Vietnam: Sustainable Development Goals Financing

September 19, 2018 Posted by Vietnam Briefing Written by Koushan Das Reading Time: 4 minutes

The United Nations Development Programme along with the Vietnamese government has released the “Financing Sustainable Development in Vietnam” report, which reviews the development finance landscape in Vietnam. According to the report, government revenues are increasing but still needs to grow at a faster pace to support the growing demand for public investment. In addition, public debt continues to rise. Going forward, the private sector is key to development financing if Vietnam wants to achieve its Sustainable Development Goals (SDGs).

Corporate Establishment and Structuring

Private Financing

Domestic private sources

Non-state investment or domestic private finance in Vietnam has steadily increased since 2000, reaching US$24.2 billion in 2015, but is still much lower than the regional average of US$46 billion (excluding Singapore). The average annual growth rate between 2011 and 2016 reached 10.3 percent, while its contribution to the total development investment during the same period reached 38.4 percent. However, the share of Vietnam’s domestic private finance is only around 23 percent of the total development finance resources, which is much lower compared to the ASEAN average of 31 percent.

The major reason for the lower share in resources and slow growth in private financing is the size of the enterprises, which continue to remain small in Vietnam compared to its neighbours. Around 97 percent of Vietnamese private firms have less than 100 workers, while 87 percent of firms have less than 24 workers, while the state-owned enterprises (SOEs) and FDI firms employ a higher number of workers.

International private sources

International private finance to Vietnam increased from US$12.7 billion in 2005 to US$36.2 billion in 2015, much higher than the ASEAN average of US$28 billion (2015).

Since Vietnam’s accession to the WTO in 2007, FDI levels have witnessed rapid growth. FDI’s share in Vietnam’s total investment peaked in 2008, at 30.9 percent, and settled at around 23.4 percent in 2015 and 2016.

Remittances

Vietnam ranks amongst the top 10 countries with the highest remittance, accounting for around 2.5 percent of the world’s total overseas remittance volume in 2017. Major sources include the US, Australia, Canada, France, Germany, and South Korea. Going forward, if remittances are directed towards productive investments rather than foreign currencies and real estate, which is the current case, they can increase their share in Vietnam’s total development finance.

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Public financing

Non-grant government revenue

Domestic sources of non-grant government revenue such as taxes, fees, SOEs, private businesses, and personal income tax has increased between 2005 and 2015. However, during the same period, the revenue from crude oil (30 percent in 2005 to 6.84 percent in 2015 of the total non-grant revenue) and import-export activities (23.64 percent in 2005 to 17.16 percent in 2015 of the total non-grant revenue) reduced substantially.

Due to the reduction in government revenue, debt and borrowing (mostly through domestic bonds) increased due to rising budget deficits. Government debt share in public debt increased from 78.7 percent in 2011 to 80.6 percent in 2015.

International borrowing increased from US$50.5 billion in 2011 to US$80.5 billion in 2015. The highest growth in international borrowing was in debt from private firms and SOEs international commercial borrowing. With respect to Official Development Assistance (ODA), Vietnam continues to be the largest recipient in terms of volume among ASEAN countries.

The share of public investment from State budget in the total public investment reduced from 61.1 percent in 2009 to 48.22 percent in 2016. With the rise in government borrowing, the share of borrowed resources in total public investment increased from 16.9 percent in 2009 to 35.5 percent in 2016.

The share of the SOEs investments was only 6.1 percent of the total development investment and 16.3 percent of the total public-sector investment. The decline was mainly due to the growing number of SOEs undergoing equitization.

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Going forward

To achieve its Sustainable Development Goals, the report advises Vietnam to introduce reforms focusing on public finances, SOE management, debt management, and private sector development.

Developing the private sector

The government needs to support the domestic private sector and introduce policies to increase their productivity, competitiveness, and linkages with global value chains. In addition, the government also needs to focus on improving access to credit and land as well as the technical capabilities of domestic firms.

FDI – quantity to quality

The focus of FDI needs to shift from quantity to quality. FDI incentives should move away from tax and other similar incentives and focus on high skilled workers, consistent investment regulations, infrastructure quality, and competitive domestic supporting industries as means to attract FDI.

Government revenues

The government needs to find new ways of increasing domestic revenue such as carbon taxes, property taxes and focus on improving the management of state assets. Transparency and accountability in the use of public finances should also be improved for ensuring effective utilization of funds.

Government spending also needs to be controlled in areas such as government salaries and expenditures should focus majorly on growth-focused investment projects.

Public debt management

Due to the rise in public debt, the government needs to manage cost, calculate the risks, and strengthen its capacity to calculate future borrowing needs and payment obligations. In addition, supervision and monitoring of all government borrowings should be increased to ensure efficient management of capital.

Moving away from ODA

Vietnam needs to move away from ODA and find new sources of finance focusing on the green economy, private foundations, and climate change adaptation.

Increase coordination between the State and local governments

Both, the State and local governments need to work closely with each other and amongst themselves and focus on increasing the quality of local institutions, transparency, and the efficiency of decision-making processes to ensure a prudent management of resources and spendings.

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