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Speeches & Transcripts January 8, 2020

Vietnam: Doing Business 2020, Challenges and Solutions

Distinguished Guests,

Ladies and Gentlemen,

Good afternoon. I am delighted to be here today for the 2020 New Year Event Luncheon. I would like to thank the EuroCham for organizing this event and giving me the chance to speak here.

In my remarks today, I wish to touch on three points:

1. Updates on Vietnam’s economy

2. Progress in improving business environment

3. The way forward

Updates on Vietnam’s economy

Brexit and US-China trade war dominated global headlines in 2019. And certainly, they added to the many ongoing challenges that we’re facing today: climate change, inequality, social unrest.

Amid this difficult environment, Vietnam continues to be the bright spot. Its estimated GDP growth rate of approximately 7 percent is three times higher than the world average and the second fastest in East Asia. The country reported a trade surplus for the fourth year in a row and has reduced its public debt to GDP by approximately 8 percentage points since 2016. Inflation was maintained below 3 percent and the financial system has remained relatively stable.

Exports expanded at an impressive rate of almost 10 percent in 2019, considering the depressed world environment.  Foreign investors kept their confidence in Vietnam in 2019, registering US$3 billion worth of FDI on average per month. At the World Bank, we are positive about the prospect of Vietnam’s economy over the next few years.  We forecast a GDP growth of around 6.5 percent for the period 2020-22.  

The economy will continue relying on its strong foreign sector and its fast-growing consumption demand. We also believe that the Government could accommodate a slightly more expansive fiscal policy if the global environment remains depressed in the next few years.  After building a welcomed fiscal space over the past few years, the authorities are ready to launch a more ambitious investment program, especially in light of the recent amendments made to the Public Investment Law, and so help the country meet its aspirations in terms of infrastructure and social services.

However, the Vietnamese economy is not immune to risks.  A potential global recession cannot be discarded.  A closer look at recent export data already shows signs of possible slowdown. Vietnam’s export to the US grew by nearly 30 percent in 2019, partially driven by the diversion of Chinese exports. However, this number was only 3.7 percent when it comes to non-US markets, including Europe.

To compensate for those external risks, Vietnam will have to count on a competitive and dynamic private sector. Competitive domestic firms will strengthen Vietnam’s exports to other markets but also are critical to meet growing domestic demand.  The domestic market has become a new platform for both domestic and foreign firms in Vietnam. We have seen the rise of many big domestic champions in recent years. Foreign investors have also been more interested in mergers and acquisitions of domestic firms rather than in greenfield investments for exports.

Let’s not forget that the Vietnamese market represents almost 100 million people or the equivalent of 1/5 of the EU population or as much as France and Spain together.

Progress in improving business environment

However, you can’t expect the private sector to thrive without a conducive business environment.  While Vietnam has made impressive progress over the past decade, there is still ample room for improvements. Let me use the results of the 2020 Doing Business report to illustrate this point.

The latest report ranked Vietnam at 70th out of 190 economies.  This rank is relatively good compared to the past as Vietnam was over the 90th position in 2010, and in comparison, to economies with similar per capita income. Yet, Vietnam remains distant from aspiring countries such as Malaysia and Indonesia. The breakdown of the overall rating shows that Vietnam is still ranked lower than 100th in four sub-indicators: starting a business, paying taxes, trading across borders and resolving insolvency.  For example, it takes businesses 384 hours to pay taxes in Vietnam compared with 64 hours in Singapore, 174 hours in Malaysia and 191 hours in Indonesia.

Beyond administrative procedures, private firms are facing other major obstacles. Our enterprise survey revealed that domestic firms consider access to credit as the most severe constraint to doing business, more than taxes, corruption and skilled labor.  The issue, here, is not the complexity of administrative procedures but the requirements from banks, most notably in terms of guarantees, that explain why the vast majority of small of medium firms have no access to credits. In Vietnam, businesses only finance 1/3 of their investment needs through banking credit while this proportion reaches over 40 percent in Malaysia and 50 percent in OECD countries.

It’s important to emphasize that not all firms face these obstacles in the business environment. Their magnitude might vary depending on the sectors of activity and ownership. Most FDI firms benefit from special regimes that allow them to reduce their tax payments and to accelerate their trade procedures. Similarly, state-owned enterprises benefit from privileges such as access to land.  We can all agree that the most penalized firms are generally the small and medium ones that do not have the human and financial resources to circumvent those obstacles.  This helps explain why so many of those small firms opt to operate in the informal sector and why so many of them are unable to generate the productivity gains necessary to their success.

