Aus4Reform Program
AUS4REFORM PROGRAM
MACROECONOMIC REPORT FIRST QUARTER 2019
INTRODUCTION
After impressively socio-economic achievements in 2018, Vietnam is expected to continue its momentum in 2019, aiming at achieving planned figures set out for 2016-2020. However, Vietnam has also identified some difficulties and challenges to realize its expectation, especially in the context of an increasingly uncertain global economy and limited policy space for promoting growth. The Government continues to emphasize on macroeconomic stability, improving business environment and enhancing economic resilience as major priorities. Movements of economic growth and inflation have been closely monitored, with lots of executing actions and messages throughout the first quarter. This macroeconomic report serves several objectives, including: (i) to update, and review macroeconomic development and policy changes in Q1/2019 with evidence-based analysis and perspectives of experts/Central Institute for Economic Management; (ii) to update the macroeconomic outlook for 2019; (iii) to analyze in depth selected economic issues with quantitative and/or qualitative findings; and (iv) to make recommendations on economic reforms (including institutional reforms) and on macroeconomic policies in 2019. During the preparation and finalization of this report, the authors have received valuable comments of various experts from CIEM, and other Ministries and agencies. On this occasion, the CIEM would like to thank Aus4Reform Program (Aus4reform) for financially supporting the preparation of this Report. The Team would also dedicate our special thanks to Mr. Raymond Mallon, Aus4Reform program Advisor for valuable and insightful comments. The report was jointly prepared by the CIEM and Aus4Reform-funded consultants. The Team is led by Dr. Nguyen Dinh Cung, with contributions by Dr. Vo Tri Thanh, Nguyen Anh Duong, Pham Duc Trung, Dr. Dang Quang Vinh, Tran Binh Minh, Dinh Thu Hang, Le Mai Anh, Do Thi Nhan Thien, and Pham Thien Hoang. The consultants who have provided inputs and data by Nguyen Thi Doan Trang and Nguyen Thi Linh Huong. All remaining errors, views and opinions presented in the Report are solely of the authors and may not necessary reflecting those of Aus4Reform Program and/or CIEM.
DR. NGUYEN DINH CUNG President, Central Institute for Economic Management National Director of Aus4Reform Program
i TABLE OF CONTENTS
LISTS OF FIGURES ...... iii LIST OF TABLES ...... iv ABBREVIATIONS ...... v EXECUTIVE SUMMARY ...... vii I. ECONOMIC CONTEXT IN QUARTER 1 OF 2019 ...... 1 1. Regional and global economic context ...... 1 2. Domestic economic context ...... 6 II. MACROECONOMIC PERFORMANCE AND OUTLOOK ...... 11 1. Macroeconomic performance in Q1/2019 ...... 11 1.1. Real economy ...... 11 1.2. Inflation ...... 19 1.3. Monetary movement ...... 20 1.4. Investment ...... 25 1.5. Trade ...... 30 1.6. Budget revenues and expenditures ...... 36 2. Macroeconomic outlook ...... 39 III. SELECTED ECONOMIC ISSUES ...... 41 1. National Innovation Center: Expectations, specific mechanisms and requirements. ... 41 2. Equitization of state-owned enterprises: Implementation and practical issues...... 53 IV. RECOMMENDATIONS ...... 61 1. Recommendations on further reforms of microeconomic foundatins ...... 62 2. Recomendations on macroeconomic policies ...... 63 3. Other related recommendations ...... 65 REFERENCES ...... 66 APPENDIX 1: POLICY CHANGES IN THE FIRST 3 MONTHS OF 2019 ...... 69 APPENDIX 2: MACROECONOMIC STATISTICS ...... 76
ii LISTS OF FIGURES
Figure 1: USD Index, 2018-2019 ...... 4 Figure 2: Exchange rates of selected currencies against the USD, 2018-2019 ...... 4 Figure 3: International commodity price indices, 2017-2019 ...... 5 Figure 4: Oil price, 2018-2019 ...... 6 Figure 5: Crude oil price, 2018-2019 ...... 6 Figure 6: Business Climate Index (BCI) ...... 8 Figure 7: Improved economic governance over time ...... 9 Figure 8: Quarterly GDP growth (%) ...... 11 Figure 9: GDP growth movement ...... 11 Figure 10: Role of institutional reforms vs. economic growth in Vietnam ...... 12 Figure 11: Growt rate of gross capital formation, final cosumption and GDP ...... 12 Figure 12: GDP growth by sector, 2012-Q1/2019 ...... 13 Figure 13: Index of Industrial Production, 2013-March 2019 ...... 14 Figure 14: Purchasing Manager Index, 2014-March 2019 ...... 14 Figure 15: Quarterly GDP structure, 2011-Q1/2019 ...... 15 Figure 16: Selected indicators of enterprises‟ performance, January 2014-March 2019 ...... 16 Figure 17: Business tendency ...... 16 Figure 18: Factors affecting production and business ...... 16 Figure 19: Maajor challenges in production and business, PCI 2018 ...... 17 Figure 20: Most troublesome administrative procedures ...... 17 Figure 21: Selected indicators of labor and employment, Q1/2013-Q1/2019 ...... 18 Figure 22: Unemployment rate (%) ...... 18 Figure 23: Inflation, 2016-2019 ...... 20 Figure 24: Interbank interest rate from March 2018 to March 2019 ...... 22 Figure 25: Growth rate of outstanding credit and M2 ...... 22 Figure 26: Bad debt ratio of credit institutions, 2013-2018 ...... 23 Figure 27: VND/USD exchange rate, 1/2017-3/2019 ...... 24 Figure 28: Gap between exchange rates of commercial banks and central rate and in the parallel market ...... 25 Figure 29: Real Effective Exchange Rate ...... 25 Figure 30: Investment capital by types of ownership ...... 27 Figure 31: FDI attraction and disbursement ...... 27
iii Figure 32: Top five groups of industries with FDI attraction ...... 28 Figure 33: Foreign investment by country and territory ...... 29 Figure 34: Exports, Imports and Trade Balance, 2013- Q1/2019 ...... 30 Figure 35: Imports of automobiles, ...... 33 Figure 36: Imports of automobiles, ...... 33 Figure 37: Trade balance by partner in Q1/2019 ...... 35 Figure 38: Retail sales of goods and services by activity, Q1/2019 (%) ...... 36 Figure 39: Budget revenues to GDP ratio ...... 36 Figure 40: Structure of budget revenues ...... 37 Figure 41: Structure of State budget expenditure ...... 37 Figure 42: Government bonds issuance, 2012-2019 ...... 38 Figure 43: Interest rate on successful bids of Government bonds with 5-year terms to maturity (%/p.a) ...... 38 Figure 44: Assessment of existing innovative facilities ...... 42 Figure 45: Necessary components of creative ecosystem ...... 51
LIST OF TABLES
Table 1: Global economic prospects ...... 1 Table 2: Popular VND-denominated deposit rate of commercial banks ...... 21 Table 3: Gross investment, current prices ...... 26 Table 4: Export growth of Vietnam by product category, Q1/2019 ...... 31 Table 5: Export growth of Vietnam by partners, Q1/2019 ...... 31 Table 6: Vietnam's import growth by product category, Q1/2019 ...... 33 Table 7: Vietnam's import growth by partner, Q1/2019...... 34 Table 8: Projection of macroeconomi indicators in 2019 ...... 39 Table 9: IPO of large-scale state corporations during 2017-2018 ...... 55
iv ABBREVIATIONS
ADB Asian Development Bank AEC ASEAN Economic Community AFF Agriculture-Fishery-Forestry ASEAN Association of Southeast Asian Nations BOJ Bank of Japan CIEM Central Institute for Economic Management CPI Consumer Price Index CPTPP Comprehensive and Progressive Trans-Pacific Partnership DVA Domestic value added DB Doing Business ECB European Central Bank EU European Union FDI Foreign Direct Investment FED Federal Reserve FTA Free Trade Agreement GB Government Bond GDP Gross Domestic Product GSO General Statistic Office HNX Hanoi Stock Exchange HSBC The Hong Kong and Shanghai Banking Corporation IFS International Financial Statistics IIF The Institute of International Finance IIP Index of Industrial Production IMF International Monetary Fund IP Industrial Park IR4.0 Industrial Revolution 4.0 JPY Japanese Yen M2 Total liquidity MOF Ministry of Finance MOIT Ministry of Industry and Trade MOST Ministry of Science and Technology MoM Month on month MPI Ministry of Planning and Investment M&A Merger and Acquisition NCIF National Centre for Socio-Economic Information and Forecast
v NPL Non-performing loan OECD Organization for Economic Co-operation and Development PMI Purchasing Managers Index QoQ Quarter on quarter RCEP Regional Comprehensive Economic Partnership REER Real Effective Exchange Rate RoO Rules of Origin SBV State Bank of Vietnam SCIC State Capital Investment Corporation SOE State-owned Enterprise TPP Trans-Pacific Partnership TTIP Trans-Atlantic Trade and Investment Partnership USD US Dollar VEPR Vietnam Institute for Economic and Policy Research VND Vietnam Dong WEF World Economic Forum WB World Bank YoY Year on Year
vi EXECUTIVE SUMMARY
1. The global economy envisages further slowdown. International organizations (the OECD, WB, IMF) and central banks (FED, ECB) estimated slower economic forecasts of the global economic expansion as well as of economic growth of major economies in 2019. Tightening financial conditions (including monetary contraction) were slowed down, even halted in some countries. Economic slowdown of China, the US-China trade tensions, uncertainty of the Brexit and radical terrorism are among biggest risks to world trade, production and economic growth. 2. The US economy showed positive expansion with economic growth rate of 2.9% in 2018; however, there remains signals of recession. Major economies in Europe are facing with both internal and external difficulties and challenges, including the reduction of industrial production, stagnancy of business activities, the slowdown of exports and high public debts. The Japan‟s economic growth is forecasted to slowdown in 2019 as key economic indicators casted a gloomy picture. China economic growth rate continued to slowdown. 3. The US-China trade war was temporarily at ease. USD continued to appreciate against major currencies, however the appreciation pace was slowdown. The most recent World Trade Outlook Indicator attained 96.3 points. World commodity prices increased slightly, but in general were below the figures in 2018. UNCTAD forecasted that the global FDI will rebound in 2019 compared to in 2018, in particular in advanced economies. International economic integration showed modest improvement. 4. The Government identifies the year 2019 as a breakthrough for implementing socio-economic development plan for 2016-2020 through the promulgation of important documents, including Resolution 01, Resolution 02, and Directive 09. In addition, the Government accelerates the development of e-government under Resolution 17. Ministries, agencies and associations have promoted the active implementation of CPTPP and some other trade agreements. 5. The domestic economic context in Q1 still shows some limitations, including (i) high growth "interest" still exists, meanwhile, policy groups promoting real growth has not shown new features as compared to existing and being implemented policies; (ii) controlling low inflation is an important requirement, however, both modality and message has been still in the nature of "administrative" management, thus, it is difficult to sustain; (iii) the adjustment of domestic regulation for the implementation of new FTAs (including CPTPP) has been lack of punctuality, comprehensiveness, even inaction; (iv) provincial investment promotion takes place with quite high frequency, but there is no assessment on the implementation of investment commitments; and (v) the content and coordination between the Commission for the
vii Management of State Capital at Enterprises and ministries, agencies has not been specified. 6. GDP growth attained 6.79% in Q1, lower than that of Q1/2018 and initial forecast of the Government. It could be a challenge for Vietnam in Q2-Q4 to achieve the 2019 target. Vietnam‟s economy is still in the expansion phase of growth cycle. Potential GDP growth – reflected through GDP trend – shows a downward trend. The momentum of economic recovery in some recent years has been partially significant from reforms of economic institutions in general and of business environment in particular. GDP sturcture by expenditure side showed little change in Q1/2019 as compared to that of previous year; gross capital formation and final consumption grew slowly, attaining 7.1% and 6.2% respectively. 7. The agriculture-forestry-fishery sector continued its solid recovery (2.68%); however, the growth might be limited mostly attributed to (i) the complexity of African swine fever; and (ii) severe competition of fishery export from other large exporters. Growth of industry and construction attained 8.63%. Although the manufacturing sub-sector continued its robust growth and significant contribution (up by 12.35%, and contributed 2.72 percentage points), the growth rate was lower than that of 2018. The Index of Industrial Production increased by 9.2%, lower than the same period of 2018. Purchasing Manager Index was at lower pace. The value-added of service sector grew by 6.5%. Economic structure showed almost no change. 8. The performance of enterprises experienced strong adjustment of structure. The number of newly registered enterprises was at slower pace, inactive and dissolved enterprises increased significanty. Manufacturing enterprises showed less optimism about production and business in Q1. The Report on Provincial Competitiveness Index 2018 showed that entry procedures were still the most burdensome for business community, particularly “post-entry” burdens and access to transparent information. 9. Total labor force was 55.4 million people in Q1, increasing by 331.9 thousand people, of which, total economically active labor force were 54.3 million. The overall unemployment rate was 2.17% in Q1, slightly decreased as compared to same period of previous years. Vietnam was the only country in Asia being the top 10 countries of female-headed business and continued to maintain its ranking of women‟s opportunity and participation in the economy. 10. CPI was up by 2.63% in Q1 (YoY). Key factors for slow expansion of CPI in Q1 included: (i) the decrease of price of food-foodstuff; (ii) “administrative” approach on controlling state-controlled prices; and (iii) upward adjustment of electricity price in the end of March 2019 was not calculated in the CPI of March. Average core inflation increased by 1.83% in Q1, indicating that monetary management was stable and did not intensify pressure on inflation 11. Deposit and lending interest rates were kept stable in Q1/2019, mostly attributed to: (i) Some large commercial banks reduced deposit rates or maintained low deposit rates; (ii) Liquidity of the banking system was quite
viii abundant while credit disbursement did not increased significantly; and (iii) FED announced to halt interest rate hike in 2019. 12. By 25th March, total liquidity (M2) grew 2.67% compared to the end of 2018 and 10.99% compared to Q1/2018. M2 growth continued to slow down significantly compared to the same period of 2017-2018. Outstanding credit rose by 2.28%, lower than that of the same period in 2018. Credit performance in Q1 was influenced by a number of factors, including: (i) SBV continued to control credit flows into risk-potential areas and redirected credit more towards production; (ii) the target to repel unlawful credit and (iii) the roadmap of curbing foreign currency credit to prevent dollarization in 2019. 13. Non-performing loans (NPLs) settlement had some improvement. The central exchange rate rose in Q1, approximately by 0.68% compared to Q4/2018. VND/USD exchange rates at commercial banks were quite stable. Factors facilitated exchange rate management in Q1 included: (i) FDI disbursement reached USD 4.12 billion, rising 6.2%; (ii) acquisition of foreign investors through buying was estimated at USD 5.69 billion, tripled that of the same period in 2018; (iii) FED did not raise rates in Q1 and intended to keep interest rates unchanged in 2019; and (iv) trade surplus in Q1. Real effective exchange rate (REER) increased 1% in Q1 compared to Q4/2018, but dropped 2% compared to Q1/2018. 14. Gross investment in Q1 was estimated to reach VND 539.2 trillion, rising by 8.8%. The investment to GDP ratio reached 32.16%. Disbursement of state budget investment increased by 3.2%, reaching just 14.7% of the annual plan. The investment structure shifted further towards a smaller share of state sector and higher shares for the non-state and FDI sector. Total registered capital reached USD 10.8 billion in Q1, up 86.2% over the same period in 2018 and much higher than the same period in recent years 1. Exports attained USD 58.86 billion in Q1, increasing by 5.3%; of which, domestic sector exported USD 17.8 billion, up by 10.7%; FDI sector accounted for USD 41.1 billion, up by 3.1%. Exports encountered some favorable factors in Q1 such as (i) administrative reforms, (ii) launching of export financing by commercial banks; and (iii) most of the approved CPTPP members implemented double tax reductions for Vietnam. Imports were USD 57.45 billion in Q1, up by 8%. Imports of domestic sector attained USD 24 billion, increasing by 12.9%; imports of FDI sector reached USD 33.45 billion, up by 4.7%. Trade surplus was estimated at USD 1.4 billion in Q1, lower than in Q1/2018. Total retail sales of goods and services were estimated at VND 1,184.9 trillion, up by 12%. 15. Total budget revenues in Q1 was estimated to reach VND 381 trillion, equal to 27% of 2019 planned figures, equivalent to 34.1% GDP. Budget expenditures attained at VND 315.6 trillion in Q1, equivalent to 19.3% of 2019 planned figure and increased 8.8%. Fiscal policy management witnessed some positive achievements (i) effective coordination between fiscal policies and other macroeconomic policies; (ii) state budget restructuring has resulted in more
ix balance and sustainable of budget; and (iii) fiscal administration became more flexible. 16. Economic growth in 2019 is projected at 6.88%. Export growth may reach 9.02%. Trade surplus is projected at USD 3.1 billion. Average CPI in 2018 will increase by approximately 3.71%. 17. Macroeconomic developments in Q2-Q4/2019 may be subjected to several factors: (i) the increasing risk of recession for US economy; (ii) trade tension in the area is difficult to cool down; (iii) the need for early approval of EVFTA may be reduced; (iv) Vietnam's exports may face more technical barriers in foreign markets, including CPTPP market; and (v) international financial market can also react quickly and excessively to unfavorable conditions, especially with regards to geopolitical issues. 18. On the analysis of international experiences of establishing Innovation Center, the Report identified some expectations, specific mechanism and requirements for Vietnam National Innovation Center, which focus on (i) complete ecosystem; (ii) infrastructure platform; (iii) incentives, encouragement mechanism and institutions to attract investment; and (iv) special, different and high quality coordination apparatus 19. The Report also assessed the achievements for 2017-2018, challenges and the ability of fulfilling targets by 2020; especially emphasis on practical issues such as (i) difficulties of IPO process; (ii) no clear signal on the improvement of equitization quality; (iii) obstacles in the implementation and policies on equitization, particularly land and financial issues; (iv) responsibility of the leader during equitization process; (v) lack of stringent administrative disciplines and unclear mechanism of handling violations; and (vi) institutional change, transferring the representative of state ownership and impacts on SOEs equitization progress. 20. Vietnam experienced the first quarter with a lot of uncertainties. First, the global economic outlook and the US economy showed negative signs of downturn. Accordingly, reverse trend of policy from financial tightening to response to economic downturn/recession appeared. Second, trade tension between the US and major economies remained complicated. Trade negotiation between the US and its partners, despite much information, revealed unpredictable movement. Controversy over the requirement of reforming multilateral trading system and response to protectionism were popular. Third, some regional economies (such as Thailand and Indonesia) were preparing for election, with possibility of changing government and direction associated with regional economic cooperation. Fourth, speculation and expectation of increasing foreign investment inflows to Vietnam has been accompanied by concerns about the ability to absorb capital of the economy and the mindset as well as screening of foreign investment projects. Fifth, uncertainty still existed when Vietnam was developing specific guidelines and policies to implement CPTPP and access to IR4.0.
x 21. Vietnam still has to deal with many challenges, mainly on the microeconomic foundation. The pending of regulatory documents has been popular, leading to slow implementation of thinking and new. Even for CPTPP, guidance and legal adjustments have been slowly implemented, in spite of much expectation from high-ranking leaders and business community. More important, policy enforcement has been slowly improved. The regular and continuous repeat of the Government and Prime Minister on major measures and solutions for socio- economic development, in one hand, partly showed a close monitor; however, on the other hand, it showed that measures and solutions were not recognized and implemented adequately. 22. This report re-emphasizes the message of further strengthening microeconomic foundations and reforming economic institutions for a more advanced economy. Accordingly, the Report provides some recommendations on continued reforms of microeconomic foundations together with macroeconomic measures and other measures.
