DataSpeaks - April 18, 2023 | 03:00 pm PT

Vietnam’s economic locomotive needs accelerator

Le Quang Loc, CEO of construction company Vietekcons, has just turned down a deal from a property developer.

"If we take the new offer, we will be in debt again, in even bigger trouble," he said.

The developer lacks funds due to the market slump while Vietekcons is still owed payment by many developers for whom it carried out construction.

The real estate market has been in a slump since late last year.

A motorbike driver goes past a stalled building project in in District 1, Ho Chi Minh City. Photo by VnExpress/Quynh Tran

According to data from multinational property consultancy Cushman & Wakefield, apartment sales declined by nearly 70% year-on-year in the fourth quarter of 2022.

Experts pointed to the corporate bond crisis and the arrests of the heads of some large real estate companies as the reasons for the slump.

Vietekcons is one of many construction companies to cut back on projects, which has also caused a slump in the construction industry.

With the property and construction markets stagnant, and industrial production declining, all three pillars of the Ho Chi Minh City economy, the country’s locomotive, have been shaken, causing growth to fall to a mere 0.7% in the first quarter of this year.

The rate makes HCMC’s growth the eighth lowest of the country 63 localities’ and its lowest level in the same period of the last 13 years except during the Covid period.

"The city’s economy is currently only at 80% of the 2019 pre-pandemic level," Pham Thi Thanh Xuan, who leads a research group of the HCMC-based University of Economics and Law, said.

Shaky pillars

Vietekcons’ payroll has decreased by nearly a third since Tet, the Lunar New Year, which fell in late January this year, Loc said.

If the situation does not improve in the next three months the figure could increase, he said.

Some 90% of property projects in HCMC are frozen, chairman of its People’s Committee, Phan Van Mai, said at a meeting on April 4.

Both the property and construction sectors saw negative growth of nearly 20% in the first quarter of this year.

The property sector accounts for only 3.7% of the city’s economy, but has a spillover effect. If it is in trouble, it affects industrial production.

Dinh Hong Ky, vice president of the Saigon Association of Construction and Building Materials, likened 40% of its members to intensive care patients.

"Many businesses have been forced to lay off workers, or have them work for only two or three days a week."

Since mid-2022 orders from foreign customers have gradually dried up due to weakening demand in major markets such as Europe and the U.S.

Secoin, a major construction material manufacturer based in HCMC, of which Ky is the chairman, saw export revenues drop by 70%, and domestic sales by 60% in the first quarter.

In the first three months of the year, 70% of the main manufacturing sectors experienced declines, the steepest being in garment, leather and footwear.

A quick survey by the Ho Chi Minh City Business Association (HUBA) at the end of February found that only 65% of businesses could maintain an average monthly salary of VND10 million ($423.7). The figure had been 80% in the middle of last year.

A shopping mall with few visitors in Ho Chi Minh City in Q1, 2023. Photo by VnExpress/Phong Anh

With their incomes shrinking, people have tightened their purse strings, and the services sector, which accounts for two thirds of the city’s economy, has been affected.

A manager at Guardian, a retail chain with nearly 80 stores in HCMC, said even in the case of essential products such as shampoo, consumers are opting for cheaper brands now.

Business households like Ngo Thi Huong’s in HCMC’s Thu Duc City have also seen sales decline after Tet.

Her neighbors, who used to buy a carton of beer during weekends, buy a few cans now.

Children buy a glass of soft drink for VND5,000 instead of the whole bottle as they used to.

According to researcher Xuan, consumer demand has been hit by falling salaries but also higher prices of many goods and services. HCMC’s inflation rate has been higher than in other places because it has the most open economy in the country.

In the last quarter of last year its demand for goods and services grew at a slower rate than the national average for the first time ever.

Its retail sales of goods and services rose by only 5% compared to the country’s 14% rate.

"The growth in the city’s retail sales of goods and services has never been one third of the country’s like this," veteran economist Tran Du Lich said.

Stuck cash flows

People are spending less, businesses are starved for capital and public spending is sluggish, meaning little cash is floating around in the economy.