The way forward

Unless Vietnam accelerates the pace of reforms, it might lose some of its edges.  Creating a pro-business environment should continue to be the Government’s priority.  Here, I mean a friendly business environment for all, not only for a few privileged operators. Vietnam’s future success will largely be determined by its capacity to stimulate the emergence of synergies between small and large firms, including foreign ones, and the development of innovative start-ups, which are still largely missing in Vietnam today.

International experiences show that to build a healthy environment for private sector growth, Vietnam will have to upgrade both its human capital and infrastructure.  The Government has been putting more focus on technical training and post-secondary education.  Much progresses have been recorded in building the critical hard infrastructure – roads, ports and airports. The opening of the energy sectors to the private sector should help respond to the fast-growing demand and the urgent need to divert from non-renewable resources.  The World Bank Group has and will continue to support the Government’s effort in these priority areas.

Improving further access to finance (which is the main obstacle perceived by firms, especially small and medium ones) should also be a priority.  I encourage you to read our latest Taking Stock report published last month. The report discusses how smart development of capital markets can help unleash the potential of the private sector in Vietnam.

Today, let me also share with you three principles that Vietnam should follow on the course of becoming an upper middle- and high-income economy over the next few decades.  

The first principle is to offer an attractive, undistorted and open environment to all businesses.  Such environment will allow firms to grow, innovate and ensure an optimal allocation of resources.  For Vietnam, this should translate into further opening of the economy, notably in the service sector and to new markets. Within this vision, the new FTAs such as EVFTA will create an important impetus for Vietnam to accelerate reforms. The adoption and effective operationalization of a new Public-Private Partnership Law, in line with best international practices, should also make Vietnam more attractive to new investors.  A stronger effort toward streamlining existing administrative procedures is required with a sense of urgency as many rules remained extremely complicated in Vietnam, including for land acquisition and tax payments. There is also a need to improve the coordination between central and local authorities (vertical coordination), and between line ministries and agencies (horizontal coordination).

The second principle is to reduce the cost to comply with the rules.  Today, there are so many plans and legal texts in Vietnam that confuse and dishearten many investors.  In addition, even if investors were able to identify the rules that they have to follow, it would be very hard and costly for them to comply with. Think, the median firm in Vietnam spends 40 business days more than in Singapore to pay its taxes. Since time is money, firms in Vietnam are losing a lot of money.  Beyond the simplification that I have advocated in my first principle, reducing compliance costs can be achieved by digitalization. The Government has well understood this challenge and has implemented several reforms over the past year, often with the support of the World Bank, such as the national e-services portal. For the first time, with the support of technology, Vietnamese people can stay at home to request to upgrade their driver’s license or paying taxes. Yet, Vietnam is still lagging behind its competitors in terms of digital development, indicating that the pace of reforms has to be seriously accelerated.

The third principle is about enforcement. Here the challenge is about fairness as investors want not only a set of rules easy to follow and to comply with, but they also want a guarantee that these rules apply to all. Here the emphasis should be on the justice system that has not always been fully effective.  Further attention should also be given to strengthening regulatory bodies, protecting the interests of consumers in sectors especially dominated by a few operators. Last but not least, Vietnam should make an effort to collect information and, above all, to share it with all interested parties. Over time, the best insurance for the good functioning of a market economy is to ensure that quality information is available to the maximum of people.

The combination of these principles can and will make a huge difference. For example, it would be wrong or even dangerous to enforce bad rules.  Similarly, good rules are not effective if they cannot be properly implemented in practice.  Digitalization can improve compliance but also transparency as it reduces face to face interactions between the administration and taxpayers.  It further facilitates monitoring and the collection of information, which has become the “new gold standard” in the emerging AI world.

I know we’re also here for the lunch and to enjoy this festive atmosphere. So let me come to my final remarks.

Overall, the World Bank is positive that Vietnam will make much progress in 2020 and for the years to come. The country will continue to grow this year, and the medium-term outlook appears broadly positive despite persistent downside risks in the world economy.

However, how well Vietnam will cope with these risks and how fast will the country move toward a high-income economy will be largely determined by its capacity to support the development of its private sector. And to remain ahead of the game, Vietnam will need to improve its business environment by making it become more attractive, more cost effective, more transparent and more equitable to all investors.

Thank you. Bon Appétit!