xi I. ECONOMIC CONTEXT IN QUARTER 1 OF 2019 1. Regional and global economic context 1. The global economy envisages further slowdown. International organizations (the OECD, WB, IMF) and central banks (FED, ECB) estimated slower economic forecasts of the global economic expansion as well as of economic growth of major economies in 20191. Tightening financial conditions (including monetary contraction) were slowed down, even halted in some countries. Noteworthy, economies should prepare and consider more scenarios for responding to escalating uncertainties. Economic slowdown of China, the US- China trade tensions, uncertainty of the Bruit and radical terrorism are among biggest risks to world trade, production and economic growth. Table 1: Global economic prospects Unit: % Difference* 2019 2020 2019 2020 World GDP (growth rate, %) 3.3 3.6 -0.2 0.0 Advanced economies 1.8 1.7 -0.2 0.0 The U.S. 2.3 1.9 -0.2 0,1 Japan 1.0 0.5 -.1 0,0 Euro area 1.3 1.5 -0.3 -0,2 Emerging and developing economies 4.4 4.8 -0.1 -0.1 Emerging and developing economies in Asia 6.3 6.3 0.0 -0.1 China 6.3 6.1 0.1 -0.1 ASEAN-5 5.1 5.2 0.0 0.0 World trade volume (growth rate, %) 3.4 3.9 -0.6 -0.1 Non-fuel price (% increase in USD) -0.2 1.1 2.5 -0.1 Source: IMF (April 2019). Note: *Difference between the forecasts for 2019 and 2020 with those in the report in January. ASEAN-5 includes Indonesia, Malaysia, Thailand, the Philippines and Vietnam 2. The US economy showed positive expansion with economic growth rate of 2.9% in 2018 (in comparison to 2.2% in 2017). The leading economic index of the US economy in February witnessed the first increase in the last 5 months.2 However, there remains signals of recession: GDP growth rate attained 2.2% (3rd estimate), which was downward revised by 0.4 percentage point in relative to the advance estimate due to the decrease of private and government
1 OECD (6/3/2019) estimated GDP growth rate of 2019 of 3.5%; WB (January 2019) forecasted the global growth rate of 2.9%. ECB (7/3/2019) reduced the forecast of economic expansion of the region to 1.1% in 2019 (which was down by 0.6 percentage point compared to the forecast of December 2018). FED (21/3/2019) estimated the economic growth rate of the US economy of 2.1% in 2019, 1.9% and 1.8% in 2020-2021, respectively. 2 Conference Board‟s Leading Economic Index increased by 0.2% in February, attaining 111.5 points (2016=100). https://www.conference-board.org/data/bcicountry.cfm?cid=1 1 expenditures, investment and imports.3 The recession risk of the US economy, in particular since the second half of 20194, has been raised more frequently5. Accordingly, the schedule of interest rate hike of the US may be considered more seriously, and no interest rate hike is expected in 2019.6 3. In the Europe, major economies in the region are facing with both internal and external difficulties and challenges, including the reduction of industrial production7, stagnancy of business activities8, the slowdown of exports and high public debts. Economic growth of the EU29 and the euro area was estimated at 1.9% and 1.8% in 2018 (compared to the figure of 2.4% in 2017 in both regions).9 In early of March, the ECB announced that interest rate hike will be delayed to at least 2020, and simultaneously expanded long-term credit to support economic growth. Uncertainties of the Brexit (unclear timeline and specific agreement as the UK Parliament continued to reject Brexit deals) and challenges of negotiating the FTA with the US may affect the motivation of the EU to approve other FTAs, including the EVFTA. 4. The Japan‟s economic growth is forecasted to slowdown in 2019 as key economic indicators casted a gloomy picture. Industrial production decreased10. The export expansion was down continuously (by 8.4% and 1.2% (YoY) in January and February, respectively) while import growth rate plunged (decreased by 6.7% in February, the biggest reduction since November 2016). YoY inflation stayed at 0.2% in both January and February 2019, the lowest in the last 15 months. The Bank of Japan (BoJ)‟s inflation forecast is 1.9% in 2019 and 2.0% in 2020.11 5. China economic growth rate continued to slowdown. According to National Bureau of Statistics of China (March 14), industrial production expanded by only 5.3% in the first 2 months of 2019 (the lowest in the last 10 years). Profits of industrial firms decreased by 14% in the same period12. Unemployment rate
3 The US‟s Bureau of Economic Analysis. Press release dated March 28, 2019 (3rd estimate). https://www.bea.gov/news/2019/gross-domestic-product-4th-quarter-and-annual-2018-third-estimate- corporate-profits-4th 4 Wall Street Journal‟s survey conducted in February showed that the probability of recession in the US in 2019, 2020 and 2021 is 24.53%, 45.7% and 39.1%, respectively. 5 PMI was 54.2 points in February 2019, the lowest since November 2016; industrial output increased by only 3.6% in February, the smallest increase in the last 8 months. 6 The result of Reuters‟s survey conducted during March 11-14 showed that 55% of respondents forecasted that FED will raise interest rate at least once before Q4/2019 (result of the previous survey: most agreed that interest rate hike would be taken in Q2). 7 Negative growth rate since November 2018 until January 2019 (YoY growth rate of -2.9%, -4.2% and 1.1%, respectively) 8 Business confidence index witnessed consecutive decreases, attaining 0.53 points in March 2019, the lowest level since November 2016. Manufacturing PMI went down dramatically, stood at 47.6 points in March 2019, the lowest since April 2013. 9 Eurostat. Press release dated March 7, 2019. https://ec.europa.eu/eurostat/news/news-releases 10 Industrial output decreased by 1.0% in February after the slight increase of 0.3% in January and drastic reduction by 1.9% in December 2018. The most significant drops were electronic equipment and spare parts (-9.6%), home appliances (-6.0%), machinery (-5.6%), steel and iron (-4.7%). 11 Consumption tax is scheduled to increase to 10% (instead of the existing rate of 8%) since October 2019. 12 The biggest reduction since October 2011. 2 increased from 4.9% in December 2018 to 5.3% in February 2019, partly due to impacts of the trade war with the US. Exports contracted drastically, decreased by 20.7% in February. This situation is expected to persist till Q2 as stimulus policy will take effect13 and potential ease of trade tension with the US. 6. The US-China trade war was temporarily at ease as President Trump suspended the March deadline of tariff hike on China‟s products. China is preparing for the implementation of the new investment law (which was newly promulgated in March 2019) in order to deal with concerns of accession to China market and equal treatments to foreign investors14. China proposed cutting tariffs on agricultural products, cosmetics, cars and other commodities imported from the US; purchasing natural gas worth USD 18 billion from an US emery firm (Cheniere Energy), making commitment on speeding up the removal of barriers on foreign ownership in joint ventures in automobile industry, and cutting tariffs on imported cars to below the existing rate of 15%. The US-China trade tension, however, would likely persist regardless of a potential trade deal. This can be attributed to the fact that the two parties haven‟t agreed on key issues (IPR, approach and schedule of the tariff removal), while trade deficit of the US with China did not improve significantly (which attained USD 419 billion in 2018 and USD 34.5 billion in January 2019). 7. USD continued to appreciate against major currencies, however the appreciation pace was slowdown. The risk of monetary war has been lessened as the US and China agreed that they would not intentionally intervene exchange rates (despite of disagreement on supervision mechanism). However, the USD index took the upward trend even after the announcement of the FED on the halt of interest rate hike in 2019 in mid-March, indicating that the financial market may have stronger confidence on the USD because of the concern of global recession.
13 In early March, China announced an unprecedented tariff cuts of nearly USD 2,000 billion (the effective figure could be much higher). 14 Speech delivered by the Premier of the State Council of the People's Republic of China Li Keqiang at the Prime Minister at the Boao Forum for Asia in March 28, 2019. 3 Figure 1: USD Index, 2018-2019 Figure 2: Exchange rates of selected currencies against the USD, 2018-2019
Source: https://www.marketwatch.com Source: The US Federal Reserve.
8. The most recent World Trade Outlook Indicator (WTOI)15 attained 96.3 points (the weakest since March 2010). Component indices such as export orders, international air freight, automobile production and sales, electronic components, agricultural raw materials, etc.16 showed the strongest reduction, approaching or surpassing pervious lows since the financial crisis. The WTO downgraded its trade forecast to 3.7% in 2019, but the estimate could be further downward revised if there are no significant improvements of political conditions, financial market movements and the US-China trade tension.
15 WTO (2019), World Trade Outlook Indicator, February 2019. 16 Component indices of the WTOI: Export orders – 95.3, international air freight – 96.8; automobile production and sales – 92.5; electronic components – 88.7; agricultural raw materials – 94.3. 4 Figure 3: International commodity price indices, 2017-2019
Source: World Bank‟s Commodity Price (March 2019).
9. World commodity prices increased slightly, but in general were below the figures in 2018. Oil price took the upward trend in Q1: Closing the transaction in March 28, the WTI crude oil price was up by 6.3% within 1 month and by 30.6% since the beginning of the year. This mainly attributed to signals of tightening global oil supply.17 However, YoY oil price growth rate was about - 8.6% and -13% in Q1 on the average. Concerns on the global economic slowdown, excessive supply, policy adjustment of the US on Iran sanction are main pressures on oil price. In the meanwhile, gold price attained the peak since June 2018 while the upward trend of USD appreciation was at eased. 10. UNCTAD18 forecasted that the global FDI will rebound in 2019 compared to in 2018, in particular in advanced economies. Greenfield investment projects casted significant improvement (increased by 29% in 2018 albeit of the decrease of 16% in 2017), largely thanks to investment upswings to developing countries in East and Southeast Asia. The world FDI, however, is subjected to negative impacts of the risk of global economic recession, lagged effects of tightening financial conditions, stagnancy of industrial production in major economies and escalating trade tension.
17 Saudi Arabia announced the plan on cutting crude oil exports to below 7 million barrels per day in April 2019, and maintaining oil production of 10 million barrels per day. Electricity outage in Venezuela severely affected oil exports of the country, not to mention the US‟s oil sanction. Crude oil production of the US may increase at lower pace in 2019 compared to previous forecasts. At the meeting of OPEC+ in March, member economies agreed on the reduction of crude oil production by 1.2 million barrels per day, equivalent to 1.2% of the global demand within 6 months, starting from January 1, 2019. The main objective was to rebalance the global crude oil market and support oil price. 18 UNCTAD (2019), Investment Trend Monitor, No. 31, February 2019. 5
Figure 4: Oil price, 2018-2019 Figure 5: Crude oil price, 2018-2019
Source: https://goldprice.org/ Source: https://oilprice.com 11. International economic integration showed modest improvement. Members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) held the first meeting of the CPTPP Commission, indicating the determination to effectively implement the agreement. ASEAN and Hong Kong facilitated the approval of ASEAN-Hong Kong FTA, which is expected to take effect in mid-2019. The 2nd session on WTO reform was held, emphasizing the need of concretizing dispute settlement mechanism, negotiation and supervision functions of the WTO; and simultaneously making a start of reforming 4 WTO bodies, including SPS Committee, TBT Committee, Committee on RoO and Council on Trade in Services. EU promotes regional economic partnership to minimize the risk of a hard Brexit (in February, EU-Japan FTA came into force, EU-Singapore FTA was approved, the UK and Swiss signed an agreement on trade relation after Brexit on February 11, 2019; Germany facilitates FTAs with the US, Canada, Singapore, Vietnam, etc.). 2. Domestic economic context 12. The Government has identified the year 2019 as a breakthrough for implementing socio-economic development plan for 2016-2020. Resolution 01/NQ-CP emphasized on macroeconomic stability, enhancing domestic capacity and economic resilience; and specific actions for the revision and removal of business barriers, improving business environment; or key messages, policies, and actions on access to IR4.0, digital transformation, e- government. 13. In connection with previous Resolutions 19 (during 2014-2018), Resolution 02/NQ-CP on improving business environment, enhancing national competitiveness has emphasized on continuously implementing significant solutions for creating favorable business environment, reducing transaction time and costs, and risks for enterprises. In particular, in 2019, the Resolution focuses on four priorities, including (i) abolishing and simplifying regulations
6 on business conditions; thoroughly implementing reforms of business conditions set out in 2018; (ii) comprehensively implementing reforms of management, specialized inspection and connecting to National Single Window; (iii) promoting electronic payment and public services at degree 4; and (iv) developing innovative ecosystems, supporting and encouraging startups. With such basis, specific actions to review and resolve difficulties/barriers for enterprises have been continuously implemented. As of 27 March 2019, 20 ministries and ministerial agencies and 41 provinces have issued their Action Plans with specific targets. 14. In spite of reducing lots of business conditions, there still exists difficulties for enterprises in practice. For some cases, business conditions have been transformed to standards and conformity. In addition, reforms of management, specialized inspection, and linkage with National Single Window show almost unchanged since the beginning of 2019. Barriers on specialized management and inspection are still obstacles, affecting production and business. Administrative procedures connecting to National Single Window are formal rather than facilitating business. 15. In the first half of March, concerning on the lower-than-expected economic growth has gradually appeared. The Prime Minister issued Directive 09/CT- TTg dated 1 April 2019 on focused solutions for production and business, ensuring the growth target for the first 6 months and 2019. Remarkably, the Directive includes: (i) controlling diseases of livestock and poultry, stabilizing production; promoting agriculture, forestry and fisheries for export, ensuring the completion of export plan; and (ii) focusing on solving difficulties for production, speeding up the implementation and disbursement of large-scale projects, ensuring the disbursement rate of public investment of 100% in 2019. 16. The Government accelerates the development of e-government. Resolution 17/NQ-CP on key tasks and solutions for development of e-Government during 2019-2020, orientation to 2025 has been issued, including the target of raising ranking of United Nations e-Government from 10 to 15 levels by 2020, bringing Vietnam to the group of four leading countries in ASEAN in accordance with UN assessment by 2025. At the same time, the Government also promotes non-cash payment under the regulatory framework of electronic transactions and electronic documents in financial activities issued in Decree 165/2018/ND-CP dated 24 December 2018. Since April 2019, it has been regulated that payment of enterprises to the state budget (including tax, late payment, fees and charges and other payments) should be in non-cash payment form (bank transfer) or cash deposit at a commercial bank so as to remit to the account of customs office at the State Treasury. The Government has also issued Proposal on National Portal of Public Services under Decision 274/QD- TTg dated 12 March 2019 to provide relevant information and support on administrative procedures publicly and transparently. 17. In Q1/2019, the Government approved Proposal on statistics of unobserved economic sector in Vietnam, with the purpose of reflecting scope and scale of the economy more comprehensively. The scope of unobserved economic sector
7 includes the five following aspects: underground economic activities; illegal economic activities; informally unobserved economic activities; self-produced and self-consumed economic activities of households; and missing economic activities in various statistic surveys. 18. According to the latest survey on Business Climate Index (BCI) of Eurocham, European business community continue to show their optimism on doing business in Vietnam in Q4/2018, with the highest BCI since the end of 2016 (Figure 6). Besides, Vietnam has been ranked as one of the top 10 emerging markets of logistics indexes for the first time. Accordingly, Vietnam, Indonesia and Malaysia are assessed as potential emerging markets of logistics, after India and China. The reason may be attributed to favorable business conditions and advantages of value of production and supply chain. Figure 6: Business Climate Index (BCI)
Source: Eurocham, 2019 19. A recently published report by Vietnam Chamber of Commerce and Industry (VCCI) on Provincial Competitiveness Index showed that the quality of governance has been improved over time (Figure 7). Some notable trends and findings have been identified, including reduction of firms paying bribes and informal charges19, less biased business environment for private sector, continued progress on administrative procedures20. Some other sectors also experienced improvement, such as access to land, legal institutions, law and order (each up by 0.27 points) and provincial proactive leadership (an increase of 0.11 points). However, declines were observed in some sectors, which remained concerns for surveyed enterprises, including transparency (down by
19 The percentage of firms paying bribes reduced from 66% in 2015 to 55% in 2018, the percentage of firm paying over 10% revenue in ifnformal charges went down from 11% in 2015 to 7% in 2018 20 According to the syrvey enterprises, the effectiveness of local government officials increased from 67% in 2015 to 75% in 2018; friendly local government officials went up from 59% in 2015 to 68% in 2018, the time to complete administrative procedures was shortened than specified in the regulations (from 67% in 2015 to 69% in 2018) and overlapping regulatory inspections (from 26% in 2015 to 11% in 2018) 8 0.09 points), labor policy (down by 0.11 points), business support services (down by 0.17 points) and entry costs (down by 0.41 points). Figure 7: Improved economic governance over time
Source: VCCI, 2019 20. With the taking effect of CPTPP since 14 January 2019, ministries, agencies and associations have promoted the active implementation of CPTPP and some other trade agreements. Ministry of Industry and Trade (MoIT) has upgraded and launched the National Portal on CPTPP. In addition, the amendment of some laws for fulfilling the implementation of CPTPP such as 2010 Law on Food Safety in 2010, Law on Insurance Business in 2000 and Law on amendment and supplement to some articles of Insurance Business Law in 2010, and Intellectual Property Law in 2005 (which are commitments upon the coming into force of the Agreement) are being conducted to submit to National Assembly in May 2019. However, by the end of March 2019, the list of import and export tariffs and relevant guidelines for implementing CPTPP have not been issued. 21. Vietnam Economic Policy framework to 2035 shows the determination to build a facilitating, action-taking and integrity state. Three main pillars mentioned in the framework include economic prosperity and environmental sustainability, social equity and inclusion, and increased state capacity and accountability. The focuses of reform set out under the Vietnam Economic Policy include (i) economic modernization and private sector development; (ii) development of national innovation capacity; (iii) improved economic efficiency of urbanization and spatial planning; (iv) environment sustainability and enhanced climate change resilience; (v) promotion of social equity and inclusiveness; and (vi) modern institutions and effective state. 22. The year 2019 also emphasizes the development and improvement of regulatory framework and policies on gender equality, with a focus on creating favorable conditions for women to access and to participate in various fields of social life. The gender gaps of 8 areas of political, economic, cultural and social aspects which were stipulated under the 9 Law on Gender Equality has been significantly shortened. Targets of the National Strategy on Gender Equality during 2011-2020, especially those of economic, labor and employment criteria, have reached the planned figures.21 23. The domestic economic context in Q1 still shows some limitations. First, high growth "interest" still exists, sometimes leading to excessive concern when the growth prospect is adjusted. Meanwhile, policy groups promoting real growth has not shown new features as compared to existing and being implemented policies. Second, controlling low inflation is an important requirement, however, both modality and message has been still in the nature of "administrative" management, thus, it is difficult to sustain. Third, the adjustment of domestic regulation for the implementation of new FTAs (including CPTPP) has been lack of punctuality, comprehensiveness, even inaction. There is little information on the domestic preparation for EVFTA agreement, although the possibility of approval in the second half of 2019 has been mentioned. Fourth, provincial investment promotion takes place with quite high frequency, but there is no assessment on the implementation of investment commitments. Finally, the content and coordination between the Commission for the Management of State Capital at Enterprises and ministries, agencies has not been specified.
21 In 2018, the percentage of women-headed enterprises was 31.3% in Vietnam, ranking 6/57 countries (in 2017 the number was 7/54). Vietnam is the only country in Asia to be in the top 10 countries of this index and continues to maintain its rank of opportunity and participation of women in the economy. 10 II. MACROECONOMIC PERFORMANCE AND OUTLOOK 1. Macroeconomic performance in Q1/2019 1.1. Real economy 24. GDP growth attained 6.79% in Q122. This figure was lower than that of Q1/2018 (7.45%) and initial forecast of the Government (6.93%). However, the figure of 6.79% was higher than the same period of 2009-201723 (Figure 8). From the uncertainty of economic growth in Q1 and global economic outlook, it could be a challenge for Vietnam in Q2-Q4 to achieve the 2019 target (6.8- 7.0%).
