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IFC official touts private sector benefits

Update: October, 30/2014 - 09:05
Viet Nam should take further steps to equitise State-owned enterprises (SOEs) and create ideal conditions for the private sector to flourish, according to Vivek Pathak, the International Finance Corporation's director for East Asia and the Pacific who visited Ha Noi last week. Pathak said the private sector was the engine that will get the country back on track towards robust economic growth.

What is the state of Viet Nam's economy? What are the biggest challenges and what is being done to overcome them?

Vivek Pathak

Over the last 15 years, we have seen quite a bit of reform, upward movement of the economy and a larger share of the private sector involved, which we think is good. But things have also slowed in the past few years; the growth rate is down to 5.5 per cent. I think there's recognition that things need to speed up and more reforms are needed.

The equitisation of State-owned enterprises is a step in the right direction, one that should continue. Secondly, non-performing loans (NPLs) are a key issue in the financial sector. The creation of Viet Nam Asset Management Company (VAMC) is another positive development, but the process of handling NPLs is too slow. Lastly, I think a clear strategy is needed to resolve these bad debts based on market-driven principles and practices.

However, these things are not easy to do and will take time. We just hope they will continue at a faster pace. The sooner NPLs are resolved, the sooner we re-capitalise the banking sector and the sooner we ensure that it is used to create a more productive economy.

I would like to see the development of capital markets, such as the bond market, which is important to facilitate growth and direct credit to enterprises.

Public debt is also another concern. The Government is taking some steps to bring it under control, tax reform for example.

Infrastructure is another key development area. The Government could encourage more private investment in certain sectors of infrastructure to reduce the burden of public debt.

What can SOEs do to reduce public debts?

There are three ways of reducing public debt. First, hasten the pace of privatisation because it is a major source of revenue for the State. Second, encourage more private investment in infrastructure. Third, increase excise taxes.

Equitising more than 400 SOEs by 2015 is an ambitious target, that's more than one enterprise per day. If this can be done, it will create more competition between SOEs, which is a good thing. Competition benefits consumers, investors and the entire economy.

Will SOEs successfully attract investors with their initial public offerings?

If equitisation does not lure in investors and create revenue, the Government needs to identify the reasons. Timing can be important. Watch out for periods in which the market is going down. In addition, the Government should increase the productiveness and efficiency of SOEs by good corporate governance. Let the investors feel that SOEs are managed in a transparent manner.

What advice do you have about handling NPLs?

The preferred option would be having private investors liquidate bad debts. The ultimate goal should be a market-based clearing mechanism. You want someone willing to bid for the debts. So you need to ensure that whether they are foreign or domestic investors, you've got the means to liquidate.

The launch of VAMC, which represents the State, is a positive move, but let's look at the big picture. The buy and sale of NPLs must be transparent to get more attention from the private sector. Since VAMC will only be able to address part of the NPL stock, banks will also have to resolve the problem in-house.

Countries that aggressively devised programmes for either the banking sector or the government or both to absorb the losses embedded in the NPLs overcame their NPL problems relatively quickly and returned to growth. Korea and Taiwan are good examples of this.

What role does the private sector play in Viet Nam's economic future?

Viet Nam's private sector emerged as a driver of economic growth and job creation after the reforms of the early-1990s opened up the economy to the private sector and foreign investment and trade. The private sector has proved its efficiency against the public sector, it consummes around one-third of Viet Nam's capital while providing around two-thirds of its GDP.

However, the private sector is facing heavy regulation and an unlevelled playing field in doing business, hindering it from developing to its full potential. To make good progress in the next stage of growth, Viet Nam should create favorable conditions for the private sector. Institutional reforms and a deepening of capital markets are therefore required.

Viet Nam needs to allocate capital and resources to where they can be used most effectively. This will allow the private sector to develop into the driving force of job creation, innovation and high-value growth. — VNS

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