 to 15.2 million tonnes in 2016 and 13 million tonnes last year. It is expected that the figure will be only 11 million tonnes this year.

According to the GSO, the economy’s per-capita labour productivity was $4,166 last year, up 6 per cent against 2016. Productivity rose by 5.29 per cent in 2016 and 6 per cent last year.

Meanwhile, the ratio of total-factor productivity (TFP) in the GDP was 40.68 per cent in 2016 and 45.19 per cent last year. It was 33.58 per cent in the 2011-2015 period, but rose to 42.18 per cent in the first three years of the 2016-2020 period. TFP is a measurement of the efficiency of all inputs to a production process. Increases in TFP usually result from technological innovations or improvements.

In addition, the incremental capital-output ratio (ICOR) also decreased, going from 6.41 in 2016 to 6.27 in 2017. ICOR tells how much additional capital would be required to produce a unit of growth.

According to the ADB, the quality of Vietnam’s growth has significantly improved.

“The economic growth is not only reflected in the growth rate, but also in all the sectors in the economy, from agriculture and industry to services. This means that the economy has been growing strongly, in a comprehensive manner,” Nguyen Minh Cuong, principal country economist of the ADB in Vietnam told VIR.

“For example, in the first half of this year, industrial production expanded very quickly, by 9.3 per cent, compared to the 5.4 per cent in the same period last year. In addition, a 13-per-cent rise in manufacturing output was driven by impressive increases in export-oriented sectors, such as in telecommunications, electronics, and textiles. This helped push up the economy’s industrial production and had spillover effects in other sectors,” Cuong said.

However, the ADB also noted some prospective economic risks. Specifically, looking ahead, external and domestic challenges could pose risks for the country’s economic growth. Growth moderation in major economies such as China, the EU, and Japan could dent export opportunities for Vietnam. Continued trade frictions between the US and China could have spillover effects on Vietnam’s external trade and FDI. Domestically, unfavourable weather could also undermine agricultural and mining output.