There was a time when companies could count on Vietnam to post one of Asia’s highest growth rates. In the years running up to the financial crisis, its economy outpaced ASEAN’s other major economies, consistently expanding by at least 7% per annum. Sadly, those days seem to be over.
Vietnam is in the latter stages of a structural slowdown. The continued dominance of state-owned enterprises (SOEs) in the real sector has deprived the country of much-needed productivity gains. And high levels of non-performing loans (NPLs) in the financial sector have thrown sand in the gears of the economy. Until these obstacles are removed, Vietnam will grow at well below potential.
Officials in Hanoi have paid lip service to the notion that their state-led model needs adjustment; however, they seem to lack the political will to implement painful reforms.
Take the state sector as an example. According to Hanoi’s own measures, its SOEs are 19x less efficient with capital and 9.5x less efficient with labor than non-state enterprises. Vietnam would clearly benefit from a privatization campaign a la late-90’s China. But unfortunately, that would require officials to face down vested interests, something they seem unwilling to do: after pledging to “equitize” 573 SOEs from 2012–2015, they only managed to “equitize” 13 in 2012 and 43 in 2013. (56 down, 517 to go….)
This might not be so bad if Hanoi’s reform failures were limited to the state sector. But unfortunately, they extend to the financial sector, where banks are struggling under an extraordinary weight of NPLs.
In this area, Hanoi’s bureaucrats are actively underplaying the problems they face and pursuing half-hearted reforms. The path they have chosen – to merge bad banks with good ones and create a pseudo-asset management company – is not designed to fix the financial sector’s underlying problems. Instead, it is designed to avoid painful initiatives and kick the can down the road. So much for the country’s banks.
This is not to say that all the news out of Hanoi has been bad. After all, the government has significantly improved its handling of monetary policy over the last couple of years, which has helped it tame inflation and reduce exchange rate volatility. This is no small feat in a country that used to suffer from double-digit price growth and consistent currency depreciation, but unfortunately, it won’t been enough to revitalize the economy.
If Vietnam is going to break out of its structural slowdown and return to the growth levels it saw prior to the financial crisis, its leaders need to step up their reform efforts. Given their recent track record, this seems unlikely. Barring any major changes, the economy will continue grow well below potential. Companies should not expect Vietnam to bounce back anytime soon.