Since last September bank deposit interest rates have risen to new heights, even reaching 12%.

Meanwhile, the country, especially HCMC, has been facing a corporate bond crisis.

Business owners are apprehensive about borrowing because of high interest rates.

In the event, in the first quarter bank loans in the city increased by only 0.3% or one fifth of the national rate. Deposits were down 5% year-on-year.

Nguyen Huu Huan of the University of Economics Ho Chi Minh City said businesses do not want to borrow to expand because of the high interest rates along with weak demand both at home and abroad.

Individual borrowers are waiting for interest rates to decrease before thinking about consumer loans.

City authorities have repeatedly urged speeding up of public spending.

They have set up a number of working groups which meet every week to identify solutions.

Yet, in the last three months the city has only spent 4% of the funds earmarked for public spending this year, or VND1.61 trillion out of a total of VND43.45 trillion.

Meanwhile, Da Nang has managed to spend nearly VND4 trillion in the period and Hai Phong City more than VND3.2 trillion though they are much smaller economies than HCMC.

According to Huan, cumbersome administrative procedures also act as a drag on businesses.

According to HUBA’s latest survey, businesses consider land and construction authorities the most inefficient in terms of administration.

Nearly 60% of the surveyed enterprises said their support for business is low or moderate.

While many localities have improved their rankings in the Provincial Competitiveness Index (PCI) - one of the indicators to assess local governments’ ability to build a business environment and attract investment – HCMC’s plummeted 13 places to 27th last year.

It ranked near the bottom among the country’s 63 localities in many parameters used to create the PCI.

After more than a decade of construction and multiple changes in ownership, the One Central HCM Project again saw construction stop in October 2022. Photo by VnExpress/Thanh Tung

Freeing up money

According to Huan, HCMC lacks liquidity and should seek to address that.

The Department of Industry and Trade has taken various measures to stimulate consumer demand, but they have not worked.

According to business consultant Do Hoa, the city should help businesses reduce costs.

The city may not be able to reduce taxes and fees, but could relax urban management regulations, especially for transportation, and tourists so that businesses could benefit from lower costs, he said.

More importantly, when production and exports depend on the health of major economies around the world, HCMC has only one tool at its disposal: investment.

It is the best way to pump money into the economy, according to experts.

Mai said when the city is in difficulty, it should focus on speeding up public spending money and removing obstacles for private sector projects.

The city is expected to disburse the remaining VND42.5 trillion worth of public spending in the last nine months of the year.

On behalf of the construction and building materials sectors, Ky called for speeding up public spending.

In the context that it is unclear when the domestic and world markets will fully recover, businesses are increasingly eager to access public works so that they do not have to lay off workers and overcome other difficulties.

However, to accelerate the spending, the city needs better mechanisms and its officials need to be more enterprising, according to Tran Quang Thang, director of the HCMC Institute for Economic Research and Management and a member of the city People’s Council, the legislature.

"The request to dare to think, dare to do, dare to innovate, and dare to be creative has been made over and over again, but the scope for such enterprise has not been specified.

"So officials only follow the assigned processes and schedules, and do not risk being asked to explain their potentially daring actions.

"Let us reward those who complete their tasks ahead of schedule."

He said the government should give HCMC greater autonomy.

Nguyen Minh Cuong, Principal Country Economist, Vietnam Resident Mission of the Asian Development Bank in Vietnam, said local officials seem to be hesitant and so need to be appropriately incentivized.

He suggested that the government should place more emphasis on growth, prioritizing reduction of interest rates, taxes and fees for businesses.

Huan said the central bank should announce clear directions for monetary policies so that money is freed up.

When the public and businesses are still confused about the interest rate trends, they cannot make effective plans for production and investment, he pointed out.

HCMC has set itself a growth target of 7.5-8% for this year.

But after achieving just 0.7% growth in the first quarter it needs to sprint at full speed for the remaining nine months.

Vien Thong, Viet Duc, Thu Hang, Hoang Khanh