Last week, Vietnam’s relatively new General Secretary, To Lam, announced that he wanted to see Vietnam’s private sector expand to 70 percent of GDP by 2030.
This would bring Vietnam more in line with its regional peers–Thailand, Malaysia, Indonesia, and the Philippines all have private sectors that account for roughly 80 to 90 percent of GDP.
It would also have broad benefits: making more parts and components locally reduces supply chain friction which means lower input costs which is good for business and means cheaper prices for consumers. Perhaps more importantly, however, it would help to insulate the Vietnamese economy from external risks like US dollar fluctuations or protectionist trade policies.
This announcement, however, comes eight years after a 2017 resolution was passed that introduced private sector targets of 55 percent of GDP by 2025 and then 60 to 65 percent by 2030.
The first of these targets, in particular, seems very unlikely to be reached with Vietnam’s private sector accounting for just 50.42 percent of GDP at the end of 2023, a dismal .2 percent improvement over 2016, according to preliminary estimates from Vietnam’s General Office of Statistics (GSO)–at this pace, it would take over a century to hit 70 percent.
The point being that a bigger private sector is not a new concept but that it has historically been somewhat of a struggle to realise.
With this in mind, this article looks at Vietnam’s private sector development, why it has failed to break out, and what might be different this time around.
Firstly, it’s important to note that, in the past, the private sector has not been popular in line with the communist ideology–that prioritises the interests of the workers over wealthy industrialists–on which the modern Vietnamese state is founded.
In fact, opening up Vietnam’s economy to private enterprise and foreign investment through the doi moi reforms back in the 80s was not necessarily done enthusiastically–with more than half of the population living in poverty it was more of an imperative than a choice.
That is to say that, the vision of a communist state didn’t go away just that it was reframed to allow some foreign investment and free-market enterprise to power it.
In practical terms, this saw key decision makers carve out a number of state-owned enterprises (SOE) to support with cheap credit and preferential treatment modelled on the South Korean government’s support for its chaebols. It was envisioned, at the time, that these SOEs would eventually become internationally competitive rivalling the likes of Sony and Samsung.
These firms would be supported with inflows of foreign capital from the foreign firms that would be lured to invest in Vietnam with a slew of incentives from preferential access to logistics, to government grants, to very attractive tax breaks (By one estimate, Samsung didn’t start paying tax in Vietnam until 2013, four years after it first established itself as a legal entity in the country, and even then it was only required to pay half of the standard 20 percent for the following 12 years).
Moreover, the government would use its own fundraising powers to raise cheap capital which it would funnel to its SOEs. In 2005, for example, it went so far as to issue US$750 million in international bonds with a significant portion of the proceeds channelled to state-owned shipmaker Vinashin.
(Incidentally, Vinsahin collapsed in 2010 with US$4 billion worth of debt only to be restructured with much of its assets and liabilities transferred to other SOEs. The shipbuilding heart of its operations, however, was preserved and went on to become another state-owned enterprise, Shipbuilding Industry Corporation (SBIC). SBIC went on to go bankrupt in 2023.)
Moreover, for the decade or so up to the end of 2022, Vietnam had credit growth limits (now, concerningly, functioning as credit growth targets) in place to prevent lending from getting out of control. This supply constraint created a lenders’ market with banks able to pick and choose their borrowers.
In this context, SOEs (though not officially but in reality backed by the government) were generally seen as lower risk leading to not only preferential access to credit but also often cheaper interest rates.
It’s noteworthy too, that this also came at an opportunity cost with state-owned firms generally struggling to be as competitive as their privately owned counterparts. Vietnam Airlines, for example, has more debts than it does assets as opposed to privately-owned Vietjet which ostensibly (it’s complicated) does not. More to the point, Vietnam Airlines is still in the air on account of several hundred million dollars worth of government-backed interest-free loans.
Indeed, accessing capital more generally has been a chief bugbear among private firms for some time with the World Bank’s Enterprises Survey 2023, finding it to be the second biggest challenge among Vietnamese firms surveyed.
Notably, this challenge is also compounded by a lack of other options.
The Ho Chi Minh City Stock Exchange, for example, is still classified as the lowest-tier ‘frontier market’ by both major market classification firms FTSE Russell and MSCI. As a result, foreign investment is limited which, by extension, limits the volume of funds that can be raised by listing on the exchange.
Moreover, the bond market has not only been slow to develop but also had a substantial blow dealt to its reputation following the 2022 real estate crisis and then from the reforms (well-justified reforms to be clear) that followed as a result.
The point being that bank finance is still the primary source of capital for the majority of firms in the private sector but that the preferential access afforded to SOEs may be crowding said private firms out.
All of that is to say that for Vietnam’s private sector to grow its state-owned sector will likely need to shrink (READ: greater equitisation/privatisation). Whether or not this can be made politically palatable, however, is difficult to say.
That said, there is some cause for optimism–between the ‘crackdown on corruption’ and the ‘streamlining of the apparatus’ a lot of the friction in decision-making looks to have been removed.
Moreover, the remarks made by Lam last week suggest that the ideological drive to build a stable of state-owned, internationally competitive enterprises, has significantly diminished over the past two decades.
That is to say, that there may be an opportunity here that there has not been before to push this agenda forward. It is, however, early days and details of how the private sector might find the space to grow have been scant. That it is on the minds of key decision-makers, however, is a good sign and should it be realised it could pay substantial economic dividends.