Figure 8: Quarterly GDP growth (%)
Source: General Statistics Office (GSO). 25. Vietnam‟s economy is still in the expansion phase of growth cycle. Real GDP (seasonally adjusted) in Q1 has been the 7th consecutive quarters that was above trend and the 8th consecutive quarters GDP surpassed potential GDP growth. Notably, potential GDP growth – reflected through GDP trend – shows a downward trend. It can be a concern for strengthening microeconomic foundation for sustainable growth in the coming time. Figure 9: GDP growth movement
950,000 15,000 Tỷ đồng 8 % 900,000 10,000 7 850,000 5,000
800,000 0 6
750,000 -5,000 5 700,000 -10,000
650,000 -15,000 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Chu kỳ GDP (hiệu chỉnh mùa vụ) Xu thế GDP Tăng trưởng GDP (hiệu chỉnh mùa vụ) Xu thế tăng trưởng GDP
22 In Section II, growth was year-on-year basis, except otherwise stated. 23 GDP growth of Q1 for selected years: up by 5.90% in 2011; up by 4.75% in 2012; up by 4.76% in 2013; up by 5.06% in 2014; up by 6.12% in 2015; up by 5.48% in 2016; up by 5.15% in 2017; and up by 7.45% in 2018. 11 Source: Authors‟ compilation. 26. The momentum of economic recovery in some recent years has been partially significant from reforms of economic institutions in general and of business environment in particular. Reforms of economic institutions have significantly led to improvement of TFP growth (Figure 10). For example, if quality of regulatory documents24 increase by 1%, TFP growth could be up by 1.37 percentage points. Thus, the emphasis of Government on improving business environment – despite concerns about growth in the short-term – is still a positive signal. Figure 10: Role of institutional reforms vs. economic growth in Vietnam
Tốc độ tăng TFP vs. Chất lượng văn bản quy phạm pháp luật 5
1996 4
2005 2015 3 2014 độTFP tăngTốc 2006 2007 2017 2016 2 2013 2004 2010 2003 2002 2012 1 2011 2000 1998 2008 0 -0.75 -0.7 -0.65 -0.6 -0.55 -0.5 -0.45 -0.4 -0.35 2009 Chất lượng văn bản quy phạm pháp luật (thúc đẩy khu vực tư nhân) -1 Source: Authors‟ compilation. 27. GDP sturcture by expenditure side showed little change in Q1/2019 as compared to that of previous year. Gross capital formation and final consumption grew slowly, attaining 7.1% and 6.2% respectively. These figure may reflect, to some extent, business community and households were concerned about macroeconomic risks, especially about interest rates and the ability of access fo formal finance. (Figure 11). Figure 11: Growth rate of gross capital formation, final consumption and GDP
Source: GSO
24 Based on the global Governance Index database of the World Bank. 12 28. The agriculture-forestry-fishery (AFF) sector continued its solid recovery (at 2.68% - Figure 12) in Q1/2019. The structural transformation of AFF showed its effectiveness, in addition to stable price and expansion of export market. However, the sector growth might be limited mostly attributed to: (i) the complexity of African swine fever; and (ii) severe competition of fishery export from other large exporters. 29. Growth of industry and construction attained 8.63% in Q1/2019 (Figure 12). Although the manufacturing sub-sector continued its robust growth and significant contribution (up by 12.35%, and contributed 2.72 percentage points), the growth rate was lower than that of 2018 (up by 13.56%). Main reason may be attributed to difficulties in output of export. The mining and quarrying sub-sector experienced negative growth (down by 2.2%), mostly constrained by a reduction of crude oil exploitation (down by 10.3%) and natural gas (down by 2.4%). Figure 12: GDP growth by sector, 2012-Q1/2019 Unit: %
Source: GSO. 30. The Index of Industrial Production (IIP) increased by 9.2% in Q1/2019, lower than the same period of 2018 (12.7%) (Figure 13). The manufacturing sub- sector experienced high growth of 11.1%, in spite of lowering than that of 2018 (15.7%). This figure showed a stagnant trend of manufacturing sub-sector, mostly attributed by the dependence on some selected electronic products (such as smart phones) while they have not yet transferred to new product cycle life.
13 Figure 13: Index of Industrial Production, 2013-March 2019
Source: GSO. 31. Purchasing Manager Index (PMI) was at lower pace in Q1/201925. According to HSBC, Vietnam‟s manufacturing industry was in slowdown phase; both production and orders were at higher growth, but reduction of inventories has impacted on PMI. Mail reason might include: (i) more challenges in exports; and (ii) increasing cost of production, particularly in labor-intensive industries. Figure 14: Purchasing Manager Index, 2014-March 2019
Source: Markit, HSBC. Note: PMI=50 means no month-on-month change. 32. The value-added of service sector grew by 6.5% in Q1/2019. As Q1 was coincident with the Lunar New Year, some service sub-sector experienced higher growth, such as wholesale and retail trade (increasing by 7.82%), accommodation and food service (increasing by 6.22%). Notably, international
25 PMI was 51.9 in January, reducing to 51.2 in February and up to 51.9 in March 2019 14 tourists reached 4.5 millions, increasing by 7%.26 However, the expectation of attracting more tourists when Vietnam being the host for United States - North Korean Summit was not realized. 33. The information and communication sub-sector only contributed 0.71% to overall GDP in Q1/2019 and 0.68% to GDP in 2018. These figures were quite small and unconvincing for strong messages on developing digital economy. Policy implications include: (i) the necessity of Vietnam for more prompt and pragmatical actions for the development of digital economy; and (ii) the requirement of improving statistical system for measuring digital economy. 34. Economic structure showed almost no change. With limited contribution to overall growth, the share of AFF reduced slightly to 11.35% in Q1/2019. The service sector still accounted for a significant share of 49.23%, slightly increased as compared from that of 48.97% of 2018. The share of industry and construction were almost unchanged, accounting for 39.41% (Figure 15).27 Figure 15: Quarterly GDP structure, 2011-Q1/2019 Unitị: %
Source: GSO. 35. The performance of enterprises experienced strong adjustment of structure. The number of newly registered enterprises was at slower pace, attaining 6.2%. Q1/2019 alos experienced the returning to operation of 15.050 enterprises, up by 78.1%. The number of inactive and dissolved enterprises increased significanty, corresponding to 120% of newly registered enterprises. The reason was partly attributed to the revocation of business registratioin certificated of a large number of inactive enterprises (7,342 enterprises) under the database standardization program in 2018.28
26 Increasing by 30.9%; revenue of tourism increased by 30.3% as compared to same period of 2017. 27 This analysis excludes the allocation of product taxes less subsidies on production in calculating the shares of sectors. 28 According the Business Registration Agency, of all 7,342 enterprises being revocated business registration certificates, 598 enterprises having no enterprise codes, 137 enterprises dissolved with tax agencies (but not yet finalized administrative procedures with business registration agency), 3.926 15 Figure 16: Selected indicators of enterprises’ performance, January 2014-March 2019
Source: Business Registration Agency, MPI. 36. As compared to previous quarters, manufacturing enterprises showed less optimism about production and business in Q1. Some 25.8% of enterprises assessed worse production and business conditions as compared to previous quarter. However, forward looking, most of enterprises had positive assessment, with 89,4% of enterprises perceived stable and better production and business in Q2 (Figure 17). Factors affecting production and business in Q1 included (i) modest competitiveness of domestic products (59.2%); (ii) weak demand of domestic market (45%); and (iii) financial difficulties (Figure 18). Figure 17: Business tendency Figure 18: Factors affecting production and business
Source: GSO. 37. The Report on Provincial Competitiveness Index 201829 (PCI 2018) showed more positive assessment of business community on business environment, including lowering informal costs, more equal business environment, more enterprises stopped operation without notification of more than 2 years; 2.303 stopped operation without notification of more than 1 year and 378 enterprises stopped operation without notificaion of less than 1 year. 29 Published by Vietnam Chamber of Commerce and Industry on 28 March 2019. 16 proactiveness and innovation of provincial authorities; and better improvement of administrative procedures. However, entry procedures were still the most burdensome for business community, particularly “post-entry” burdens and access to transparent information. Figure 19: Major challenges in production and business, PCI 2018
Source: VCCI, 2019. 38. PCI 2018 revealed that major common difficulties for business community included finding customers, accessing credit and financing, dealing with economic downturns, recruiting labors, etc. (Figure 19). Particularly, land, tax, social insurance were the most troublesome administrative procedures as assessed by business community (Figure 20). Figure 20: Most troublesome administrative procedures
17 Source: VCCI, 2019. 39. Total labor force was 55.4 million people in Q1, increasing by 331.9 thousand people (YoY). Of which, total economically active labor force were 54.3 million people, including 19.2 million people in the AFF sector, accounting for 35.4%; 15.6 million people in industry and construction, a share of 28.6%; and 19.5 million people, accounting for 36.0%. The participation rate of labor attained 76.6% in Q1/2019, down by 0.13 percentage point (YoY) (Figure 21). Figure 21: Selected indicators of labor and employment, Q1/2013-Q1/2019
Source: GSO.
40. The overall unemployment rate Figure 22: Unemployment rate (%) was 2.17% in Q1, slightly decreased as compared to same period of previous years (Figure 22). The underemployment rate was 1.21%, 0.3 percentage points lower (YoY), of which, AFF experienced the most, a lion share of 71.1% of overall underemployment, 6 times higher than that of service and industry and construction sector. Source: GSO.
41. According to World Employment and Social Outlook of the International Labor Organization (ILO), a majority of 3.3 billion people employed globally experienced a lack of material well-being, economic security, and equal opportunities. Some new business model often made possible through innovative technologies, threaten to undermine existing achievements of labor market such as improvement of formality, employment security, social protection and labor standard. 42. In Vietnam, the percentage of female-headed business reached 31.3% of total enterprises in 2018 and ranked 6/57 countries (the figure was 7/54 in 2017).
18 Vietnam was the only country in Asia being the top 10 countries in the world of this index and continued to maintain rankings on the index of women‟s opportunity and participation in the economy. The share of women participating in National Assembly was 27.2 in the 2016-2021, higher than the Asian average of 19% and the global rate of 21%. The participation rate of female in the labor force was also high, about 71.55%, significantly higher than the corresponding rate of the East Asia - Pacific region of 61.1% and 49.6% of the world. Moreover, Vietnam has been recognized as one of 10 countries well- performed of sustainable development goal 5 on promoting gender equality and empowering all women and girls 1.2. Inflation 43. Consumer Price Index (CPI) decreased by 0.21% in March (MoM) after the increased by 0.8% in February. On the average, CPI was up by 2.63% in Q1 (YoY), which was below the growth of 2.82% in 2018. Key factors for slow expansion of CPI in Q1 included: (i) the decrease of price of food-foodstuff due to lower demand after the Lunar New Year and impacts of Africa swine fever on pigs; (ii) “administrative” approach on controlling state-controlled prices (electricity, petrol) before the Lunar New Year30; and (iii) upward adjustment of electricity price in the end of March 2019 was not calculated in the CPI of March. 44. In Q1, the CPI was subjected to various impacts from the international market. Import price index decreased by 0.27% compared to that in Q4/2018 and by increased by 1.06% in relative to Q1/2018. In the meanwhile, export price index was up by 3.63% and by 2.88%, respectively. However, pressure of export price on the CPI was insignificantly, mainly because exported products and domestic consumptions fall under different segmentations (quality). 45. Average core inflation increased by 1.83% in Q1 (YoY). This indicated that monetary management was stable and did not intensify pressure on inflation. However, Q1 core inflation exceeded the target of core inflation for 2019 (1.6- 1.8%). As the result, it is necessary to closely monitor the situation in order to implement more appropriate measures on stabilizing interest rates and exchange rate in ending months of the year.
30 The Government delivered a number of messages on controlling prices of electricity and petrol before the Lunar New Year. Petrol price was adjusted upward once in 2019 (on March 2), and previously, was downward adjusted 3 times consecutively and kept unchanged 3 times. The meeting on March 18 between the MOF and MOIT decided not to increase domestic petrol price and adjust allocations of the petrol price stabilization fund. 19 Figure 23: Inflation, 2016-2019 (a) MoM inflation (b) Core inflation and average CPI
Source: GSO. 46. The Government withdrew the proposal on raising the ceiling of environmental tax for petrol to VND 8,000 per liter. However, petrol price was distorted by such factors as: (i) the supply of some kinds of petrol in certain times; (ii) the encouraged use of bio-fuel has not reflected in significant advantages in relative to traditional petrol; and (iii) modest transparency of the collection and allocation of the petrol price stabilization fund. 47. In the coming period, the CPI is exposed to increasing pressure from several factors, including the upward adjustments of state-controlled prices (electricity, healthcare services), the increase of regional minimum wage, uncertainty of international oil price, and some unfavorable conditions of the domestic economy (Africa swine fever on pigs). The upward adjustment of electricity price by 8.36% in the end of March 2019 would likely affect market prices though studies by the MOIT, MPI and GSO indicated insignificant impact of increased electricity price on overall prices31. Economic stimulus measures – within the current macroeconomic policies – hardly create significant pressures on inflation. To this extent, the CPI target for 2019 would likely to be achieved. Besides, overall management scenarios should appropriately consider/calculate the accumulated effect of upward adjustment of prices of essential goods for production and consumption (electricity, petrol, etc.). 1.3. Monetary movement 48. Deposit and lending interest rates were kept stable in Q1/2019. Deposit rates were popular at 0.5-1%/year for demand deposits, 4.5-5.5% per annum with terms of less than 6 months, 5.5-6.5% per annum with terms of 6-12 months and 6.6-7.3% per annum for terms of more than 12 months.
31 Accordingly, average retail electricity price will be VND 1,864.44 per Kwh instead of the current price of VDN 1,720.65 per Kwh). Studies by the MOIT and the GSO – MPI showed that the upward adjustment of electricity prices will make CPI increase by 0.26% - 0.31%, PPI up by 0.15% - 0.19%, GDP decreased by 0.22% - 0.25% (http://cafef.vn/gia-dien-tang-836-tu-cuoi-thang-3-2019-day-cpi- tang-keo-gdp-giam-2019030707393187.chn) 20 49. Positive movements of deposit rates in Q1 were attributed to: (i) the tendency of reducing deposit rates or maintaining low deposit rates of some large and dominated commercial banks; (ii) abundant liquidity of the banking system while no significant increase of credit disbursement; and (iii) the announcement of FED not to halt interest rate hike in 2019, relieving pressure to raise VND deposit interest rates to keep the currency attractive. Table 2: Popular VND-denominated deposit rate of commercial banks Unit: % per annum Demand Shorter than 6 – 12 months Longer than 12 6 months months End of December 2017 0.8-1.0 4.3-5.5 5.3-6.5 6.5-7.3 End of March 2018 0.6-1.0 4.3-5.5 5.3-6.5 6.5-7.3 End of June 2018 0.6-1.0 4.3-5.3 5.3-6.5 6.5-7.1 End of December 2018 0.6-1.0 4.5-5.5 5.5-6.5 6.6-7.3 End of March 2019 0.5-1.0 4.5-5.5 5.5-6.5 6.6-7.3 Source: State Bank of Vietnam (SBV). 50. Lending interest rates remained stable. Short-term lending rates were popular at 6-9% per annum and 9-11% per annum for medium and long-term lending rates. State-owned commercial banks actively reduced lending rates by 0.5 percentage points per annum to support businesses of prioritized areas, rice- trading and households suffered from African swine fever. However, the setting of high profit targets by some large banks raised concern about the possibility of lowering interest rate in 2019. 51. USD deposit rates were kept at 0% per annum. USD lending interest rate at the end of Q1 were popular at 2.8-6.0 per annum; in which short-term lending interest rate was popular at 2.8-4.7% per annum, medium and long-term lending interest rate were 4.5-6.0 per annum. However, access to foreign currency credit was not easy because of the SBV‟s policy to curb foreign currency credit and gradually shift from the mobilization-lending relationship to buying-selling foreign currency in 2019. 52. Overnight, 1-month and 3-month interbank rates increased just before the Tet holidays, and decreased gradually since the beginning of March. In general, the interbank rate level was stable in the first quarter and lower than the end of 2018. Causes of the movement of the interbank rate included: (i) Liquidity decreased due to people withdrew money to spend for Tet; (ii) Credit growth grew faster than liquidity of the banking system; (iii) People deposited cash back into the banking system after Tet holiday and (iv) the State Bank injected VND 150 trillion to boost liquidity for the commercial bank system.
21 Figure 24: Interbank interest rate from March 2018 to March 2019 Unit: % per annum
Source: State Bank of Vietnam. 53. By 25th March, total liquidity (M2) grew 2.67% compared to the end of 2018 and 10.99% compared to Q1/2018. M2 growth continued to slow down significantly compared to the same period of 2017-2018. Notably, the State Bank bought foreign currency in the first quarter, approximately USD 4 billion before Tet and USD 2.5 billion after Tet.32 The net amount was remarkably less than that of the same period in 2018, thus rationalizing M2 growth in Q1. However, liquidity tension of the banking system and the net injection VND 150 trillion by the SBV showed a caution of neutralization when SBV purchased foreign currency. It is important that SBV would avoid similarly “sudden” reactions (though not on large scale) in the coming months. Figure 25: Growth rate of outstanding credit and M2
6 % 4.01 5 4.37 2.67 4 3.49 3.53
3 2.28 2
1
0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2015 2016 2017 2018 2019 Tăng tín dụng Tăng M2
Source: SBV. 54. By 20th March, outstanding credit rose by 2.28% compared to the end of 2018. This growth rate was lower than that of the same period in 2018 (2.78%). Credit for some prioritized areas grew quite well. In which, credit for supporting industry increased by 3.44%, accounting for 3.14%; credit for
32 Source: http://cafef.vn/mua-luong-lon-ngoai-te-du-tru-ngoai-hoi-viet-nam-co-the-vuot-65-ty-usd- 20190402124014632.chn [Accessed on 2 April 2019] 22 export rose by 5.4%, accounting for 3.12%; credit for high-tech application enterprises hiked by 2.79%; credit for agriculture and rural areas went up by 2.23% compared to the end of 2018, accounting for about 25% of the total outstanding loans to the economy. 55. Credit performance in Q1 was influenced by a number of factors, including: (i) SBV continued to control credit flows into risk-potential areas and redirected credit more towards production and manufacturing; (ii) The banking industry‟s target to repel unlawful credit and (iii) The roadmap to curb foreign currency credit to prevent dollarization in 2019. However, “unlawful credit” seemed to be confused with “unofficial credit”.33 This posed a threat that policies aiming to reduce unlawful credit would limit the creativity of banking and financial sector and restrict non-banking capital for businesses and consumers. 56. Peer to peer (P2P) lending is becoming more popular in Vietnam with the provision of more than 76 institutions via the internet and 41 via mobile network.34 However, this new business model is facing legal barriers and could change into multi-layer model or unlawful credit. Recently, the SBV announced the piloting of P2P lending model and considered it as a conditional business industry. SBV‟s action, in spite of being late, still had positive implications in the context of Fintech development in particular and IR 4.0 in general. 57. Non-performing loans (NPLs) settlement had some improvement. By the end of December 2018, the NPLs ratio fell to 1.91%, lower than that by the end of Q1/2018 (2.18%) and the same period of 2017 (1.99%) (Figure 26). By the end of 2018, NPLs of 5 commercial banks were settled via VAMC (Vietcombank was the first bank to clean up its NPLs in 2016). However, VAMC‟s special bonds hold by 24 commercial banks amounted at VND 126.7 trillion, a reduction of only 0.5% compared to 2017. Major obstacles in dealing with NPLs includes: (i) difficulties of having proper rights of auction for mortgage (commercial banks only have rights to seize mortgage as regulated under Resolution 42) and execution of judgment; and (ii) credit control of real estate sector has limited the resources to deal with secured assets. Figure 26: NPL ratio of credit institutions, 2013-2018 Unit: %
33 Unofficial credit is estimated to occupy 15-20% total credit, of which 30-35% is unlawful credit 34 Source: https://anninhthudo.vn/kinh-doanh/giao-dich-ngan-hang-dien-tu-tang-manh-trong-nam- 2018/795859.antd [Accessed on 10 January 2019]
23 5.0 4.73 4.5 4.0 3.5 2.55 3.0 2.46 2.5 1.91 2.0 1.99 1.5 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 2013 2014 2015 2016 2017 2018
Source: SBV. 58. The central exchange rate rose in Q1. The central rate increased approximately 0.68% in Q1 compared to Q4/2018, remarkably higher than the same period of 2018 (0.15%). The central rate by the end of Q1 went up roughly 2.32% as compared to Q1/2018. SBV has significantly increased the buying/bid rate since the beginning of 2019 (VND 500 as compared to the end of 2018). These adjustments showed the flexibility of SBV when assessing the context management and implementation of net buying of foreign currency. In addition, the increase of central rate created more room for exchange rate management in the consecutive quarters – which were usually more uncertain. Figure 27: VND/USD exchange rate, 1/2017-3/2019
24,000
23,500
23,000
22,500
22,000
Tỷ giá trung tâm Tỷ giá NHTM Tỷ giá thị trường tự do
Source: Authors‟ compilation. 59. VND/USD exchange rates at commercial banks were quite stable around USD 1 equivalent to VND 23,250. In contrary to July-November 2018, the rates of commercial banks were significantly lower than ceiling rates. Exchange rates in the parallel market tended to decrease and maintained at lower level than commercial banks‟ rates in Q1.
