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K.C. Fung -- TPP will make Vietnam more efficient

2016-05-04 10:18:08

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Vietnam is often cited as the biggest winner in the 12-country Trans-Pacific Partnership trade agreement led by the U.S. and Japan. There is little doubt about the trade benefits of the TPP for Vietnam, but the financial and macroeconomic impacts on the country have not been examined in the same way.
 
After seven years of painfully detailed negotiations, the 12 Pacific Rim countries signed the agreement in Auckland, New Zealand, in February. The TPP is seen as a high-quality trade agreement, with innovative chapters covering the digital economy and labor standards, as well as a code of conduct for state owned enterprises.  
 
Many economic studies indicate that Vietnam will likely benefit from higher exports, larger foreign direct investment inflows and a rise in economic growth. Both import tariffs and non-tariff barriers will fall in the country's important export markets, especially the U.S. and Japan. 
 
In particular, Vietnam’s exports of textiles, garments and consumer electronics are forecast to increase substantially. The World Bank has said that the agreement will add about 10% to Vietnam's gross domestic product by 2030. Total exports are expected to increase by almost 30% by 2030.
 
Apart from these trade gains, Vietnam will also see an improvement in its financial standing, including an increase in its foreign reserves, which have often looked precarious and in 2015 were worth less than the value of three months’ imports, the minimum recommended by the International Monetary Fund for most economies.
 
With an increase in exports Vietnam will start to see a steadier flow of foreign reserves into its coffers, and a potentially larger current account surplus. Net exports of goods and services have grown over the last few years, but the current account surplus was only $1.3 billion in 2015 and a deficit is forecast this year. As recently as 2010, the current account deficit was $4.3 billion.
 
With an improvement in the current account, investors will gain more confidence in the currency. Vietnam has reduced its levels of currency management over the years, but nevertheless devalued the dong three times last year. One of the benefits of the TPP may be a more stable currency.
 
Historically, inflation has been a problem for Vietnam, although it has fallen to manageable levels in recent years. Part of the problem has been that in the face of slower growth, the government has often resorted to expanding domestic credit to increase economic activity. For example, credit growth reached 27% on an annual basis in 2010, leading to almost 19% inflation in the following year.
 
Few qualms
 
To combat inflation, credit growth was reduced to 12.5% in 2013, leading to much lower inflation in 2014 and in 2015. But history has shown that the government has few qualms about employing credit expansion as a tool to boost the economy, despite the dangerous side effect of double-digit inflation. The TPP opens up a new and sustainable channel to generate growth for Vietnam and should reduce the need for the government to rely excessively on domestic credit.
 
An improvement in trade and the economy will create more employment opportunities for the labor force. About a quarter of Vietnam’s population of 91 million people is between the ages 15 and 34. Each year, more than 1 million workers join the workforce. However, the International Labour Office, the permanent secretariat of the International Labour Organization, has calculated that almost 40% of the workforce between the ages of 15 and 29 is in vulnerable employment, such as unpaid work for family members.
 
Under the TPP, manufacturing and supply chain activities in garments, shoes and electronics will likely increase. The World Bank estimates that the TPP could help push up the real wages of unskilled workers in Vietnam by as much as 14% by 2030. 
 
In the past, the government has propped up jobs by employing an expansionary fiscal policy that can drain state funds and increase debt. The government’s budget deficits have been increasing since 2011 and will likely remain at about 5% of GDP in the near future. The TPP will add an important dimension for growth that will mitigate the excessive reliance on such tools. 
 
In addition, the TPP will make Vietnam an even more attractive destination for FDI, which in turn will increase jobs. Foreign companies such as Intel, Nike, Uniqlo and Samsung Electronics have created jobs in large numbers that are also of higher quality than much domestically generated employment.
 
On the financial side, the TPP will force Vietnam’s SOEs to be more competitive in price and quality. One of the major achievements of the TPP is the introduction of competitive neutrality for SOEs -- the concept that they should not enjoy government subsidies or be given priority in activities related to trade. This part of the agreement will likely have the effect of putting pressure on Vietnam’s SOEs to become more efficient and profitable.
 
In recent years, Vietnam has embarked on banking reforms, cutting the number of banks by 15 to 22. The ratio of non-performing loans had fallen to below 4% by June 2015, and in November 2015 the ratings agency Moody’s gave Vietnam’s banking sector a “stable” rating based on better economic performance.
 
However, the banking sector is still unprofitable. Furthermore, its long-term viability remains closely tied to the efficiency and profitability of its major clients, the SOEs. Improvements in their performance triggered by the TPP may lessen the burden on Vietnamese banks and allow them to be more viable in the longer run.
 
Source: Nikkei.