Positive outlook, but SMEs need to join GVCs

Though the Vietnamese economy is forecast to continue its uptrend, challenges remains in integrating private firms into global value chains.

In spite of bright economic prospects, SMEs need support to partake in global value chains
In spite of bright economic prospects, SMEs need support to partake in global value chains

Positive performance

Spain-based FocusEconomics Consensus, which provides economic data for organisations and institutes in hundreds of nations worldwide, told Nhan Dan Online that Vietnam’s economic momentum appears to be holding up in the first quarter of the year as the resilient manufacturing sector defies external headwinds from weakening global growth and the slowdown in China.

“While growth is expected to cool from 2018’s robust showing, the economy should remain on solid footing in 2019. Industrial output and investment are expected to stay robust as Vietnam continues to solidify its position as a global manufacturing hub,” FocusEconomics said. “Likewise, exports and foreign direct investment (FDI) inflows will likely be resilient despite headwinds from slower global growth and US-China trade tensions.”

FocusEconomics panellists project the economy to expand by 6.6% in 2019, and 6.4% in 2020.

The economy grew 7.08% last year, and 6.79% in the first quarter of 2019.

“FDI was a big highlight in the quarter, with many high-quality projects. Newly-registered and added FDI totalled US$5.1 billion, up 30.9% on-year. Disbursed FDI reached US$4.12 billion, up 6.2% on-year,” the government reported.

Last year, disbursed FDI reached US$19.1 billion, up 9.1% against 2017.

“We expect export-led growth and robust domestic demand to keep the growth trend
for real per capita GDP above average. We believe that institutional settings in the country are improving,” said S&P Global Ratings, one of the three largest rating agencies in the world.

Last week, after nine years of maintaining the “BB-“ for Vietnam, S&P Global Ratings raised its long-term sovereign credit rating on Vietnam to ‘BB’, from ‘BB-‘ previously. The firm also affirmed its short-term rating at ‘B’.

The US-based Trading Economics, which provides over 20 million economic indicators for 196 countries, has also released a fresh econometric calculation that Vietnam’s GDP is expected to reach US$255 billion by the end of this quarter, up from last year’s US$245 billion.

In the long-term, the figure is projected to hit around US$281 billion in 2020.

According to Trading Economics, the Nikkei Vietnam Manufacturing Purchasing Managers’ Index rose to 51.9 in March 2019 from a near three-year low of 51.2 in February. Output increased the most since November last year and new orders advanced for the fortieth consecutive month, driven by new export business. In addition, buying activity went up at the fastest pace so far this year.

Recently, the Asian Development Bank (ADB) released a fresh update on Vietnam’s economic outlook, forecasting 6.9% in 2019, inspired by Vietnam’s positive growth rate of 6.79% in the first quarter.

“Despite the drop in mining and oil output, the Vietnamese economy continues to perform well, driven by its twin engines of export-oriented manufacturing and rising domestic consumption,” said Eric Sidgwick, ADB country director for Vietnam. “The impressive growth in the first quarter will lay good groundwork for the economy to drive forward.”

Integrating private firms into global value chains

However, the ADB stressed that Vietnam is facing a policy challenge in integrating private firms into global value chains.

Since the beginning of economic reform in 1986, Vietnam has rapidly integrated with the global economy. The value of all trade to and from Vietnam is now twice its GDP, and FDI inflow in 2018 equalled 8% of the GDP.

Vietnam is a signatory to 12 free trade agreements that integrate the economy with global value chains (GVCs).

However, participation in GVCs has been driven largely by foreign-invested enterprises. Domestic private firms in Vietnam are predominantly small and medium-sized enterprises (SMEs).

SMEs, which form the largest entity of the domestic private sector, play a vital role in Vietnam’s economy. Of the total 518,000 enterprises registered in 2017, around 500,000 were SMEs. SMEs contributed 47 per cent of the GDP and 40 per cent of the state budget. Nine million jobs were created by SMEs in 2017.

“However, despite their economic and development significance, SMEs have historically played a minimal role in the country’s integration and industrialisation process due to multiple binding constraints,” said Nguyen Minh Cuong, principal country economist from the ADB.

“SMEs are weak linkages with the domestic economy. SMEs’ minimal role in the FDI-driven industrialisation process was in part attributed to preferential treatment to state-owned enterprises at the expense of SMEs,” he said.

According to the ADB, though more than 500,000 domestic SMEs contributed nearly half of the GDP, hardly any participated in GVCs.

“The uneven quality of products and services offered by domestic SMEs is the main constraint on their integration into GVCs. This is particularly problematic as international markets tighten their technical, quarantine, environmental, and health standards,” said an ADB on the Vietnamese economic outlook recently released. “SMEs have little access to new technologies that would help them overcome these barriers.”

A World Bank enterprise survey found that SMEs in Vietnam approached product innovation primarily as a way to reduce costs, not to improve product quality. In addition, few SMEs purchase or license newer technologies developed elsewhere.

Indeed, SMEs in Vietnam suffer many constraints. Their capacity to purchase and adapt newer technologies is restricted by limited access to finance and a shortage of workers with the necessary skills.

Affordable financing is often out of reach because of banks’ stringent collateral requirements and complicated procedures, added to the fact that capital markets are insufficient, despite the existence of multiple mechanisms to provide finance to SMEs, such as the SME Development Fund, commercial banks, credit guarantee funds, and the Vietnam Development Bank, among others.

Regarding the shortage of skills, a recent survey by ManpowerGroup showed that only 11% of firms in Vietnam can provide the skills required for GVC participation. Yet the “low cost, low skills” era of Vietnam’s development is over, and Vietnam must become a higher-skilled economy.

The ADB suggested that, in order to address the underlining causes of uneven product quality, policies should encourage and support the adoption of new technology and, eventually, domestic innovation. SMEs need credit for purchasing and leasing capital equipment and new technologies.

“Developing the necessary skills requires comprehensive and integrated solutions that bring together governments, schools, and the private sector to provide technical and vocation training that responds to the demand. Without better access to finance and skills, SMEs will continue to lag behind in their integration into GVCs,” said the ADB report.

Chart: Vietnam’s GDP growth since 2009 (Unit:%)

2006: 7

2007: 7.1

2009: 5.4

2010: 6.4

2011: 6.2

2012: 5.2

2013: 5.4

2015: 6.68

2016: 6.21

2017: 6.81

2018: 7.08

First quarter of 2019: 6.79