24 Figure 28: Gap between exchange rates of commercial banks and central rate and in the parallel market
600 3.50 % VND
500 3.00
400 2.50
300 2.00
200 1.50
100 1.00
0 0.50
-100 0.00
Chênh lệch tỷ giá thị trường tự do - tỷ giá NHTM Chênh lệch tỷ giá NHTM- tỷ giá trung tâm (%) Source: Authors‟ calculation. 60. Factors facilitated exchange rate management in Q1 included: (i) FDI disbursement reached USD 4.12 billion, up by 6.2%; (ii) capital contribution to buy shares of foreign investors was estimated to attain at USD 5.69 billion, tripled that of the same period in 2018; (iii) FED did not raise rates in Q1 and intended to keep interest rates unchanged in 2019; and (iv) trade surplus in Q1. 61. Real effective exchange rate (REER) increased about 1% in Q1 compared to Q4/2018; however, it dropped by 2% compared to Q1/2018. It means that Vietnam‟s goods were relatively cheaper than goods of partner countries. It was mostly attributed to effective control of inflation and not much movement of exchange rates between VND and partner countries‟ in Q1. Figure 29: Real Effective Exchange Rate
100
95
90
85
80 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2013 2014 2015 2016 2017 2018 2019
Source: Authors‟ calculation. Note: Q1/2012=100. REER is calculated based on trade data with the 20 biggest trading partners and CPI statistics. Data for Q1/2019 was estimated. A smaller value implies that Vietnamese goods are relatively more expensive than foreign ones 1.4. Investment 62. Gross investment in Q1 was estimated to reach VND 539.2 trillion, rising by 8.8% (Table 3). By 2010 constant price, total investment increased by 5.8%.
25 The investment to GDP ratio reached 32.16%, slightly decrease from the same period in 2018 (32.22%). The growth rate of investment from the non-state sector reached 13.6%, nearly double than that of FDI sector and 4 times bigger than that of the state sector. Table 3: Gross investment, current price Unit: trillion VND
Growth No. Category Q1/2019 Q1/2018 rate (%)
Gross investment 359.2 330.1 8.8 I State investment 106.8 103.2 3.5 1 State budget investment 50.8 49.2 3.2 2 Government bonds 4.8 5.9 -19.2 3 State credit 8.7 7.6 14.9 4 Borrowings from other sources (by State sector) 21.1 20.7 1.7 5 Investment by SOEs (Equity) 15.3 14.8 3.4 6 Other sources 6.1 5.0 22.9 II Non-state investment 158.1 139.1 13.6 III FDI 94.4 87.8 7.5 Source: GSO. 63. Disbursement of state budget investment increased by 3.2% over the same period, reaching just 14.7% of the annual plan. By the end of Q1, most ministries, central agencies and provinces have basically finalized the detailed plan of capital allocation for projects; investors were in the process of preparing bidding procedures, selecting contractors, and completing advance payment documents according to the laws. 64. The investment structure shifted further towards a smaller share of state sector and higher shares for non-state and FDI sector. The share of state sector reduced 1.6 percentage points, accounting for 29.7% of gross investment. The non-state sector increased its share to 44%, increasing by 1.9 percentage points (Figure 30). The rapid growth of private investment also partly reflects an increasing confidence of business community in Vietnam‟s improved investment and business environment. In this regard, it can be proved through a sharp increase in the number of enterprises returning to operations in Q1, with over 15,000 enterprises, up by 78% over the same period in 2018.
26 Figure 30: Investment capital by types of ownership
Source: GSO. 65. Vietnam continues showing its attraction to FDI inflows. Total registered capital (including new registration, additional registration and capital contribution to buy shares of foreign investors) reached USD 10.8 billion in Q1, up 86.2% over the same period in 2018 and much higher than same periods in recent years. In which, there were 785 newly registered projects with a total capital of 3.8 USD billion, an increase of 80%. Contributed capital for purchase of shares reached nearly USD 5.7 billion, an increase of over 200%. FDI disbursement reached 4.12 billion USD, up 6.2% (Figure 31). Figure 31: FDI attraction and disbursement Unit: USD billion
Source: GSO Note: (*) Including capital of new registration, additional registration and contributed capital to buy shares of foreign investors.
27 66. The manufacturing industries continued to show its dominance in FDI attraction with more than USD 4 billion of newly registered and additionally registered capital, equivalent to 78.64% of the total newly registered and additionally registered capital in Q1. The second position belonged to real estate sector with a total capital of USD 505.6 million, accounting for 9.88% of the total newly registered and additionally registered capital. The cumulative data of projects still in effect until March 20, 2019 showed that the top five groups of industries with FDI attraction accounted for 87.9% of total registered FDI, of which the manufacturing industries attracted USD 201.2 billion, accounting for 58.1% (Figure 32). Figure 32: Top five groups of industries with FDI attraction
Source: GSO 67. Q1 also witnessed the busy movement of M&A activities with 1653 share capital contributions, resulting in the increase of more than 3 times of total value of contributed capital compared with the same period in 2018, reaching nearly USD 5.7 billion, accounting for 52.6% of total registered capital. The most prominent M&A deal is the capital contribution and share purchase project by Beerco Limited (Hong Kong) into Vietnam Beverage Company Limited. The deal has the value of contributed capital of USD 3.85 billion with the main goal of brewing beer and malt for brewing beer in Hanoi. 68. Of all 46 countries and territories with investment projects in Vietnam in Q1, the top five countries and territories accounted for 75.6% of total newly registered capital35 (Figure 33). China took the lead in newly registered capital with more than USD 723 million in Q1, 3.5 times higher than the same period of 2018 (USD 205.8 million), accounting for 18.9% of total newly registered capital, followed by Singapore with USD 691 million, accounting for 18.1%. Korea ranked third with USD 547 million, a share of 14.3%.
35 Including capital contribution and share purchase. 28 Figure 33: Foreign investment by country and territory
Source: GSO 69. The increase of China‟s investment in Vietnam Q1 has somewhat shown the shift of Chinese investors to Vietnam amid complicated tension of the US- China trade war. However, in practice, China has increased its investment inflow to Vietnam and become the fourth largest investor in recent years. Nguyen Thi Thanh An (2019) pointed out that China has expanded its investment in Vietnam under various forms and diversified approaches; with an average increase of capital scale, from only USD 1.5 million/project in 2007 to USD 5 million/project in 2017, up by more than 300%. With regard to manufacturing industries, Chinese investors invested significantly in metal processing and textiles and garments (T&G) industries, which accounted for roughly more than half of its investment capital. It is worth noting that China's investment shift into labor-intensive industries in Vietnam (e.g., T&G and metal processing industries) is very likely aimed at taking advantage of opportunities from rules of origin, preferential tariff treatment under the framework of CPTPP and the future EVFTA. In addition, labor-intensive industries are also part of China's roadmap to adjust industry policies. Given such concerns about the possibly prolonged US – China trade tension, we cannot rule out the possibility of an influx of unwanted investment waves from China in the coming time - if Vietnam fails to take appropriate responses. 70. The CPTPP, signed on 14 January 2019, is expected to strongly boost exports to major markets such as Japan, Australia, Canada, etc., thereby creating incentives to attract FDI36, particularly high-quality FDI in sectors and areas to which Vietnam sees the need of development, promoting the development of supporting industries. Moreover, trade diversion may impact to help Vietnam reduce substantial trade deficits with China and South Korea. However, it should be noted that the challenges and competition pressures facing Vietnam as a result of implementing CPTPP are also not insignificant. This is partly
36 As of early Jannuary 2019, the cummulative figure of inward FDI from CPTPP countries attained USD 112 billion, equivalent to 15% of total registered capital (Lac Phong, 2019) 29 reflected by the fact that exports have not yet utilized the potentials of some CPTPP markets (such as Australia) in Q1/2019. 1.5. Trade 71. Exports attained USD 58.86 billion in Q1, increasing by 5.3% (YoY) (Figure 34). Domestic sector exported USD 17.8 billion, up by 10.7%, contributing 3.1 percentage points to overall export growth. FDI sector accounted for USD 41.1 billion, up by 3.1%, contributing 2.2 percentage points to overall export growth. Unlike previous years, export growth of the FDI sector was slowed and lower than domestic sector. 72. Exports encountered some favorable factors in Q1: (i) the continuous reforms of administrative procedures for exports37, simplifying procedures, thereby reducing costs and time for enterprises; (ii) the simultaneous launching of many supporting-export products38, specialized credit packages for major industries such as textiles, footwear, agricultural and fishery products by commercial banks and (iii) the official enforcement of CPTPP, and most of the approved CPTPP members implemented double tax reductions for Vietnam Figure 34: Exports, Imports and Trade Balance, 2013- Q1/2019 Unit: Million USD
Source: General Department of Customs. Note: Exports and imports are shown in the left-hand axis and trade balance is shown on the right-hand axis. 73. However, exports still faced some difficulties in Q1, including: (i) the complexity of trade tensions between the US and its major trading partners (especially China; (ii) the lack of interest in certification of origin (C/O), disadvantages for exporters when there is increase of international prices, as
37 Completing the implementation of 61 new administrative procedures on the National Single Window, preparing to exchange information of ASEAN Customs declarations and electronic C/O with Eurasian Economic Union and Korea, animal and plant quarantine certificates with ASEAN countries. 38 Commercial banks such as SHB, HDBank, TPBank, VPBank, etc.financed export enterprises through letter of credit discount, supported usance payable at sight Letter of credit, help enterprises pay in advance for exporters of raw materials in foreign currency with low interest rates, still allowed up to 360 days of deferred payment, reducing pressure on foreign currency and save costs for enterprises. 30 well as in taking advantage of preferential treatment under various FTAs Vietnam participated; and (iii) the small-scale and scattered production practices made it difficult to meet high standards. 74. 11 products attained export values of over USD 1 billion in Q1/2019, accounting for 75.2% of total export revenue. Telephones and components continued to attain the highest export value of USD 12.1 billion, but down by 3.6% with regard to growth. Some key products had positive growth, such as: textiles and garments, electronics, computers and components, footwear (Table 4). However, FDI sector continued to account for the lion share of major product exports, accounting for 97.1% of telephones and component exports; 90.8% of computers and component exports; and 77.2% of textile exports. 75. Export of many AFF products decreased in Q1: fruits and vegetables (down by 2.1%); coffee (down by 21.9%), rice (down by 17.9%). Only rubber experienced export revenue of USD 458 million, up by 7.8%. Fisheries exports only increased by 1.6%, reaching nearly USD 1.8 billion. Although tariffs have fallen sharply in many markets, Vietnam's agricultural products still face great difficulties in exporting because of limited negotiation for recognition of international standards, food safety and quarantine management. Table 4: Export growth of Vietnam by product category, Q1/2019 Unit: Million USD Export Q1/2018 Q1/2019 Δ growth rate Percentage point (%) Total export 55,902 58,860 2,958 5.29 5.29 Including Textiles 6,441 7,126 685 10.63 1.23 Footwear 3,447 3,932 485 14.06 0.87 Electronics, computers 6,339 7,058 719 11.35 1.29 and components Telephones and 12,591 12,133 -458 -3.64 -0.82 components Machinery and spare parts 3,702 3,979 277 7.48 0.50 Source: General Department of Customs and GSO. 76. In Q1, Vietnam's exports to traditional markets increased, except for China. The US remained the biggest export market of Vietnam with value of USD 13.3 billion, increasing by 28.8%. The EU ranked 2nd (with value of USD 10.2 billion, up by 2.6%). For Chinese market, the export turnover reached USD 7.6 billion, down by 7.7%, the biggest drop was telephones and components 64.7%, vegetables and fruits fell by 6.3% (Table 5). Table 5: Export growth of Vietnam by partners, Q1/2019 Unit: Million USD
Export Q1/2018 Q1/2019 Δ growth rate Percentage point (%)
31 Total 55,902 58,860 2,958 5.29 5.29 EU28 9,969 10,223 254 2.55 0.46 ASEAN 5,928 6,279 351 5.92 0.63 China 8,245 7,610 -635 -7.70 -1.14 Japan 4,335 4,626 291 6.72 0.52 South Korea 4,350 4,628 278 6.39 0.50 USA 10,338 13,317 2,979 28.82 5.33 Canada 605 864 259 42.78 0.46 Mexico 460 497 37 8.03 0.07 Source: General Department of Customs. 77. Although the CPTPP Agreement has only been implemented for nearly 3 months, Vietnamese enterprises have taken advantage of some export opportunities. Export value to Canada reached over USD 864 million in Q1, up by 42.8%, higher than the rate of 2.7% in Q1/2018. In particular, the export of telephones and components to Canada increased by over USD 153 million. For Mexico, the export value reached nearly USD 497 million, up by 8% while reducing by 9.9% in Q1/2018. 78. Exports to Australia decreased by 14.6% in Q1, to some extent, it showed that taking advantage of CPTPP to enter difficult markets was not easy. Therefore, Vietnam needs to consider more thoroughly whether the enterprise can actively meet the standards of foreign markets, or to promulgate regulations to harmonize domestic with foreign standards. Noteworthy, the number of non- tariff measures for Vietnam's exports has increased from 167 in 2015 to 219 in 201839. 79. Imports were USD 57.45 billion in Q1, up by 8%. Imports of domestic sector attained USD 24 billion, increasing by 12.9%, contributing 5.2 percentage points to overall import growth. Imports of FDI sector reached USD 33.45 billion, up by 4.7%, contributing 2.8 percentage points. 80. In Q1, Vietnam had 12 items with individual import values of over USD 1 billion, accounting for 66.8% of total import turnover. Imports of production means and inputs amounted to USD 53.1 billion, up by 8.6% and accounting for 91.6% of total imports (a reduction of 0.3 percentage points). However, of which, imports of telephones and components decreased by 16.6%. Imports of raw materials amounted at USD 27.5 billion, up by 6.9% and accounting for 47.5%. Of which, import of petroleum dropped the most by 45% (Table 6). Imports of consumer products were estimated at USD 4.9 billion, up by 12.5% and accounting for 8.4%.
39 Source: Nguyen Anh Duong et all. (2019). It should be noted for some limitations when interpreting the non-tariff measures. 32 Table 6: Vietnam's import growth by product category, Q1/2019 Unit: Million USD Import Q1/2018 Q1/2019 Δ growth rate Percentage point (%) Total import 53,216 57,449 4,233 7.95 7.95 Including Petroleum 2,230 1,226 -1,004 -45.02 -1.89 Plastic materials 2,127 2,147 20 0.96 0.04 81. Fabric 2,670 2,872 202 7.55 0.38 Iron and Steel 2,194 2,262 68 3.10 0.13 Electronics, computers 10,425 11,788 1,363 13.07 2.56 and components Telephones and 3,342 2,788 -554 -16.58 -1.04 components Machinery and spare 7,577 8,567 990 13.07 1.86 parts Source: General Department of Customs. 82. Notably, the total volume of automobiles imported to Vietnam reached 39,000 units, amounted at more than USD 883 million, increased by 9.5 times in volume and nearly 7.5 times in value as compared to Q1/2018. The average price of imported automobiles in Vietnam decreased significantly. Specifically, the average price of automobile import was VND 412 million/unit in March, lower than the VND 461 million/unit of the beginning of the year. Compared to 2018, the average imported price was about VND 100 million/unit lower. The reason was attributed to: (i) importers mainly bring into Vietnam low-value, small-sized or universal-class automobiles instead of high-price under high-end segment; and (ii) Enterprises met the requirements of automobile import under Decree 116/2017/ND-CP. Figure 35: Imports of automobiles, Figure 36: Imports of automobiles, 2015-2018 Q1/2015- Q1/2019
Source: General Department of Customs and GSO. Note: Import value is shown in the left-hand axis and number of automobiles is shown on the right-hand axis.
33 83. In early 2019, Thailand was the largest automobile export market to Vietnam, accounting for 25,945 units of all kinds. In addition to the import tariff of 0%, it was partly due to the enforcement of Decree 116/2017/ND-CP when the Ministry of Transport approved the quality certificate issued by Thailand, facilitating the first shipments to Vietnam. Indonesia ranked 2nd with 9,053 units. China ranked 3rd with 995 units. Japan, Germany, and the US exported 944, 502, and 375 units respectively. 84. In Q1, Vietnam's imports from all traditional markets increased. China remained the largest source of imports, accounting for 28.3%, up by 18.8%. Of which, the import growth of electronics, computers and components was the fastest, reaching 70.8%. Imports from Korea attained USD 11.45 billion, but decreased by 1.35%, accounting for 20%. ASEAN amounted at USD 7.9 billion, up by 7.5%. The EU was valued at USD 3.4 billion, up by 13.8%. Table 7: Vietnam's import growth by partner, Q1/2019 Unit: Million USD
Import growth Q1/2018 Q1/2019 Δ Percentage point rate (%)
Total 53,216 57,449 4,233 7.95 7.95 EU28 2,998 3,413 415 13.83 0.78 ASEAN 7,375 7,927 552 7.49 1.04 China 13,675 16,240 2,565 18.76 4.82 Japan 4,340 4,272 -68 -1.57 -0.13 South Korea 11,607 11,450 -157 -1.35 -0.29 USA 2,683 3,022 339 12.64 0.64 Source: General Department of Customs. 85. Trade surplus was estimated at USD 1.4 billion in Q1, lower than the same period of 2018 (USD 2.68 billion). Domestic sector incurred trade deficit of USD 6.2 billion, while FDI sector (including crude oil) had trade surplus of USD 7.6 billion. Vietnam continued to achieve the largest trade surplus with the US and EU. On the other hand, Vietnam had the biggest deficit with Korea, followed by China and ASEAN (Figure 37).
