Strengthen commercial banks is a top priority

In order to increase GDP growth, strengthen the commercial banking system by handling bad debt and raising equity should be a priority policy. Picture: The Internet.

Need a breakthrough in policy to advance further

Speaking at the Vietnam Economic Forum 2017 on Promoting internal strength, sustainable development held in the morning of June 27, 2017, Nguyen Van Binh, Head of the Party Central Committee’s Commission for Economic Affairs said, from one of the poorest countries in the world, Vietnam has made remarkable strides in economic development since the reforms in 1986. Accordingly, the average economic growth rate has been at 6.4% per year from 2000 to present and poverty rates have dropped to under 3% from compared to 50% in the early 1990s. Since 2008, Vietnam has surpassed the GDP per capita of $US 1,000 and has entered the middle-income group.

However, according to Prof.Kenichi Ohno (From Japan Policy Research Institute), who has reached on Vietnam for 20 years, "the current economic structure of Vietnam has changed for 20 years but it is unclear”. Mr. Nguyen Van Binh also stressed that besides these achievements, we need to look straight at the model and quality of economic growth of our country today.

Specifically, Vietnam exports 65% of manufactured goods but most of it is from the FDI sector, while domestic enterprises are still mainly export goods such as textiles, footwear and agricultural products with low added value. "That means, the important part contributing to Vietnam's current growth rate is its external resources, not the internal force of its economy. Therefore, what we need to do and do right now is to re-evaluate the sustainability of the comparative advantages that we often refer to as abundant, cheap labor in the context of the golden population which only exists in 10 years and the increasing competition from other countries with lower production costs," said Nguyen Van Binh.

According to Mr. Binh, Vietnam has reached a level of economic development, however, in order to move forward to become a higher income country, it needs a breakthrough in policy.

Also at the forum, economist Nguyen Xuan Thanh, Director of the Fulbright Economic Teaching Program, said that we have stepped through the first quarter of 2017 with the growth of 5.1%. This is a surprising result, as the previous expectation at the end of 2016 is that the economy will get better when it enters 2017. But the results in the first quarter are much lower than the same period in the 2 last years.

Thus, the Government is now under great pressure on the results of the economic growth. The GDP growth in the first two years of this term is all lower than the last year of the previous term.

According to Mr. Thanh, with the economic development over the time, it can be predicted that the GDP in the second quarter will grow over 6%. As the growth in the first quarter was 5.1%, the first two-quarters will see a growth rate of 5.5% -5.7% and if the third and fourth quarters are 7%, then 2017 is predicted to achieve the GDP growth of 6.4-6.5%.

Accordingly, achieving the 6.7% GDP growth target for the whole year is very difficult, and if we remain to complete the target of 6.7%, we have to create a pressure of growth on the ministries and branches. However, in the short term, it is difficult to achieve. At the same time, the expert also said that the growth of 6.2% - 6.5% in 2017 would be reasonable.

Speed up SOEs equitization

Analyzing the reasons for low growth, expert Nguyen Xuan Thanh said that the main reason was the heavy burden of slow economic restructuring, especially the structural problems: banks, public debt and public investment and SOEs.

According to the expert, a large amount of banks’ bad debts still exists, which means that the economy still has to use scarce resources to feed. This is the biggest burden that is pulling down the growth.

"Vietnam is the economy with the highest credit growth in the region, but the credit growth does not promote the economic growth. Because banks want to seek high profits, they must boost consumer credit; Also, if they want to be safe, they will invest in government bonds or lend to a small number of reputable large enterprises and secured assets. Bad debt and high-interest rates require a significant portion of credit growth, it is actually a new loan to pay the old interest and debts. As a result, SMEs are still hungry for credit, although credit for the whole economy rose by 18.25% in 2016 and 5.76% in the first four months in 2017, the highest level in 8 years and equivalent to 20.2% compared to the same period,” Mr. Thanh said.

From the analysis above, expert Nguyen Xuan Thanh said that in order to improve the GDP growth, strengthening the commercial banking system by handling bad debts and raising equity must be the priority policies.

Besides, affirming that although the economy still needs public investment, Thanh emphasizes that, the public investment is not only to boost the growth in demand, but it is more important to remove infrastructure bottlenecks. Not to mention, the public investment now has to borrow and the public debt has reached the ceiling of 65% of GDP. According to the expert, in the previous period, the public investment was high compared to the size of the economy, but because of inefficiency, the quality property created from the investment was not great. Therefore, in order to grow during this period, it is necessary to invest but the resources are exhausted. "In order to have the public investment in the short term without breaking the public debt ceiling, it is only money from equitization and divestment in SOEs," expert Nguyen Xuan Thanh said.

The expert also suggested, in the medium term, instead of changing the land for infrastructure as before, making the operation unclear, increasing public debt, we can change the method of raising funds for public investment. That is to accept the local investment in infrastructure by building bonds, secured with land use rights, the State does not guarantee, thus it is not carried the public debt. Proceeding competitive bidding, investment infrastructure is completed, the value is higher and auctioning land, collecting money and repaying bonds. Thus, we can both invest in infrastructure and still ensure transparency without raising public debt.

In addition, in the longer term, tax reform, especially property tax for local infrastructure investment and institutional reforms, can be considered to improve public investment efficiency.

Dr. Truong Van Phuoc, Deputy Chairman of the National Financial Supervisory, said that successful reform of growth model to improve labor productivity of the economy, creating breakthrough growth in the next years, accompanies with the high economic growth. It is necessary to continue to consolidate macro stability more drastically in the implementation of the economic restructuring in order to consolidate the fiscal and deal with problems which effect on the macroeconomic stability such as bad debt, handling of weak banks. He also emphasized that the financial system as the lifeblood of the economy will continue to play a key role in the overall social investment, supporting high growth during this period. Accordingly, the restructuring of a modern and harmonious financial market between money and capital markets is becoming ever more necessary.

Among the solutions to reconstruct the financial market, in a more modern and harmonious way, Dr. Tran Van Phuoc said that, for the money market, banking credit, monetary policy should be more flexible, expanded reasonably the money supply to support the growth. Creating a financial infrastructure system to handle bad debts in the banking sector. From there, increasing the ability to provide credit to the real economy and reduce interest rates, reduce the cost of capital of the economy. In addition, directing the credit inflows into the domestic production and business sector, especially in enterprises, branches, sectors having high efficiency, productivity, and high technology - the key drivers of growth in the coming time.