Cannot rely on FDI
There are many studies that are ongoing on a post Covid-19 economic situation, and many of them mainly focus on assessing the final impact of the pandemic on the country’s GDP growth. According to the US Statistics Office, Vietnam's GDP increased by 3.82% in the first quarter. Many US organizations and researchers predict that Vietnam will still have good GDP growth, lower than in previous years, though not negative, even if the rest of the world suffers negative growth.
According to the income method, there are three basic factors when assessing GDP, namely, income of workers, production surplus, and indirect taxes. Amongst these, only the income of workers and production surplus are factors that can make growth. So it is now important to see which of these two GDP factors are growing, or if both are growing.
Currently, the Vietnam Statistical Office has not yet calculated or officially published GDP by the income method, so which of the two above mentioned factors have increased or decreased is a question that needs to be answered. The General Statistics Office (GSO) data published at the end of April shows that till mid-April there were five million unemployed labor, which indicates a 9% reduction of labor force. From the interdisciplinary balance sheet, the labor elasticity coefficient is about 0.7%, the average annual labor productivity has increased by 5%, social investment capital has decreased by 2%, and GDP in the first four months has decreased by 2.1%.
However, by early May, the economy gradually reopened and went into production. Forecasts now show that FDI inflow may explode in the second half of the year, meaning that GDP growth can still reach 3.5% to 4% in 2020. GDP growth leads to employment for workers and a robustness in the economy, but GDP growth based on the FDI sector can make economic resources smaller for savings, in case remittances get into trouble. Moreover, such GDP is only short-term. In order to make the economy sustainable for the long term, it is necessary to study and assess the economy's saving capacity targets.
When looking at the resources of Vietnam’s economy, we only see the size of GDP, which may not reflect all the real resources of the economy to meet long-term growth goals. According to the principle of permanent residence in calculating GDP, which includes surplus of FDI enterprises, this amount may be retained or they may transfer profits to the parent company in another country.
Imbalances in economy
The statistical yearbook shows that the ratio between Gross National Income (GNI) and GDP is increasingly expanding. If in 2010 the ratio between GNI and GDP was 97%, by 2018 this rate was 93%. This shows that the money flowing out through the ownership payment index is increasing. The average growth in the payment of net ownership during 2010-2018 was at current price of 29%, while GDP growth at current price averaged over 16% in this period. Thus, it can be seen that the outward money flow increased faster than GDP growth by almost 13%.
In 2018, according to the GSO preliminary data, the payment of net ownership was around USD 17 bn, while ownership payment was only about USD 18 bn. Much of this USD 18 bn was the FDI sector remitting money after enjoying all Vietnam's preferences. Estimated ownership payment in 2019 may be around USD 19 bn. Ironically, GDP growth is dependent on the FDI sector, which perhaps could suggest that the more paradox of GDP growth makes resources of the economy erode.
Currently, Net Domestic Income (NDI) targets have not been calculated and officially announced by GSO. According to estimates from GSO, the State Bank of Vietnam and the Ministry of Finance, NDI compared to GDP in 2013 was at 113%, and by 2018 this rate was at 110%. If the NDI subtracts the final consumption of the population and recurrent expenditures of the Government, we get the economy's savings.
Although the economy's savings in GDP still account for a higher portion of investments made than GDP, the gap between savings and investment is increasingly narrowed. In 2013, the ratio of savings to GDP was at 41%, while investment compared to GDP was at 31%, so the gap between the two was 10%. By 2018, the ratio of savings to GDP was at 36%, while the investment to GDP ratio increased to 33%, the difference being only 3%. In principle, saving greater than investment shows that the resources of the economy are stable, but this resource is becoming smaller and smaller.
Paradoxically, although savings is greater than investment, the economy still borrows too much. According to the Vietnam Enterprises White Paper recently published by the GSO, the average ratio of liabilities to equity in the whole economy increased from 2.1% during the period 2011-2016 to 2.5% in 2017, and in SOEs, this ratio increased from 3.02% to 4.24%. This can only be explained by the phenomenon of saving much but not going into production cycle. Another reason is the savings rate of the economy compared to the GDP which is getting smaller and smaller as payment of ownership increases, making remittances unable to compensate.
This year, although the Covid-19 pandemic is causing havoc across the world, FDI inflow into Vietnam is expected to increase sharply. This may lead to an increase in overseas ownership payments and a significant reduction in remittance flows. It is estimated that remittances will be reduced by about 30%, which may result in a GNI to GDP ratio of only 90%, a lower NDI rate than GDP, and a source of reinvestment that will be insufficient in the next production cycle.
When looking at such a situation, we see that as obviously GDP is a temporary and short-term indicator, saving is an indicator reflecting internal economic power in the long term. Therefore, policymakers should not only be concerned about the short term, but ignore factors affecting the economy in the longer term that are too radical. GDP is not everything.