34 Figure 37: Trade balance by partner in Q1/2019 Unit: Billion USD
Source: GSO. 86. In the context of increasing trade tensions and prolonged negotiations between the US and China under various scenarios, to some extent, Vietnam had effective measures to respond at both economy and enterprise levels. For example, some Vietnamese shrimp exporters have been temporarily imposed anti-dumping duties of 0% in the US market, or Canada was not imposed safeguard duties on Vietnamese steel. Vietnam also had some dialogues and demonstrated its action on balancing the trade relation with the US. Exports to China have been more difficult to meet standards. The reason may include: (i) China actively restricted imports in the context of trade war; or (ii) China created some barriers for Vietnamese commodities as it has been thought that Vietnam limited Chinese goods "passing through" to export to a third country. 87. In Q1, total retail sales of goods and services were estimated at VND 1,184.9 trillion, up by 12%. Excluding the price factor, the growth was 9%, higher than the rate of 8.6% in Q1/2018. Retail sales of good accounted for the largest proportion (76.8%), attained VND 910.4 trillion and increased by 10.5%. Retail sales of accommodation and catering services was estimated at VND 140 trillion, accounting for 11.8% and increasing by 9.2%. Other services revenues were estimated at VND 123.2 trillion, accounting for 10.4% and up by 5.1% (YoY) (Figure 38).
35 Figure 38: Retail sales of goods and services by activity, Q1/2019 (%)
Source: GSO. 1.6. Budget revenues and expenditures 88. Total budget revenues in Q1 was estimated to reach VND 381 trillion, equal to 27% of 2019 planned figures and higher than that of the same period in 2018 (23.4%). Budget revenues was equivalent to 34.1% GDP. Compared to Q1/2018, budget revenues rose about 23.5% Figure 39: Budget revenues to GDP ratio Unit: %
35 34.1
30 30.1 30.0
27.9 27.1 25.8 25
20
15 I II III IV I II III IV I II III IV I II III IV I II III IV I 2014 2015 2016 2017 2018 2019 Source: Ministry of Finance. 89. By category, domestic revenues attained more than VND 315.4 trillion, accounting for 82.8% of total revenues in Q1 and equal to 25.5% of the planned figures. Revenues from crude oil was VND 12.3 trillion, a share of 3.2% of budget revenues and 27.5% of planned figure. Notably, revenues from export and import achieved VND 53 trillion, equal to 13.9% of total budget revenues and 42.1% of the planned figures. Revenues from export and import grew 26.1% in Q1, which partially contributed to the slowing down of export- import growth.
36 Figure 40: Structure of budget revenues Unit: %
Source: Ministry of Finance. 90. Budget expenditures attained at VND 315.6 trillion in Q1, equivalent to 19.3% of 2019 planned figures and increased 8.8% (YoY). Of which, recurrent expenditures reached VND 268.9 trillion, equal to 26.9% of the planned figures; Expenditures for development investment was VND 46.7 trillion, amounted to 10.9% of the planned figures. These figures were consistent with the results of the last few quarters where the proportion of recurrent expenditure tended to decrease and expenditures for investment to increase (Figure 41). Despite the slowing down of recurrent expenditure and the significant improvement of investment expenditure, the scale of investment development was still small. Moreover, interest payment amounted at VND 30.8 trillion, equal to 11.4% of recurrent expenditure and 9.7% of total expenditures. Obviously, it is essential for Vietnam to further improve the efficiency of state budget expenditures. Figure 41: Structure of State budget expenditure Unit: %
Source: Ministry of Finance. 91. Government bonds (GBs) issuance in Q1 reached VND 69.5 trillion, higher than that of Q1/2017 and Q1/2018. The amount of GBs issuance in Q1 was equivalent to 34.75% of the planned figure in 2019 (VND 200 trillion)
37 Figure 42: Government bonds issuance, 2012-2019
160,000 Tỷ đồng 140,000 120,000 100,000 80,000 69,468 60,000 48,037 47,180 30,359 40,000 20,000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2012 2013 2014 2015 2016 2017 2018 2019
Source: HNX. 92. Interest rate on successful bids of GBs (5-years term to maturity) ranged from 3.63% to 3.82% per annum in Q1. Compared to Q4/2018, the interest range was almost similar (4.02%-4.2% per annum). Although the GBs issuance in Q1 was higher than the same period of previous years, it did not put pressure on the liquidity of commercial banks thanks to the SBV‟s management coordination. Figure 43: Interest rate on successful bids of Government bonds with 5-year terms to maturity (%/p.a)
14 %/năm
12
10
8
6
4
2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2012 2013 2014 2015 2016 2017 2018 2019
Source: HNX. 93. The recent fiscal policy management witnessed some positive achievements. First, the coordination between fiscal policies and other macroeconomic policies, particularly with monetary policies, showed its effectiveness and significantly improved. Second, the state budget restructuring has resulted in more balance and sustainable of budget. Third, fiscal administration, to some extent, had taken into account public consultation and became more flexible; notably, the reduction in GBs issuance target in Q4/2018 and the withdrawal of the proposal to raise environment tax on gasoline in March 2019. 94. Fiscal policy administration still faced some difficulties and challenges. First, the efficiency of utilizing public capital in general and state budget capital in particular were slowly improved. In which, in spite of improvement, GBs
38 disbursement was still more sluggish than requirement. Second, harmonizing between state budget discipline and prevention of the “fear of responsibility” in making decisions to utilize investment capital from state budget was not easy. Third, preventing the erosion of tax base and price transferring was necessary, however, it needed more thorough consideration to avoid regulations only be applied on domestic enterprises. Fourth, tax policies was harmonized slowly as compared to other countries, especially with regards to development of digital economy. Finally, regulations on preferential tariffs under CPTPP and other related issues have not yet been issued in Q1/2019. 2. Macroeconomic outlook 95. A forecast scenario is updated for Vietnam in 2019, basing on assessment of global economic recovery and domestic economic movement. Accordingly, GDP growth in partner countries is projected at 3.9%40. US inflation may reach 2.0%.41 Export prices of agricultural products may grow by 2.1%.42 Export prices of crude oil may reduce by 7.2%.43 For Vietnam, the central VND/USD exchange rate is increased by 2%. Total liquidity increases by 13%. Outstanding credit increases by 14%. Import prices increases by 2%. Population increases by 1.08%/year and employment by 0.86%. The export volume of crude oil is assumed to be similar to that of 2018. REER is assumed to decrease by 1%. On the balance of payments, Government and (net) private transfers are assumed to decrease by 10% and increase by 5% respectively. The implemented capital of FDI (including both Vietnam and foreign side) increases by 5%. Investment from State budget will be supplemented VND 423.9 billion. 96. Economic growth in 2019 is projected at 6.88% (Table 8). Export growth may reach 9.02%. Trade surplus is projected at USD 3.1 billion. Average CPI in 2018 will increase by approximately 3.71%. Table 8: Projection of macroeconomic indicators in 2019 Unit: %
GDP growth 6.88 Inflation (average CPI) 3.71 Export growth 9.02 Trade balance (bil. USD) 3.1 Source: CIEM‟s projection from its macroeconometric model. 97. Macroeconomic developments in Q2-Q4/2019 may be subjected to several factors. First, the increasing risk of recession for US economy has been mentioned. The survey in February of Wall Street Journal showed that the
40 According to IMF (April 2019), with global forecast of 3.9%. 41 Source: https://knoema.com/kyaewad/us-inflation-forecast-2019-2020-and-up-to-2060-data- and-charts [Accessed on 31 March 2019]. 42 EIU forecast (March 2019). 43 EIU forecast (March 2019). 39 probability of recession in 2019, 2020 and 2021 in the US was 24.53 %, 45.7% and 39.1% respectively. Accordingly, the roadmap of adjusting interest rates of may be considered more prudential. Reuters survey during 11-14 March perceived that 55% of respondents expected FED to raise interest rates at least once before Q4 (while the previous survey showed a consensus of raise interest rates in Q2). Second, trade tension in the area is difficult to cool down. US- China trade tension and negotiations are still unpredictable. China can concede some contents of negotiation, but achievements can hardly push back the disagreement between the two parties on trade policies. The US may also increase trade tension with other economies (for example, Japan). Third, despite high expectations for ratifying EVFTA, Vietnam should also be aware that the EU is very busy with the trade agenda (related to Brexit, trade negotiations with the US). The EU itself has ratified the FTA with Japan in Q1, so the need for early approval of another FTA may be reduced. Fourth, Vietnam's exports may face more technical barriers in foreign markets, including CPTPP market. Fifth, international financial market can also react quickly and excessively to unfavorable conditions, especially with regards to geopolitical issues, etc., thus affecting investor psychology and inflows/outflows to Vietnam.
40 III. SELECTED ECONOMIC ISSUES 1. National Innovation Center: Expectations, specific mechanisms and requirements. 98. Vietnam has achieved remarkable economic development in the last 30 years. However, the gap of Vietnam‟s per capita income has been widened as compared to other countries in the region, such as Singapore and Malaysia. This reality shows that Vietnam can hardly grow faster under the horizontal model combined with international integration to catch up soon with other countries in the region. 99. Under such situation, the Government has promulgated lots of policies on reforming economic growth models, including policies on developing the startup of innovative ecosystem, boosting the establishment of innovative start- up businesses with high growth potential, with export-oriented products and services.44 This is an important policy direction for Vietnam's economy to transform from a horizontal growth model to deeper growth model based on science, technology and innovation. 100. The world is at initial stage of Industrial Revolution 4.0 (IR 4.0).45 Countries are racing to apply advanced technologies to transform their production, to improve productivity and competitiveness, and to develop new technology solutions on the basis of core technologies.46 The IR4.0 has been creating great opportunities for countries to take advantage, and at the same time pushing backward and slow countries back to lower position in the global value chain. In this race, many countries have been building innovation centers (IC) to promote their domestic innovation47. 101. In Vietnam, some innovative-supporting facilities have been established. However, it can be said that we do not yet have a proper IC complied with international best practice (Figure 44). Specifically, our innovative-supporting facilities have not fully assembled all elements of innovative ecosystem. High-technology zones only focus on attracting
44 Resolution 27/NQ-CP on the Government's Action Plan implementing Resolution 05-NQ/TW dated November 1, 2016 of the Fourth Congress of the 12th Central Party Committee on some orientation and major policies for renovating the growth model, improving quality of growth, labor productivity, an competitiveness of the economy and Resolution 24/2016/QH14 dated November 8, 2016 of the National Assembly on the economic restructuring plan for 2016-2020. 45 Schwab, Klaus. 2016. The Fourth Industrial Revolution. 46 Such as internet of things, artificial intelligence, big data, layer fabrication, virtual reality, blockchain, cloud computing. 47 Innovation centers have appeared for a long time in developed countries (United States, Germany, the United Kingdom, Northern European countries, Japan, Korea, etc.). Recently, many countries have established new ICs to develop new technologies. A typical example is that China establishes 15 ICs in 2020 and 40 ICs in 2025 according to "Made in China 2025" Plan. ASEAN countries are also making efforts to establish ICs, for example: Thailand established True Digital Park in Bangkok in 2018; Singapore is developing its Silicon Valley area at Punggol (called Punggol Digital District, expected to be completed in 2023) after successfully building One-North innovation zone (since 2001); Newly established Asia Center of Excellence for Smart Technologies in Malaysia in 2018; Indonesia established the Census Center to create Block 71 in Jakarta in 2017. 41 investment (mainly FDI) into software fabricating and manufacturing (without any specific products and services related to IR4.0). Some big technology corporations have invested in high-technology zones, but not yet created any significant technological diffusion for the economy.48 Meanwhile, innovative- supporting facilities for start-ups have been at small scale, mainly provide some basic supports for creative start-ups; lack of necessary facilities and connection with different investment funds and large companies, and lack of appropriate superior institutions to create impacts on a large scale. They do not have enough financial, technological sources, governance and other supporting factors to create a-strong-enough ecosystem that can support creative start- ups. As a result, Vietnam's innovative startup ecosystems have not yet been listed in any of the global ranking.49 In the last ten years, Vietnam‟s innovative supporting facilities have not created a company worth over USD 1 billion.50 Many start-up entrepreneurs have switched to Singapore to complete their innovative products and deploy their business models.51 Figure 44: Assessment of existing innovative facilities
Source: BCG.
48 Intel assembles computer chips in the Ho Chi Minh City High-Tech Park (SHTP); but only with the nature of assembling an manufacturing for serving world market. The current Hoa Lac High-Tech Park mainly attracts software firms, producing some telecommunications equipments, aircraft engine components, and there is no real enterprise with innovative and special products and services representing for IR 4.0. Furthermore, Intel's assembling of computer chips or Samsung‟s assembling of smart phones in Vietnam has not yet created any significant technological spillover for Vietnam‟s economy. 49 The ranking of Report on 2018 Global Startup Ecosystem of the Startup have listed the name of ecosystem of Beijing, Kuala Lumpur, and Manila but have not considered the ranking of any ecosystem in Vietnam. 50 VNG is considered as billion-dollar technology company in Vietnam but it has not grown from any ecosystem and was founded in 2004. Meanwhile, Singapore has Grab, SEA, Razer; Malaysia has Lazada; Indonesia has Go Jek, Tokopedia, Traveloka, Bukalapak; The Philippines has a Precrafted Revolution (worth over USD 1 billion in 2 years). 51 For example, Tomochain Company (Blockchain technology) and Luxstay Company (room for rent). 42 102. To realize the development opportunities from IR4.0 and to put innovation as a driving force for economic growth, contributing to successful transformation of growth model, gradually moving the country to innovation-driven stage52, it is essential to establish IC complied with popular international standards, moving towards to the formulation of innovative network at high level of development. International experiences 103. IR4.0 is happening with superior technologies and the application of revolution has been still quite new to most of nations. In this context, it is critical for both developed and developing countries to establish and develop a favorable environment for supporting research and application of technologies. 104. Many countries have established network of ICs to connect various ICs within their countries; of which each IC has its own conditions and infrastructure, contributing to favorable ecosystem for businesses to develop and achieve breakthrough achievements. One of benefits brought by the model is that enterprises sharing same area and favorable conditions can enjoy economies of scale. The essential inputs for starting up a business include infrastructure, accounting and legal services, logistics and human capital. Enterprises in same geographic area can share fixed costs related to these resources. It can be more important when start-up businesses create jobs more quickly and directly and contribute positively to diversifying economic activities rather than developed enterprises. Start-up businesses can take advantage of new opportunities from technology, and creating more value-added than developed businesses. Governments set up innovation centers with a view to boost the quality of start- ups - those that directly facilitate environment to develop sharing economy and digitalized workforce capacity, provide consulting services, support cooperation between research and training institutes and enterprises, demonstrate applications of IR4.0, publish IR4.0 use-cases and support the development of IR4.0 ecosystems at provincial and national level. 105. In each country, the network of ICs and start-up ecosystems are formed and developed differently, but they share common characteristics. Specifically, each IC aims at gathering resources for specialized development within its efforts of maximizing operational efficiency. It is often funded by the government and private sector, which means that both government and private sector manage the IC. In addition, another important feature is that these ICs set up network with international partners to assist enterprise to access new markets. South Korea 106. Since September 2015, the Korean Government set up 17 Regional Center for Creative Economy & Innovation (CCEI, with 18 local offices) to support innovative start-up businesses in the field of Information Technology -
52 The World Economic Forum (WEF) considers Vietnam's economy as at innitial stage of efficiency- driven process, not innovation-driven (2017-2018 Report on Global Competitiveness Index of WEF). WEF's report on Future Production Readiness ranks Vietnam as nascent group, meaning low level of readiness, of which the Technology and Innovation Index attained 3.09/10, ranked 90 out of 100 countries. 43 Communications and IR4.0. These centers support startups to connect with Korean conglomerates as well as regional corporations. This initiative expressed the determination to promote economic development in the direction of creation and innovation of Korean Government. It can also be a proof for the support of government in developing start-up ecosystems and creating more jobs through the forming of new industries. CCEI centers are considered as the foundation of creative startups established in provinces of Korea. These centers provide consulting and comprehensive services for enterprises to develop advanced technologies, such as office leasing, investment support, and international business expansion. The operation of these centers based on intensive knowledge and expertise with simple investment and cooperation mechanisms (even for foreign investors). Thus, they create favorable conditions for start-ups to access modern facilities and equipment and be effectively supported in all business activities, from design to export of products. CCEI centers identify the demand of start-ups and offer consulting services. In addition, these centers also employ financial, legal and patent experts to provide professional advisory services when there is demand during operations. Being as public employment introduction center, CCEI bring market new human resource needs for startups and strategic businesses. These centers hold small-scale job fairs and conduct training for new local business leaders. Other components of the ecosystem formed around CCEI centers include technology parks, design centers, industrial complexity, research institutions and colleges/universities. 107. Each CCEI administers a direct supporting system for each partner based on its cooperation with local/central governments and large corporations. Each center is a non-profit unit, being selected from affiliated or cooperated organizations of state agencies, economic organizations, colleges/universities, research institutes, etc, with consultation of the Korean Minister of Science, Communication and Future Planning, managers of big corporations, city mayors or governors. The CCEI model focuses on supporting specialized area via linking with local government with large corporation that has advantage of being local leader. Each big corporation such as Lotte, LG, Hyundai Motor, Samsung and SK are invited to participate in one of 17 centers, focusing on their area of expertise. The center in Daegu, for example, receives support from Samsung – a corporation proposed by the Government as connectors of electronic industry. Similarly, Hyundai Motor Corporation is assigned to join another center in Gwangju city, located in the south-western part of the country, as connector of new energy vehicles. The model enables start-ups and and small and medium enterprises to access investment capital, advanced technology, marketing activities and even M&A based on taking advantage of big corporations. Each center focuses on supporting projects within its location through using abundant resources and experience of large corporation. In addition, start-ups and small and medium enterprises can also access global network to contact overseas partners. This global network also serves as focal point for foreign start-ups to access Korean market. Many global organizations participated in the program through some certain CCEI centers (such as
44 Knowledge and Innovation Communities (KIC) Beijing, United States KIC, European KIC, Moscow KIC). This initiative is also complemented by close cooperation with state and private-funded innovation organizations in other countries such as the UK's Digital Catapults Center, NTT Docomo venture capital funds of Japan. Thanks to the support of the government, start-up businesses have not only operated successfully in the territory of Korea but also expanded to the world. Recently, the number of Korean star-tups engaged in partnership with venture capital funds, start-up incubators and investors through global corporation networks – affiliates of CCEI, has skyrocketed. 108. By December 2017, more than 2,600 start-ups participated in the program, thus, some enterprises significantly improved quality of products. The supports of both state and private sector enable CCEI centers support their members amount of USD 1.8 billion under the form of investments, guarantees and loans, thus attracting nearly USD 7 billion of investment in innovative and creative activities of start-ups and small and medium enterprises. 109. In general, the jointly mechanism of state and private sector in investing and administering the Center for promoting economic initiatives and innovation has created opportunities for Korean enterprises to effectively carry out research and successfully establish business models based on the application of technological advancement. Each regional center is managed by local government and a large enterprise. These centers attract investments and have outstanding development networks and actively work to build international partner networks; thus, they can support members to access new markets and to share information of Korean market with foreign companies. China 110. China supports its innovative ecosystem by setting up its own network of innovation centers of manufacturing industry, Center for national technology innovation and the network of demonstration zones for innovative ideas. National network of innovation centers of manufacturing industry 111. The Chinese government considers development of national innovation as an important mechanism to promote nation-wide innovation, creation and start-up. Accordingly, under "Made in China 2025" plan, the Government planed to set up national network of manufacturing innovation centers (with the target of 15 centers by 2020 and 40 centers by 2025). Each centers focus on one industry or one area. The network of ICs serve as focal point to support multi-sector research and development between companies, academic institutes and government, to apply IR4.0 technologies – which enable China‟s leading position of manufacturing industry. This network helps improve the innovative capacity and efficiency of domestic manufacturing enterprises, creating leaps of breakthroughs, incubating global leadership and talents in technological industry as well as increase the number of potentially commercial studies in China. 112. So far, China has established 5 centers, majority are advanced technologies and information technology such as batteries (in Beijing), layer fabrication (in
