FIEs obscure potential risks in domestic economy

03:04' PM - Friday, 12/10/2018

Vietnam’s economy grew 6.81% in 2017, and is likely to attain a higher growth rate this year. While Samsung was the key driver of economic growth in 2017, Formosa and Nghi Son Refinery will take over this role in 2018. Last year, Samsung invested more than US$5 billion in Vietnam. Meanwhile, starting this year, Formosa and Nghi Son Refinery will operate at 100% capacity.

Almost all of the major drivers of Vietnam’s economic growth are FIEs. Then, what will be the driving force for the country to maintain high growth momentum in 2019? So far, no answer has been figured out. Then, how can Vietnam keep her economic growth strong for a long period as per the goal she is aiming at?

Back to the story of trade balance, the entire surplus value comes from FIEs. On the contrary, domestic manufacturers always suffer deficits. As shown in the chart below, while FIEs are achieving a greater and greater surplus, the deficit domestic firms run up is more and more severe. However, the problem is probably not that simple. We know that the surplus registered by FIEs is not necessarily bringing Vietnam real money. It is because the cash flows for most FDI projects run through intermediaries: corporate headquarters in foreign countries. However, the deficit recorded by domestic manufacturers is almost certainly real money. For this reason, the demand for foreign currencies in Vietnam tends to increase over time, and if it is not offset by other cash flows such as foreign indirect investment or overseas remittance, the value of the dong will face downward pressure on the long run. Therefore, the fact that the economy is lacking elements in maintaining high growth momentum and that our currency will always be under the pressure of devaluation are the potential risks for Vietnam in the future.

Undeniably, FIEs have been the main driving force of Vietnam’s economy. However, the country cannot rely on them forever. Aside from such issues as environment, taxation or poor added value, which have been analyzed over and over by experts at various scientific conferences, the first thing Vietnam should take into account is that FIEs themselves are limited. Vietnam will hardly find a second Samsung or Formosa in the near future. It may take some time until the country manage to find one.

This was also the issue raised by the Prime Minister. The scenario many people are expecting is that local private corporations will gradually replace FIEs in the coming time. To have an elite force of private firms, the Government must adopt a comprehensive, breakthrough solution in its management of the economy. - VNN -

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