45 Xi'an), information and opto-electronics (in Wuhan), robots (in Shenyang), flexible printing and screens (in Guangdong). Two national ICs of manufacturing with focus on integrated circuit and smart touch have been approved for construction in Shanghai in 5/2018. After the operation of these two centers, there will be a total of 7 ICs in China. 113. For example, the National Additive Manufacturing Institute, founded in 2016, is the first manufacturing IC established in China. This IC has involved the participation of 5 universities and 13 enterprises of different industries of additive manufacturing such as components, materials, machinery and software development. This center prioritizes the discovery of common, essential technologies that benefit entire ecosystem - including the development of materials, software, key equipment and components. Non-member enterprises and industrial technology innovation corporations also participate in the center's activities to motivate the commercialization of research results. The Chinese government pledged to donate 200 million yuan to build the center, in addition to funding from provincial government and industrial enterprises. The government also supports the supply of workforce through encouraging talents package (i.e. the plan of thousands of talents53). 114. Another example is the National Integrated Circuit Innovation Center that will be built in Zhanjiang High-Tech Park in Shanghai's new Pudong area. This technology zone attracts over 200 famous Chinese and foreign integrated circuit enterprises. The center will be built by Fudan University and two of China's leading integrated circuit manufacturers, SMIC and Huahong Group. Main fields of the center include research and development of microchips with dimensions of 5 nanometers or smaller as well as advanced technologies such as EUV ultraviolet printing, simulation, advanced integrated techniques, object linking and embedding for process control (OPC). Big Chinese integrated circuit corporations will also cooperate with the center to contribute to research and development of the industry; provide technical assistance, talents, intellectual property protection, technology upgrading and construction of large-scale production lines in the future. 115. In addition to national ICs, China is also supporting the development of 48 provincial manufacturing ICs. These national and provincial centers have formed the network of manufacturing innovation system in which national centers play a key role with significant support from provincial centers. National technology ICs 116. In addition to manufacturing ICs, the Chinese government has also set up two technology ICs, of which one IC involved new-energy means of transport (not using traditional fuels, such as electric vehicles and gasoline-electric vehicles) and another IC for high-speed rail transport. 117. The national center for technological innovation of means of transport using new energy was established in Beijing by the Ministry of Science and Technology and the Beijing government. The center consists of 21 China‟s
53 http://www.1000plan.org/en/ 46 leading units in production, research and development of new energy-use vehicles, including Baidu, Tsinghua University, BAIC Group of Beijing, Geely, BYD. Funding of the ministry and central government will be provided to the center for testing, technology research and incubating services. National independent innovation demonstration zone 118. National independent innovation demonstration zone was established by the Chinese government to implement pilot programs, gain experiences, demonstrate independent creative activities and develop high-tech industries. Since 2014, the Chinese Government has planned to promote the replication of pilot programs in Zhongguancun to other regions as well as to speed up the establishment of national innovation zones. As a result, national innovation zones have been established throughout the country. By the end of 2017, the Chinese government has approved the establishment of 17 such demonstration zones in localities from the coastal city of Shenzhen to Chengdu. These 17 national innovation demonstration zones were selected by the Chinese government and allowed to adopt favorable policies as well as incentive mechanisms to promote innovation and regional economic growth on the basis of exploiting its strengths and geographical advantages. 119. Under the model of innovation demonstration zone, cities/city clusters can choose to register for participation when setting up the demonstration zone so as to ensure the inclusion of leading industries with creative businesses, surrounded by academics and talents, adopting flexible micro-policies and having favorable business environment. The government allows the employment of preferential policies, thus demonstration zones can lead the country in the fields of technology transfer, technology development grants and incentive mechanisms sharings. With such measures, demonstration zones are leaders of implementing relevant technology policies, depending on the testing ability and policy initiatives. These demonstration zones are expected to be at the top of developing creative activities and reforming science and technology system. It is also a place to gather new industries. Through the revising of appropriate innovation management mechanism, these demonstration zones have discovered suitable development manner. All of these activities have avoided the same development of demonstration zones so as to increase resource efficiency, to improve the effectiveness of innovation policies, and to enhance independent innovation capacity in Chinese economy Singapore 120. Singapore has established JTC LaunchPad@one-north and recently finalized an JTC LaunchPad@Jurong innovation district to provide industrial space and supporting services for start-up businesses and qualified incubators. 121. Located in an area of 6.5ha, the JTC LaunchPad@one-north zone provides start-up businesses effective environment and favorable ecosystem. With a central location of One-north area, the start-ups in JTC LaunchPad@one-north zone have advantage of being nearer to multi-disciplinary research and development environment, including knowledge-based enterprises, research
47 institutions, colleges/universities - leading institutions of innovation such as the INSEAD program of MBA, Lucasfilm science area, National University of Singapore, Singapore Polytechnic University. JTC Launchpad@one-north includes block 71, 73 and 79 with many start-ups and accompanied support services such as legal consulting and investment services. It is worth noting that block 71 has about 100 start-up enterprises, including venture capital funds, incubators, start-ups in technology, video game development companies with investment capital of over 670 million Euro. 122. Located in the clean technology zone of Juron Innovation District, JTC LaunchPad@JID zone focuses on supporting start-up businesses in the areas of clean technology, advanced manufacturing. With the location of neighboring to Nanyang Technological University, research institutes and networks of enterprises, start-ups in JTC LaunchPad@JID zone can work closely with the mentioned partners, enjoying overall growth and promoting commercialization of new technologies. JTC LaunchPad@JID creates a favorable environment for companies to test innovation initiatives and to share ideas through the use of common facilities such as a trial factory. 123. In addition, ACE International Center - a one-stop center opened in September 2017 in the JTC LaunchPad@one-north zone offers access to resources and consulting services for start-ups and connects them to foreign markets as well as assisting foreign start-ups to access to technology, investment information and market opportunities in Singapore.. Thailand 124. Since the beginning of 2018, National Innovation Agency (NIA) of Thailand launched a policy to build 15 pilot sites for innovations, such as Yothi Medical Innovation District54. In response to technology development policies of the Government of Thailand, the True Group has invested in the construction of True Digital Park55, located in the NIA's Punnawithi Innovation Zone in Bangkok. True Digital Park is a complex consisting of a number of high-rise buildings with 77,000 m2 of floor space, creating a creative work space for large enterprises and SMEs, start-up groups, investors, researchers, and universities. The objective of True Digital Park is to create a complete ecosystem with the participation of all stakeholders, especially large technology companies in the world. Thereby, True Digital Park can contribute to making Thailand as global center for digital innovation. Up to now, 80% of True Digital Park area has been registered for use by start-ups and enterprises. 90 start-ups received funding with amount of up to USD 280 million. True Digital Park received the cooperation of major partners like Google (Google Learning Center). France
54 https://www.bangkokpost.com/business/news/1552962/nia-plots-strategic-innovation-nation 55 https://www.truedigitalpark.com/ 48 125. Under the trend of investing and encouraging technology enterprises, the French government established Station F in 201656. Station F was the largest innovation center in the world (366,000 m2) founded in Paris by French billionaire Xavier Niel, who invested 250 million Euro for Station F. This center started receiving start-ups and enterprises since December 2016 and announced their official operation from June 2017. At this moment, Station F has about 1,000 start-ups and enterprises from all over the world. In 2017, Station F's startups and enterprises attracted USD 250 million of investment. Station F received enthusiastic support from the French government and Paris authorities. Station F investors are assisted quickly with the establishment procedures and operation. Business registration decreases from 6 months to 1 week. In addition, enterprises established in Station F also enjoy other preferential treatment. Estonia 126. Estonia is famous for e-government and recently, Estonia has boosted research and development of technologies for smart cities. Estonian smart city center57 invested by the state budget and the EU Regional Development Fund in 2015. The center has supporting programs for start-ups in developing smart city solutions. It has support the development of more than 50 good solutions that can be exportable. With the goal of becoming a developed and exporting zone of smart city solutions by 2020, the center is supported by Estonian Government through the investment of connecting infrastructure, data, and minimum of 1-month piloting for enterprises to finalize their products. Vietnam National Innovation Center: Expectations, specific mechanisms and requirements Establishment of National Innovation Center (NIC) 127. Recognizing the important role of NICs in science and technology development, innovation and economics, the Government assigned the Ministry of Planning and Investment to develop a proposal on the establishment of NIC (under Resolution 02/NQ-CP dated 1 January 2019 of the Government). Currently, the Ministry of Planning and Investment is actively implementing this Project (referred to as Center or NIC). 128. It is expected that NIC will be located in Hoa Lac High-Tech zone. Although Hoa Lac High-Tech zone has not yet developed as expected, the zone has had supporting elements for NICs, such as FPT University, V-KIST Institute, Vietnam-Japan University, Hanoi National University, major technology corporations such as Viettel Group, VNPT Group, CMC, Vinsmart, etc. Besides, NIC office is located in appropriate area in the center of Hanoi to soon finalize the management model and strengthen its connections with universities, research institutes, talents and enterprise while waiting for the construction of the headquarters in Hoa Lac High-Tech Zone.
56 https://stationf.co/ 57Estonia Smart City Hub (http://smartcitylab.eu/ and https://investinestonia.com/business- opportunities/smart-cities/) 49 Expectation 129. NIC is developed with targets and expectations of becoming a large-scale, high quality innovative ecosystem, which promotes national innovative ecosystem. The establishment of NIC aims at supporting the capacity to receive and to apply technology, especially technology of IR 4.0, for Vietnamese enterprises, to improve research and development and innovation capacity at national level; contributing to the implementation of the national strategy IR4.0. 130. As a national center, NIC will connect, support and collaborate with innovative-supporting facilities and develop existing technologies, forming system of innovation in the nationwide; thus, contribute to the development and upgrading of technological capacity. NIC will organize and carry out research and development, innovation and technology transfer. The ultimate purpose of NIC is to improve technological capacity and innovation of enterprises and the economy as a whole, contributing to the improvement of labor productivity and national competitiveness, leading Vietnam to the growth path of upper middle income country. 131. Major functions and tasks of NIC include: Promoting technology transfer via: introduction and demonstration of new technologies, especially IR4.0-technology; connecting technology providers with domestic enterprises, especially small and medium enterprises; providing technology transfer and supporting services for technology acquisition and application, especially IR-4.0 technologies for small and medium enterprises. Promoting research and development, creative innovation and start-up via: developing a complete ecosystem, creating the most favorable environment for enterprises; providing creative start-up facilities, technology research and development, including laboratories, trial workshops, simulation equipment, etc. Being a place for testing superior policies and institutions; creating facilitating regulatory environment to attract talents, investment in creative innovation, to encourage and support creative research and development and start up enterprises in the context of IR4.0. Investing and funding for innovative start-up enterprises; promoting the process of developing innovative technologies, products and services. Specific mechanism and requirements A complete ecosystem 132. International experiences show that to have a successful NIC, it is critical to involved necessary components of creative ecosystem as shown in Figure 45 below.
50 Figure 45: Necessary components of innovative ecosystem
Source: BCG. 133. In this ecosystem, the government plays a decisive role. The government creates institutions, favorable business environment to attract the rest of the ecosystem. Government participation can accelerate or slow down the revolution of the ecosystem. The government not only facilitates investment and business procedures, and reduces business costs, but also supports stakeholders by allowing them to deploy new products, services, and business models. 134. Universities and research institutes provide necessary human resources for the ecosystem. At the same time, universities and research institutes also provide technologies and ideas for developing technology for ecosystems. Start-up enterprises are the direct force creating technologies, products and services. They are the main subjects of the ecosystem but they still need support from the rest of the ecosystem. Domestic and international technology companies both contribute to and benefit from the ecosystem. They can provide research facilities, order researches, support trainings, provide consulting services for start-ups and/or even technology start-ups. They are also buyers of technologies and recruitment of human resources from the ecosystem. 135. Incubators and accelerators are integral parts of the ecosystem. On one hand, these companies support and provide trainings and tutor for start-ups; on the other hand, they invest in start-ups. Silicon Valley, California, United States is the most successful innovation ecosystem in the world and there are many
51 successful incubators, for example Y Combinator, 500 Startups, Plug and Play.58 136. Innovation is risky and needs funding from non-traditional channels. Therefore, it is necessary to have appropriate investors, especially venture capital funds and angel investors for ecosystem. Large technology companies are also a great source of investment for innovation.59 A specific mechanism 137. The current technological-economic competition requires countries, especially latecomers like Vietnam, to have a specific mechanism, which is different from previous ones, to compete with advanced countries to attract quality stakeholders of the ecosystem. Specific mechanisms can be divided into two groups: (i) incentives, encouragement mechanism and institutions to attract investment; (ii) special, different and high quality coordination apparatus. 138. International best practices show that countries have strong incentives to attract talents, start-ups and domestic and international enterprises. Incentives include low office rental costs, low corporate income taxes and low personal income taxes, research grants, etc. Special institutions often include simple administrative procedures, fully freedom environment in a clear regulatory sandbox. 139. ICs and ecosystems require special coordination and support mechanisms with direct or indirect involvement of the state. In the context of Vietnam, the apparatus may be established by the state and have flexible and effective operation mechanism like private enterprise. It requires the involvement of state in designing new and special administrative and operational mechanism, not in accordance with existing regulations for public agencies. Specifically, when the Government established NIC, it is necessary to have a completely self-financing unit operated under market mechanism, particularly recruiting good managers with adequate salary. This non-business unit must mobilize funding from private sector to minimize its dependence on the approval of through state budget and expenditure constraints regulated. Infrastructure platform 140. In addition, to develop the ecosystem, it required a developed infrastructure platform. The infrastructure includes both technical and socio-economic infrastructure. High-speed broadband connection is an essential condition. Traffic connections with city center and international airport are also required. Living conditions, such as housing, health care and education system, leisure and entertainment, and shopping are also essential to attract human resources for the ecosystem.
58 According to Forbes (2018), see more at https://www.forbes.com/sites/alejandrocremades/2018/08/07/top-10-startup-accelerators-based-on- successful-exits/#3f0065a24b3b 59 For example, Google owns Google Ventures with USD 2.4 billion of capital and aims to invest USD 500 million/year (Wired page, https://www.wired.co.uk/article/google-ventures-gv-venture-capitalism- investment) 52 141. Currently, science, technology and creative innovation play the leading motivation for growth and development. Developing ICs is a tool employed by many countries to promote science, technology and creative innovation. ICs are to form and develop innovative ecosystems, to create new technologies and enterprises, to be growth engines for industries and sectors, especially under the IR4.0 context. Vietnam has begun to test this model through the development of NIC. International experiences show that for NIC to succeed, it is necessary to employ preferential treatment and special incentives and institutions to attract, develop essential elements of a successful ecosystem. It is also necessary to have new and different coordination scheme to effectively coordinate and operate the ecosystem. Under the context of Vietnam, strong and continuous support with involvement of ministries, agencies are crucial for the success of new policy initiatives. 2. Equitization of state-owned enterprises: Implementation and practical issues Plan and roadmap to 2020 142. Based on the 5-year national plan of finance during 2016-202060, the criteria for classification of SOEs61 and the Project of restructuring SOEs during 2016- 202062, the Prime Minister has issued list of SOEs to be equitized in 2017-2020 and list of enterprises to be divested in 2017-202063, which clearly identifies the roadmap for each year: Equitizing 126 SOEs in 2017, 2018 and 2019 (including 44 SOEs in 2017, 64 SOEs in 2018, and 18 SOEs in 2019 and, in addition, 1 SOE in 2020), excluding the number of enterprises not yet finalizing the equitization plan prior to 2017. Divesting state capital shares in 406 enterprises during 2017-2020 (including 135 enterprises in 2017, 181 enterprises in 2018, 62 enterprises in 2019, and 28 enterprises in 2020), excluding the number of enterprises not yet finalizing divestment plan prior to 2017. On the budget revenue, Resolution 25/2016/QH14 of the National Assembly set out a target of VND 250 trillion from divesting state capital for development and investment expenditure during 2016-2020. Achievements of 2017-2018, challenges for 2019 and the fulfilment of target by 2020 143. In 2017, 69 enterprises were equitized with total value of VND 366,880 billion, of which real value of state capital amounted at VND 160,798 billion. State capital divestment attained VND 8,915 billion, gaining VND 139,385 billion; of which, the divestment of state capital was nearly VND 110,000 billion and
60 Resolution 25/2016/QH14 of the National Assembly. 61 Decision 58/2016/QD-TTg of the Prime Minister. 62 Decision 707/QD-TTg of the Prime Minister 63 Offical document 991/ TTg-DMDN dated July 10, 2017 and Decision No. 1232 / QD-TTg dated August 17, 2017 53 VND 8,990 billion for the cases of Sabeco and Vinamilk respectively. In 2017, some VND 60,000 billion was transferred from the supporting fund for enterprise arrangement and development to state budget. 144. In 2018, 32 SOEs got approval of equitization plans; another 30 enterprises was IPO and divest to strategic shareholders, achieving VND 24,250.04 billion; the divestment of state capital in industries where not necessary hold by state was VND 18,054 billion, 2.4 times higher than the book value. 145. Preliminary summary for the implementation of first 3 years during 2016-2020 showed that 156 enterprises were equitized. Total revenue from equitization and divestment reached VND 212,304 billion, 2.71 times higher than that of 2011-2015; another VND 155,000/250,000 billion was transferred to state budget, achieving 62% of planned target set by the National Assembly for 2016-2020. 146. However, enterprises recognized as equitization in the last 2 years were mainly in the list of previous period. Under which, of all 108 enterprises which should have equitized in 2017-2018, listed out in Document 991/TTg-DMDN of the Prime Minister, 77 enterprises were not approved for their equitization plan (accounting for 71%) by February 2019. 147. Most ministries, agencies and provinces have not completed the approved plan. 2 out of 6 listed-out enterprises was approved for equitization in 2017-2018 for Ministry of Industry and Trade, 2 out of 4 for Ministry of Construction; 1 out of 5 for Hanoi and 0 out of 39 for City Ho Chi Minh in the 2018 equitization plan. 148. The equitization result in 2017-2018 put a pressure and challenge to equitize 95 SOEs in 2019 instead of 18 enterprises to complete the approved plan under Document 991/TTg-DMDN of the Prime Minister. It is reasonable to have concern about this challenge in 2019, particularly the list of equitized enterprises include big corporation and large-scale SOEs such as Vietnam National Coal - Mineral Industries Holding Corporation Limited (TKV), Vietnam National Chemical Group (Vinachem), Posts and Telecommunications Group (VNPT), Vietnam Bank for Agriculture and Rural Development Bank (Agribank), National Tobacco Corporation (Vinataba), Power Generation Corporation 1, Power Generation Corporation 2, Vietnam Northern Food Corporation (Vinafood 1), and MobiFone. 149. In this context, it is quite concern about the completion of the approved plan under document 991/TTg-DMDN of the Prime Minister. 150. Ministries, agencies and provinces have proposed the re-approval of roadmap based on the principle of transferring the planned enterprises in 2017-2018 (and 2019) to be equitized by the end of 2020 (instead of equitizing only 1 enterprise under document 991/TTg-DMDN). However, even in the case of achieving target number of equitized enterprises by the end of 2020, other important objectives are still difficult to achieve, such as the reduction of state ownership to the regulated floor level, or attracting private investment, etc.
54 151. In general, if equitization process cannot attract social investment and the State continues to maintain its investment capital, it will not change the allocation of resources among economic actors, and thus, will not meet the targets and requirements of economic restructuring plan. Practical issues of SOEs equitization Difficulties of IPO process 152. In the first 3 years of restructuring during 2016-2020, the auction of IPO continued to face similar difficulties as in the period of 2011-2015.64 In addition to successful IPO transactions (such as IDICO, VINAFOOD2, etc.), many enterprises had low rate of initial offering as compared to approved plan such as Machines and Industrial Equipment Corporation (0.1%), Vinafood1 Flour Company (4%), Tan Bien Rubber Company (0.4%), Gia Lai Water Supply Company (0.04%), GENCO3 (2.8%); Song Da Corporation (0.4%), etc. Even in some cases, if IPO of SOEs do not succeed, state and employee shareholders have to hold all shares of the company. 153. As a result, the State must maintain non-state shares of enterprises, failing to meet the targets under Resolution 24/2016/QH14 of National Assembly and Resolution 27/NQ-CP of the Government, stated that "Fully divesting all state capital in enterprises of industries not requiring state capital of more than 50%, divesting state capital to regulated floor level for sectors requiring re- arrangement and restructuring of investment capital ”. Table 9: IPO of large-scale state corporations during 2017-2018 GENCO3 Song Da Corporation 1. Shareholders structure (%) Planned Realized Planned Realized numbers numbers - State 51% 99.19% 51% 99.79% - Strategic shareholders 36% 0% 30% 0% - Individual shareholders 13% 0.81% 19% 0.21% Offering 267051900 shares 219678000 shares 2. IPO results Successful 7451400 shares 790900 shares (0.4%) offering (2.8%)
Source: Songda.vn, Genco3.com. No clear signal on the improvement of equitization quality: 154. The quality of equitization was not improved significantly as compared to previous period. Enterprises was not able to attract private investment, and lacked strategic shareholders, failed to meet the restructuring target in order to improve the quality of corporate governance, to increase financial strength, and to access new market and technologies.
64 During the SOE restructuring in 2011-2015, the offering of shares did not meet the target, outside investors bought only 9.5% shares of equitized enterprises (target was 16.7%), strategic investors bought 7.3% (target was 15.8%). 55 155. In addition to the objective factors from financial markets and more options for investors thanks to increasing of stock supply, some other reasons were mainly attributed to legal regulations, efficiency of SOEs operation as well as enforcement: In terms of regulation, strategic shareholders have been treated as ordinary shareholders, with no specially preferential treatments rather than the right of participation based on the holding rate. Economically, redution of SOE efficiency65, narrowing down of economic, competitive advantages, monopoly and policy advantages were factors contributing to less attractiveness of SOEs equitization. In practice, SOEs with better business indicators experienced more success of IPO, implying a need to review the equitization approach, including therestructuring measures, and the raising of value prior to equitization. This approach has long-term effectiveness, but it may be conflicted with the pressure on finalizing equitization plan. In terms of corporate governance, preliminary statistics showed that enterprises maintaining low shares of state capital were more successful in IPO rather than enterprises maintaining dominant shares of state capital, and more attactive to investors with expectation of real participation in the management after equitization. It requires continuous adjustment of narrowing down the equitization of SOEs with more than 50% of charter capital hold by state. Box 1: Impact of maintaining the ratio of state capital on result of attracting social investment: Comparison from two equitization cases of Ministry of Construction In June 2017, the Prime Minister issued a decision approving the equitization plan of the Song Da Corporation and the Industrial Zone and Urban Development Investment Corporation (IDICO). Both two corporation were under the management of the Ministry of Construction, sharing similarities of size of state capital and business lines, and IPO plans of more than 18% for external investors. However, IPO implementation showed different results. While 100% of shares offered by IDICO were sold and mportant and suitable strategic shareholders were attracted; only 0.4% of shares offered by Song Da Corporation were sold. The Ministry of Construction had to hold 99.7% of shares after the tranformation to joint stock company, failing to meet the target of approved equitization plan. Factors leading to the successof IDICO in equitization process: with regards to economic aspect, IDICO's performance indicators were better prior to equitization. In terms of management, IDICO's plan of maintaining low share of state (represented by Ministry of Construction) - 36%) and increasing the ownership rate of strategic investors up to 45% created greater attraction to
65 The ratio of earnings before taxes over total assets of SOEs was 6.5% in 2012, 6.3 in 2013, 6% in 2014, 5.3% in 2015, 4.6% in 2016, and a slight increase to 5.5% in 2017. The ratio of earnings over equity was 16.4%, 15.8%, 15.2%, 11.7%, and 10% respectively. The ratio of SOEs not gaining profitability was maintained at 20%. 56 private investors and strategic shareholders to invest.
IDICO Song Da
1. Shareholder structure (%) Planned Implemented Planned Implemented Total charter capital (bil. dong) 3000 3000 4495 4495 - Ministry of Construction 36% 36% 51% 99.79% - Strategic shareholders 45% 45% 30% 0% - Other shareholders 19% 19% 19% 0.21% No. of shares offered 55305500 CP 219678000 shares (Starting price) (VND 18.000/share) (VND 11.000/share 2. IPO Successful offer 55305500 shares 790900 shares (%) (100%) (0.4%) 3. ROE of the year prior to 11.8% 4.21% equitization Source: Songda.vn; Idico.com.vn Obstacles in the implementation and policies on equitization, particularly land and financial issues: 156. Policies and regulations on equitization were adjusted in accordance with the requirements of restructuring process over 2016-2020 through issuing Decree 126/2017/ND-CP including new regulations, such as diversifying the selling shares based on international practices, strengthening the inspection and supervision of valuation of enterprises and land use rights, etc. 157. However, ministries, agencies, and local authorities have faced difficulties during the implementation of new regulations and policies on equitization, arising problems, prolonging the preparation time, and slowing down the progress of equitization: According to current regulations, enterprises must review all land areas under their management, prepare using plans and submit for approval by authorized agencies prior to equitization decisions. However, the actual progress was slowly in the stage of reviewing, statistics, cadastral measurement, and planning the usage of houses and land. Particularly, large-scale SOEs, corporations and state-owned commercial banks with nation-wide branches and affiliates which were assigned to manage and use large land areas for production and business, wide spreading in many provinces/cities and being used in various purposes, however, legal documents were inefficient. In some cases, enterprises were assigned to manage and use land and properties on land for decades but there was no legal documents to prove their legitimate. The documentation, submission, and approval for land
57 use plans even become more complicated for national defense and security enterprises that were in the list of equitization. There existed obstacles and bottlenecks on procedures for approving land use plans. In some cases, enterprises‟ land use plans have not been approved by the local People's Committee and local authorities because legal documents were incomplete, inconsistent of land use plan and land area, and incompatible with local plan, construction of land areas; also not including the case that local authorities have not yet had land use plans or adjusted land use plan and lacked of consistency or overlapping between plans. In addition, it has been said that the valuation of land to include in the valuation of enterprises under current Land Law and land price regulated by provincial People's Committee were not close to market price, not yet reflected the adequate value of state capital and assets in enterprises, creating a risk of losses to the budget, causing pressing in public. Difficulties in handling financial, asset and debt issues, determining corporate value and state capital value have been one of the reasons for slowing down the equitization progress. Most equitized enterprises under 2016-2020 plan are large-scale, with large operational scope; thus they required more time for handling financial issues, preparing documents and plans, particularly for SOEs facing financial difficulties and large liabilities; some types of costs and assets managed by those enterprises were not accounted accurately. Administrative discipline and responsibility of the leader during equitization process: 158. The preliminary and summary reports of Government on equitization over time have assessed that some ministries, agencies, provinces, and enterprises were not proactive, not serious, and not aggressive in administering and enforcement, leading to slow equitization progress. In the first 3 years of SOEs equitization plan of 2016-2020, the mentioned practices continued under many manifestations, including: According to current regulations, the representatives of state capital are assigned with huge tasks and responsibilities in the equitization process, from deciding the equitization plan of enterprises under their management, selecting consultant organizations, organizing auction, announcing business value, approving debt trading plans, adjusting state capital, approving of employment plan, approving financial settlements, selecting strategic shareholders to inspecting and supervising the equitization process. However, due to the lack of appropriate apparatus, resources, human resources and skills, representative agencies were not able to implement fully and effectively those important tasks and responsibilities. Some representatives and related agencies have not yet made prompt and drastical administration, not actively implemented the equitization plan,
58 even reluctant to enforce. When facing difficulties such as valuation, debt handling, or land issues, the common sentiment was fear of responsibility; particularly in the context of mistakes in SOEs management and equitization discovered and handled recently, leading to psychology of fearing responsibility, being inactive and not making decisions within their autonomy, pushing decision-making authority to higher levels or taking more time and longer procedures to get consensus from other agencies. The coordination and support of ministries, agencies, and provinces were often not strong and timely. Guidance and execution have not been synchronized and consistent. In practice, it has been reflected quite often that some provincial People's Committees were slow to provide comments on land use plans, land prices, which then affected on equitization progress. Some SOEs have not complied with regulations on equitization, slowly finalized the equitization plan to submit to authorized agencies for approval; there still existed reluctant and concerned about the position and leadership after equitization. During the post-equitization process, SOEs were slowly registered for trading and listing on the stock market, failing to meet the market's requirements on information disclosure and publicizing periodical reports on production and business and corporate management. Although the Party and State have identified equitization as the main solution for re-arranging and reforming SOEs over the past 30 years and in the coming time; the benefits of equitization have also been confirmed, however, there has been reluctant and concerned on the role, position and leadership of related officials of all levels, and enterprises‟ managers in the post-equitization process, and therefore, they did not attempt to implement equitization, even deliberately delayed the process, affecting the overall progress of equitization process. Lack of stringent administrative disciplines and unclear mechanism of handling violations as core reasons for slowing down the equitization progress: 159. Since the period of 2011-2015, the Government have repeatedly required appropriate handling measures when failing the enforcement of SOEs arrangement and equitization. Directive 04/CT-TTg in 2017 and Directive 01/CT-TTg in 2019 have further affirmed "Clearly defining the responsibilities of individuals and organizations in delaying equitization and divestment…; the execution of principles, administrative disciplines, and regulations on equitization, divestment, restructuring and operational efficiency of SOEs; strong sanctions and strict treatment for violations to avoid recurrence”. 160. However, in practice, enforcement and process of SOEs equitization was not effective and seriously implemented. There has been almost no experiences on the treatment of violations, replacement or changing of staffs as compared to its popularity of failing to fulfill the restructuring and equitization of SOEs.
59 161. In addition to clear violations prosecuted, main reason for failing of violations treatment related to equitization was attributed to lack of mechanisms and specific regulations on dealing with mistakes and violations, degree of treatment as well as competent agencies involved in the process, etc. Institutional change, transferring the representative of state ownership and impacts on SOEs equitization progress 162. Mechanism and policies are decisive factors determining equitization progress during 2016-2020. However, only by the end of 2016, criteria for classification of SOEs were issued and until 2017 and 2018, important regulations on resolving land issues (under Decree 01/2017/ND-CP), equitization (under Decree 126/2017/ND-CP), arranging and handling public assets (under Decree 167/2017/ND-CP), and on divestment (Decree 32/2018/ND-CP) were issued. The untimely issuance of these documents has created a waiting attitude, slowing down developing and approving equitization plans of most enterprises under the equitization plan in 2017-2018. 163. The establishment of the Committee for Management of State Capital (CMSC) in 2018 taking responsibility of representatives for state ownership in 19 large- scale corporations, including the responsibility of administering, approving equitization plans has a significant impact on the equitization progress of some enterprises such as TKV, Vinataba, VinaCafe, Vinafood1, MobiFone, VNPT, Vinachem, etc.,. However, the apparatus, human resources, and other resources for fulfilling tasks and mandates of CMSC at enterprises are insufficient and not strong. 164. Similarly, the progress of preparing and implementing equitization in some enterprises has been slowed down due to the handling of negative cases, law violations, and losses such as Mobifone and some industrial and trade projects.
60 IV. RECOMMENDATIONS 165. Vietnam experienced the first quarter with a lot of uncertainties. First, the global economic outlook and the US economy showed negative signs of downturn. Accordingly, reverse trend of policy from financial tightening to response to economic downturn/recession appeared. Second, trade tension between the US and major economies remained complicated. Trade negotiation between the US and its partners, despite much information, revealed unpredictable movement. Controversy over the requirement of reforming multilateral trading system and response to protectionism were popular. Third, some regional economies (such as Thailand and Indonesia) were preparing for election, with possibility of changing government and direction associated with regional economic cooperation. Fourth, speculation and expectation of increasing foreign investment inflows to Vietnam has been accompanied by concerns about the ability to absorb capital of the economy and the mindset as well as screening of foreign investment projects. Fifth, uncertainty still existed when Vietnam was developing specific guidelines and policies to implement CPTPP and access to IR4.0. 166. By April 2019, the formula of Vietnam's macroeconomic management still showed it appropriateness. Monetary policy was kept prudent and flexible, and still reinforced policy space (of interest rates, foreign exchange reserves). The execution of monetary policy still aimed at strengthening market confidence and foundation of the system (increasing capital adequacy, handling bad debts), instead of dealing with short-term issues. Fiscal policy has more active coordination with monetary policy, on the basis of state budget was restructured towards more sustainable. Trade policy continued to promote flexibility and pragmatism, in linkage with key economies to support enterprises to take advantage of opportunities, to reduce the risk of anti- subsidy, anti-dumping, etc. As a result, the macroeconomic environment has created conditions for Vietnam to deepen its reforms of business environment and competitiveness. 167. Vietnam still has to deal with many challenges, mainly on the microeconomic foundation. The pending of regulatory documents has been popular, leading to slow implementation of thinking and new. Even for CPTPP, guidance and legal adjustments have been slowly implemented, in spite of much expectation from high-ranking leaders and business community. More important, policy enforcement has been slowly improved. The regular and continuous repeat of the Government and Prime Minister on major measures and solutions for socio-economic development, in one hand, partly showed a close monitor; however, on the other hand, it showed that measures and solutions were not recognized and implemented adequately. 168. This report re-emphasizes the message of further strengthening microeconomic foundations and reforming economic institutions for a more advanced economy. Accordingly, the Report provides some recommendations on continued reforms of microeconomic foundations together with macroeconomic measures and other measures.
61 1. Recommendations on further reforms of microeconomic foundations 169. Further concretize and implement Resolutions of the Party Central Committee on shifting economic growth paradigm and effective implementation of international economic integration and private sector development; the reform of wage policy for officials, civil servants, armed forces and laborers in enterprises; reform of social insurance. 170. Continue to provide instructions and organize effective implementation of basic Laws of market economy institutions such as the Civil Code; (amended) Law on promulgation of legal normative documents; (amended) State Budget Law; Law on Public Debt Management; (amended) Competition Law; Law on Cybersecurity; etc. Quickly assess the enforcement situation to propose necessary adjustments, if any 171. Continue assigning priority to business environment reforms toward facilitating production and business activities in line with Resolutions 02/NQ-CP in 2019. Continue studying, discussing and identifying specific solutions to consolidate and improve rankings of improved indicators; prevent falls in rankings and quickly improve rankings of remaining indicators. At the same time, continue studying and learning experience from international best practices on improving business environment and competitiveness. Continue comprehensive reforms of regulations on business conditions in order to facilitate production and business activities of enterprises in accordance with international practices and requirements of international economic integration. 172. Promulgate the National Strategy on the Fourth Industrial Revolution. Identify, issue policy framework and prepare necessary conditions to promote digital transformation in Vietnam. 173. Research, identify and consult on strategic economic orientations for 2021- 2030. 174. Proactively engage in exchanging and cooperating with partners to effectively implement CPTPP and seek supports in ratifying EVFTA and promptly finalize RCEP‟s negotiation. Continue to seek support on recognizing Vietnam‟s full market economy status. Closely monitor and analyze new actions and attitudes of major economies to non-marketed economies to propose appropriate solutions. 175. Issue the amendment of selected laws for implementing CPTPP. Continue reviewing commitments under concluded, signed or pending FTAs and international treaties of Vietnam in order to make relevant attempts on regulatory improvements Further review and develop a roadmap to gradually phase out discriminatory and differential treatments (e.g., access to land and credit, Government procurement, etc.) that may affect competitive neutrality between SOEs and the private sector.
62 Strengthen institutional and technical capacity of the Trade Remedies Authority of Vietnam (TRAV). Enhance the partnership between TRAV and the business community. Consider harmonization and international regulatory cooperation to improve capacity and make appropriate adjustments not contrary to commitments. Frequently consult the business community, laborers and other social groups to facilitate appropriate preparations for implementing FTAs and other international treaties. 176. State authorities should keep disseminating information on signed and pending FTAs of Vietnam to enterprises; support and provide instructions for enterprises to participate in the integration process to ensure harmonized implementation of FTAs, especially strengthen businesses‟ responses to technical barriers by trading partners. 2. Recommendations on macroeconomic policies 177. Reaffirm the priority of macroeconomic stability, create more space for macroeconomic execution, apply flexible macroeconomic policies to cope with adverse movements of global and regional economies (especially US-China trade tension). 178. Accelerate economic and sectoral restructuring, focusing on quality improvements in order to strengthen economic resilience of the economy in response to unpredictable developments of the international trade and the global economy. * Monetary policy: 179. Accelerate the promulgation of national strategy on financial inclusion, making it easier for citizens and enterprises to access finance and reduce unlawful credit. 180. Study the possibility of further reducing lending rates for priority areas. 181. Prudently manage monetary policy and direct policy on supporting the stabilization of inflation and the financial market; maintaining reasonable liquidity and monitoring credits for risky sector (real estate, securities, etc). 182. Clearly define the scope of "unlawful credit" to have solutions on avoiding equating "unlawful credit" and "informal credit", thus, constraint creativity in banking and financial sector and meet the demand of non-bank capital for business. 183. Consider the relaxation of roadmap fo reducing foreign currency credit to support enterprises. 184. Research and issue regulations on more open foreign exchange management for funds and enterprises investing in creation and innovation. 185. Periodically disseminate information on exchange rate management to the market. Avoid setting "hard" targets for exchange rate management. Closely
63 monitor movements of exchange rates of USD, CNY, EUR and prices of essential commodities in the international market in order to flexibly and cautiously manage exchange rate, aiming at mitigating impacts on inflation and macroeconomic environment of Vietnam. 186. Flexibly manage liquidity of commercial banks to support credit activities, issuance of Government bonds, prevention and response to volatility of indirect investment flows and remittances. * Fiscal policy: 187. Ensure strict discipline of state budget expenditures to fulfil state budget deficit target for 2019 and reduce pressure for budget revenues. 188. Consider refraining from expanding more or increasing taxes and fees so as to leverage benefits and supports for business – manufacturing activities of the private sector. Accelerate the reduction of budget deficit through increasing budget revenue by preventing losses of revenues. 189. Accelerate the reduction of recurrent expenditure associated with significant reduction of the number of public servants. Continue experimenting and popularizing the model of outsourcing with regard to services which do not need to be directly conducted by those under State payroll. * Trade policy 190. Foreign affairs and trade representatives abroad (particularly in key trading markets) are given a mechanism and/or more proactive in promotion and capturing situation/actions of partners and some other necessary activities (instead of waiting for domestic comments). 191. Study solutions for diversifying exports to the US market, to ensure sustainable export growth Review regularly and seriously the origin of Vietnamese goods exported to the US, avoiding origin fraud. Consider the scenario of trading with the US (without using SPS/TBT barriers for important imports from the US; the possibility of reducing import demand from the US, etc.). 192. Discuss with China to remove difficulties for Vietnamese exports to this market. 193. Improve management capacity of competition, anti-subsidy, anti-dumping, trade dispute settlement and market control, together with providing legal support for enterprises. 194. Ensure harmonization of relevant commitments and technical requirements (especially with regard to rules of origin, regulations relating to agricultural products). Improve institutional regulations related to such issues as intellectual property, labor, environment, food hygiene and safety, etc., thus facilitating the negotiation and implementation of trade and investment agreements.
64 195. Continue to diversify export markets. Facilitate trading across borders, infrastructure for logistics services, etc. Integrate more specialized procedures into the National Single Window. 196. Proactively engage in cooperation with trading partners (in particular the US and EU) for recognizing Vietnam‟s full market economy status. 197. Continue to seek supports from EU for quickly approval of EVFTA. * Investment policy 198. Address barriers to accelerate the allocation and disbursement of public investment, avoid disbursement tension in end of the year that may result in pasive responses to implement development targets and impacts on investment efficiency. 199. Enhance monitoring and evaluating of investment flows (in particular indirect investment via the stock exchange) to control the risk of "hot money", high- leverage business and the contagion effects. 200. Concretize direction on FDI attraction in the new context. Encourage foreign investors with established presence in Vietnam. 201. Examine strategies and measures to promote technological transfer from foreign firms that comply with international practices and commitments and be associated with concesus of foreign investors. 3. Other related recommendations 202. Implement some solutions to attract international visitors to Vietnam (considering visa exemption, even unilateral, for citizens of some countries like the US and Australia; developing tourism infrastructure, etc.) 203. Examine and invest in some medium-size service/infrastructure projects (funding from loans or PPP), together with accelerate the procedures and implementation in Ho Chi Minh City and Hanoi./.
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68 APPENDIX 1: POLICY CHANGES IN THE FIRST 3 MONTHS OF 2019 No. Content Policy changes until March 2019 Major economic The main tasks of 2019 reflected in Resolution 01/NQ-CP on socio-economic development plans, including: management 1. Enhancing macroeconomic foundation, controlling inflation, ensuring major balances of the economy Operate proactive, flexible and prudent monetary policy, harmoniously coordinate with fiscal policies and other macro policies, maintain consistent goals for macroeconomic stability, control inflation, ensuring major balances of the economy, promoting business and production. Continue to administer interest rates, exchange rates flexibly, in line with macro balances, market developments and management requirements. Stabilize foreign exchange market and gold market. Credit growth is coupled with restructuring and improving credit quality, giving credit priority for production sectors, especially priority areas; having appropriate credit solutions to meet the demand of people, contributing to limit black credit. Strict control of credit in the areas of potential risks and the mobilization and lending in foreign currencies; strengthening the state foreign exchange reserves. Effectively implement measures to stabilize prices and markets; adjust prices of goods and services managed by the State under appropriate schedule. Increase GDP by 2019 by 6.8%, control CPI growth rate below 4%. Restructure the state budget. Tighten financial and budget discipline; strengthen inspection, examination, publicity and transparency of the use of state budget. Effectively implement the Law on public property management and use. Closely monitor the management and use of loans. By the end of 2019, public debt balance is about 61.3% of GDP, Government debt is about 52.2% of GDP, the country's foreign debt is below 49% of GDP. Improve the effectiveness of trade promotion and export market expansion. Facilitate trade in linkage with strengthening market management and inspection; prevention and combat of smuggling, trade frauds, ... strictly handling violations. Promote advertisement and encouragement of domestic product consumption. Finalize the technical regulations and standards for specialized inspection and, at the same, effectively control imported goods and equipment. Ensure import and export balance; with target of total export turnover up by 8-10%, control trade deficit below 2%, total retail sales of goods and consumer service revenue increase by about 12%.
2. Drastically implement strategic breakthroughs, restructure the economy, renovate the model, improve the quality of growth Focus on reviewing, finalizing institutions, mechanisms and policies to create strong and comprehensive changes, especially in the field of high-tech applications. Formulate and submit the Proposal of internalization of international integration commitments under Agreements to National
69 Assembly. Promote the development of financial, securities, labor, real estate and science and technology markets. Deploy the project of restructuring securities, insurance market; restructuring the organization of stock exchanges; promote the development of derivative market, corporate bonds and new products. Complete institutions, encourage the development of a variety of financial, accounting, auditing, valuation, credit rating services. Allow resources, strongly attracting out-of-budget resource for synchronous development of the infrastructure. Restructure investment, focusing on public investment; institutionalize to strengthen mobilization and effective use of social resources; develop the project on Investment Law in the form of public-private partnership (PPP). Strict management, avoid loss and waste, improve the efficiency of public investment resources. Promote the arrangement, restructuring, equitization and divestment of state-owned enterprises associated with listing on the stock market. Promoting the role of the State Committee of Capital Management at enterprises. Drastically implement the Resolution of the National Assembly on piloting the handling of bad debts of credit institutions, the Law amending and supplementing a number of articles of Law on Credit Institutions and Project of restructuring credit institutions associated with bad debt handling by 2020; propose solutions to increase capital for state-owned commercial banks and state-dominated commercial banks. Try to bring the internal NPL ratio to below 2% and the ratio of NPLs and risky NPLs (including bad debts and bad debts sold to VAMC that have not been processed yet and the restructured debts) below 5%. Create fundamental changes in banking governance, operational efficiency and safety. Focus on effectively handling weak credit institutions and bad debts under market principles, not directly support from state budget. Strengthen inspection, monitoring and supervision, strictly handle violations in the operation of credit institutions and monetary markets. Promote the application of Basel II. Promote non-cash payment; pilot new payment models, financial technology enterprises (fintech), research on recharging to electronic wallet not through bank accounts and apply new technologies, innovative solutions in the banking sector Trade and integration 1. Resolution 01/NQ-CP dated January 1, 2019 on socio-economic development plan policy Active international integration, forcing the implementation of signed Free Trade Agreements. Implementing the Directive of the Party Secretariat Committee on promoting and enhancing Focus: Increasing trade multilateral relations. Strengthen lobbying to support Vietnam as a non-permanent member of the UN facilitation and Security Council for the term of 2020 - 2021; prepare conditions to well-perform the role of ASEAN international economic President 2020. Actively participate, contribute responsibly and further enhance Vietnam's role in integration. multilateral organizations and forums, such as: WTO, APEC, ASEM, G20, regional cooperation and
70 Greater Mekong sub-region. Issue and conduct the implementation plan for CPTPP; mobilize the signing and ratification of EVFTA. Continue to lobby the recognition market economy for Vietnam.
2. Resolution 31/NQ-CP dated May 3, 2018 on the amendment of detailed regulations for implementing of articles of Law on foreign trade management law, to support the import of machinery, equipment and used technology to facilitate the production and business of enterprises. 3. Resolution 72/2018/QH14 dated 12 November 2018 approving the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP) signed on March 8, 2018 in Santiago, Republic of Chile. 4. Resolution 04/NQ-CP dated January 7, 2019 approving the second protocol on the designation of border gates under the ASEAN framework agreement on facilitating goods in transit. Investment policy and 1. Decision 1897/QD-TTg dated December 31, 2018 on the allocation of state investment plan in 2019 improvement of business Assign VND 337,617.901 billion to ministries, ministerial agencies, governmental agencies, central environment agencies, economic and state corporations and provincial People's Committees state budget investment plan in 2019 Focus: increasing the Assign MPI and MoF to coordinate and review the reduction of capital for slowly-implemented control and transparency projects, supplement capital for projects with high completion of public investment, 2. Decision 135/QD-TTg dated 31 January 2019 on medium-term investment plans for 2016-2020 and supplement capital for 2019 from government bonds for contingent railway and road projects. medium-term public 3. Document 904/VBHN-BKHDT dated 12 February 2019 on annual plan of medium-term public investment for 2016-2020. investment. On business environment, Regulate the principle of allocation for annual plan of medium-term public investment for programs continue to reduce the and projects under Article 54 of Law on Public Investment. administrative procedures Principles for reserve funds: and facilitate the single- For national plan of medium-term public investment, the Prime Minister stipulate the level of reservation window for enhancing the based on certain source ranking of Vietnam in For medium-term public investment plans of ministries, central agencies and local levels, the reservation is EoDB. 10% of planned figure based on certain source. Reservation is used to handle problems arising in the implementation of medium-term public investment plans, including: Dealing with price adjustment after using up all reservation in the approved investment of each project regulated by law; Supplement additional investment for emergency projects and newly developed projects; reciprocal fund
71 for ODA projects and concessional loans from foreign donors not yet listed under the medium-term investment portfolio; Other contingency raised in the implementation of medium-term public investment plans. Issue appraisal principles, monitor and evaluate other public investment plans. 4. Document 905/VBHN-BKHDT dated 12 February 2019 guiding the implementation of some articles of Law on Public Investment 5. Document 903/VBHN-BKHDT dated 12 February 2019 regulating specific mechanism in construction management for projects under national target programs during 2016-2020 Apply to small-scale projects of Group C (less than VND 5 billion) managed by communal People's Committee, with simple design, partly use state budget and the remaining contributed by the people (in cash, in-kind or labor force) 6. Decree 10/2019/ND-CP dated January 30, 2019 on the rights and responsibilities of representatives of state ownership regulated under the Law on management and use of state capital invested in production and business at the enterprise. Strengthening control and management at state-owned enterprises. Reorganizing, approving business strategies, appointing and transferring chair of BOD and other members based on the recommendations of representatives of state-owned enterprises 7. Resolution 02/NQ-CP dated January 1, 2019 on implementing major solutions to improve business environment, national competitiveness in 2019 and orientations to 2029. Target: Increase ranks in international rankings of WB, WEF, WIPO, UN on business environment, competitiveness ... to adapt to new production in IR4.0. Strongly improve the business environment, rapidly increasing the number of newly established enterprises; reduce the rate of dissolved or inactive enterprises; reduce input costs, opportunity costs, informal costs for businesses and people. Try to make business environment and competitiveness in ASEAN-4. Assign ministries to monitor and improve relevant indicators. Continue to remove, simplify regulations on business conditions; fully and thoroughly implementing business conditions reforms realized in 2018. Assign relevant agencies to assess the situation and results of implementing comprehensive reforms of business conditions in ministries, agencies and provinces; quarterly report and propose to the Prime Minister to direct administering of delays, deviations, changes and new issues arising. Reform of specialized management and inspection and full disclosure of information on the website. Implement and organize the inspection of administrative procedure reform, implementing single- window mechanism, single-window in solving administrative procedures ... Monitoring, forcing and advising the implementation online public services at levels 3 and 4 in ministries, agencies and provinces.
72 Monetary policy and 1. Resolution 01/NQ-CP on socio-economic development plan management of credit Conducting proactive, flexible and prudent monetary policy, harmoniously coordinating with fiscal institutions policy and other macro policies, consistently aim at maintaining macroeconomic stability, controlling inflation. Focus: Conducting 2. Resolution 02/NQ-CP dated January 1, 2019 on implementing major solutions to improve business prudent and flexible environment, national competitiveness in 2019 and orientations to 2029. monetary policy. Promoting electronic payment and providing online public services at level 4. Ministers and heads of Enhancing non-cash ministerial agencies execute the provision of at least 30% of online public services within their payment and fintech authorities at level 4; encouraging people and enterprises adapt non-cash payments via different means. SBV reports the plan of allowing cash deposit into electronic wallets without bank payment accounts to the Government before Q3/2019; identifying the maximum amount of money to charge via e-wallet and monthly transaction value. Request commercial banks and payment intermediaries to apply the standard QR code facility to ensure compatibility between payment solutions on QR code. Coordinate with the MoF to list and publicize the list of transactions required to pay via banks, and propose to the Government to amend the provisions of law to encourage non-cash payments for real estate transactions. 3. Document 10/VBHN-NHNN dated February 22, 2019 on non-cash payment, regulating detailed provisions on opening payment cards, applicable subjects and information security requirements for payment card. 4. Decree 80/2016/ND-CP dated July 1, 2016 on amending and supplementing some articles of Decree 101/2012/ND-CP on non-cash payment. Adding prohibition including issuance, supply and use of illegal payment instruments 5. Decision 2545/QD-TTg dated 30 December 2016 approving the Project on non-cash payment development in Vietnam in 2016-2020. Target: By the end of 2020, the ratio of cash over M2 is lower than 10%; strongly develop card payment through card acceptance devices; gradually increase the number and value of card payment transactions through card acceptance devices. By 2020, there are over 300,000 POS installed, with about 200 million transactions per year; Promoting electronic payment in e-commerce, completing the targets set out under Master plan on e-commerce development for 2016-2020 (100% of supermarkets, shopping centers and modern distribution facilities equip cards acceptance devices and enable consumers with non-cash payment when purchasing, 70% of suppliers of electricity, water, telecommunications and communication services accept the payment of individuals and households through non-cash forms, 50% of individuals and households in big cities adapt non-cash payment means for purchasing and consumption); focusing on development of new and modern means and
73 forms of payment, serving rural, and remote areas, contributing to promoting financial inclusion; strongly increase the number of people access to payment services, increasing the proportion of people aged 15 and over holding bank accounts to at least 70% by the end of 2020. Provide solutions for finalization of regulatory framework, policy mechanisms for electronic payment; Upgrading and expanding the inter-bank electronic payment system for the requirements of the economy and international economic integration process; Building and developing retail payment systems and services and promoting electronic payment in the Government and public administrative services. 6. Decision 242/QD-TTg dated 28 February 2019 approving the project on “Restructuring the securities and insurance market by 2020 and orientation to 2025”. One of the 2020 targets is comprehensive innovation of trading and payment clearance technology in the stock market. Thus, it is necessary to promote online trading activities. Issue legal documents guiding online trading activities, automatic portfolio management (AI asset management), automatic consulting (robot-advisory); Digitize financial assets on the stock market using new financial technology (Fintech). 7. Decision 2445/QD-BTC dated 28 December 2018 promulgating e-government architecture of financial sector. Target: improving the efficiency of the financial sector, towards developing digital finance based on big and open data. The roadmap up to 2025: developing information system to manage interest rate, exchange rate and market risks; medium-term budgeting; tax inspection, supervision and handling; inspection, supervision and handling of customs violations; exploitation and use of new public financial services provided by third parties (fintech companies) on open financial data of financial sector; piloting the application of artificial intelligence and virtual assistants in a number of key business activities and operational guidance of financial sector. 8. Decision 986/QD-TTg dated 8 August 2018 approving the development strategy of Vietnam's banking industry to 2025, orientation to 2030. One of the focuses is the development of modern banking products and services, creating basis for improving access to banking services. Encouraging cooperation in a healthy competitive relationship between banks and financial technology organizations (Fintech), non-bank organizations, microfinance institutions and people's credit fund systems for developing network of banking agents at low cost; creating favorable legal environment for the development of safe and effective financial technology institutions; promulgating standards for connection between credit institutions and between credit institutions and financial technology
74 organizations; Providing policy to expand cash access points and new, modern, convenient, affordable and easy-to-use forms of payment, suitable for many people, especially people in rural, remote and disadvantaged regions, on the basis of using available networks of credit institutions, postal networks and networks of payment intermediaries, and some non-bank institutions. Fiscal policy 1. Circular 12/2019/TT-BTC regulating the cost of using state budget for the advancement and borrowing from central and provincial budget 2. Documents 19/VBHN-BTC dated 29 January 2019 regulating accounting documents, accounts, books and financial statements, management reports and related documents for tax and other operations for export and import goods 3. Document 14/VBHN-BTC dated 22 January 2019 regulating collection rates, mechanism, deposit, management and use of fees for certification of eligibility for environmental protection in import of scraps as production material. 4. Decree 14/2019/ND-CP amending and supplementing some articles of Decree 108/2015/ND-CP on October 28, 2015 of the Government detailing and guiding the implementation of some articles of the Special Consumption Tax Law and the Law on Amendment and Supplement some articles of the Special Consumption Tax Law. 5. Decree 20/2019/ND-CP amending and supplementing some articles of the Government's Decree 140/ND-CP on 10 October 2016 on registration fees. 6. Directive 723/CT-TCHQ on synchronous and drastic implementation of trade facilitation solutions, anti-revenue loss in the implementation of the state budget collection in 2019 Strengthen post-clearance inspection, specialized inspection, controlling against smuggling, trade fraud Conduct inspections at 3 levels (General Department, Department and Sub-Department) in accordance with internal inspection and regulations for customs procedures, customs inspection and supervision Strengthen cadres, civil servants, employees and workers; maintaining principles and disciplines in implementing tasks; organize training courses to improve the capacity for civil servants and employees; focus on education of professional ethics, with good moral qualities, strong and professional political attitude; 7. Decision 135/QD-TTg on the allocation of medium-term investment plans in 2016-2020 and in 2019 of central budget (GBs) for important and urgent railway and road projects.
75 APPENDIX 2: MACROECONOMIC STATISTICS Unit 2015 2016 2017 2018 2019
I II III IV I II III IV I II III IV I II III IV I GDP growth Overall % 6.0 6.5 6.8 7.0 5.5 5.6 6.6 6.8 5.2 6.3 7.5 7.7 7.4 6.7 6.9 7.3 6.8 Trade Growth rate of exports % 8.8 10.6 9.2 4.4 6.6 4.9 8.4 13.0 14.9 22.3 22.5 24.3 24.8 10.4 15.1 6.5 5.3 - FDI sector % 18.7 21.5 22.0 9.6 10.8 7.4 15.4 25.6 14.6 25.0 23.7 26.8 27.1 6.3 16.0 3.8 3.1 Growth rate of imports % 20.1 14.2 11.6 3.7 -4.0 2.2 4.9 15.5 25.2 24.2 20.5 15.9 13.3 8.0 16.1 9.8 8.0 - FDI sector % 27.1 20.3 18.4 1.7 -4.5 0.0 6.7 18.9 24.0 32.2 30.2 8.8 13.6 2.2 18.9 8.9 4.7 Exports/GDP % 96.3 92.8 87.0 69.7 99.8 92.4 87.8 73.1 106.2 105.4 98.5 80.9 121.2 106.4 104.7 80.8 122.4 Money M2 growth (YoY) % 2.4 3.6 3.7 5.7 3.1 4.8 3.6 5.7 3.5 3.3 3.4 4.9 4.0 4.2 0.6 3.1 2.7 Credit growth (YoY) % 2.7 5.1 4.0 4.6 3.0 5.0 3.2 5.9 4.4 4.5 2.9 5.3 3.5 4.1 2.3 3.2 2.3 Interbank/central VND/USD exchange Dong 21446 21593 21773 21890 21890 21876 21891 22074 22219 22371 22442 22451 22434 22555 22674 22742 22902 rate (average) Investment Investment/GDP % 30.4 31.7 33.2 33.6 32.2 33.2 33.5 33.2 32.0 33.4 35.1 32.5 31.9 33.6 35.9 32.8 32.2 Implemented FDI Bil. USD 3.1 3.3 3.4 4.8 3.5 3.8 3.7 4.8 3.5 3.8 5.2 5.0 5.8 4.5 4.9 5.9 4.1 Other indicators Inflation (YoY) % 0.9 1.0 0.0 0.6 1.7 2.4 3.3 4.7 4.7 2.5 3.4 2.6 2.7 4.7 4.0 3.0 2.6 State budget deficit/GDP % 4.6 6.4 3.9 8.6 5.5 3.7 5.7 6.9 0.4 1.4 3.3 6.7 -1.8 1.3 2.1 8.9 -5.9 Current account Bil. USD -1.3 0.7 0.5 1.1 2.6 2.2 3.5 0.2 -1.1 0.3 4.3 3.0 3.9 1.2 - - - Balance of payments Bil. USD 2.7 0.6 -6.6 -2.7 3.5 3.2 3.0 -1.2 1.4 1.0 2.3 7.7 7.3 1.2 - - - Source: Authors‟ compilation.
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