Trade boost to offset Government revenue drop

Monday, Oct 12, 2015 08:10

A World Bank economist expects Viet Nam's GDP to grow by at least 8-10 per cent a year until 2030 because of the TPP effect. — Photo vov

In the final round of negotiations in Atlanta, the US, which began on September 30 and ended on October 5, twelve Pacific-rim countries reached a deal on the Trans-Pacific Partnership, creating the world's largest free trade area.

The deal will cut trade barriers and set common standards for the 12 countries, including Viet Nam.

As the participating countries, which include the US, Japan, and Australia, account for 40 per cent of global GDP, Viet Nam is expected to be able to tap into a huge market.

Among other things, the deal will seek to lower trade barriers such as tariffs, establish a common framework for intellectual property, enforce standards, and establish an investor-state dispute settlement mechanism.

Viet Nam is trying to develop a strong presence in the global market. It has signed free trade agreements (FTAs) with 11 countries and territories and is said to be preparing for signing five more.

FTAs involve co-operation between at least two countries to reduce trade barriers – import quotas and tariffs.

Analysts expect the country's deep global integration in the form of FTAs and the TPP to be a positive factor for its economic and social development.

A World Bank economist expects Viet Nam's GDP to grow by at least 8-10 per cent a year until 2030 because of the TPP effect.

The CEO of the HCM City chapter of the American Chamber of Commerce, Herb Cochran, has said Viet Nam's cumulative exports by 2025 will be 28.4 per cent higher than without the TPP and its GDP would have expanded by an additional 10.5 per cent.

Some experts, however, pointed to a likely sharp decrease in the Government's revenues to which taxes on exports and imports now contribute 20 per cent. Clearly, they ignore the greater income and value-added tax revenues from the additional economic activity that is imminent.

Besides, a Government official also pointed out that taxes on trade have been falling in recent years due to tariff cuts because of the nation's commitments.

The decline is expected to continue when several important FTAs, including one between Viet Nam and the EU, come into effect.

Some 90 per cent of import tariffs, except on certain items such as cigarettes, sugar, eggs, and salt, would be scrapped when the TPP comes into effect. The remaining tariffs will be abolished over a period of 10 years.

According to the Ministry of Finance, Viet Nam has signed 11 bilateral and multilateral FTAs, most of which require cutting tariffs on about 90 per cent of all goods and services.

The taxes on items needed for domestic production will be cut first, while those on sensitive goods, involving high tariffs, will be reduced later.

It is expected that 90-97 per cent of tariffs will be eliminated entirely by 2020.

However, the tariff cuts so far have increased trade significantly. Exports reached a record US$150 billion last year, doubling in just four years since 2010. Imports were up 75 per cent from 2010 at $148 billion.

There has been a commensurate surge in revenues from corporate income tax, excise duties, special consumption taxes, and environmental tax.

Last year, corporate income tax collections amounted to VND220.42 trillion, which accounted for 26 per cent of the Government's revenues, and value-added tax to VND166 trillion (19.6 per cent). In 2010 they had been worth VND148.66 trillion (25.3 per cent) and VND98.74 trillion (16.8 per cent).

Dong depreciation

Hoang Thi Linh Nga of HCM City's Tan Binh has no plans to convert nearly $20,000 she has deposited in a bank into dong though it only fetches 0.25 per cent interest.

"The current interest rate of dong deposits is about 6 per cent. However, this rate does not make dong deposits more attractive than dollar deposits because the dong is likely to continue depreciating against the greenback from now to after Tet (the Lunar New Year)," she said.

Tran Quoc Hung of District 5 has also decided to keep his $33,000 in the bank though the interest rate on his deposit will fall from 0.75 per cent in two months when it matures.

"I keep my money at the bank since I want to ensure safety and avoid devaluation. Besides, I do not have experience in real estate and securities," he said.

It is not just individuals but also companies who want to hang on their dollars.

The general director of a seafood export company in Can Tho said his company did not convert the US dollars it has in a bank since the interest rate, now at zero, used to be a mere 0.25 per cent.

In late September the State Bank of Viet Nam reduced the interest rate caps on dollar deposits from 0.75 per cent to 0.25 per cent in case of individuals and from 0.25 per cent to zero in case of businesses.

The move was aimed at reducing demand for the greenback.

Since then there has been a perceptible shift to dong deposits at banks.

However, not all individuals and businesses want to convert their dollars into the dong.

One important reason is that the US Federal Reserve still intends to hike interest rates this year, which could cause the dollar to appreciate.

Another important — and annual – event is the surge in imports in the last few months of the year to serve skyrocketing demand in the run-up to and during Tet. Importers usually hoard dollars for this reason.

One might wonder why companies cannot just buy dollars from banks when they need them. But the hard reality is that even businesses requiring foreign currencies for legitimate purposes cannot buy them without producing a bunch of documents.

Yet, not many domestic businesses have dollars in their bank accounts.

Many foreign companies do, but most of it is meant for projects that are underway.

Overall, analysts said, the zero interest on dollar deposits has not had as much effect on hoarding as initially expected.

Government bond sales

In September the Ha Noi Stock Exchange (HNX) organised 34 auctions to sell VND2.63 trillion (nearly $118.47 million) worth of government bonds, a 66.4 per cent decrease from August.

The Government managed to raise VND2.5 trillion (over $112.61 million), and the Viet Nam Development Bank, VND125 billion ($5.63 million).

But the amount represented a mere 10th of what the Government had hoped to raise during the month.

In August, VND7.83 trillion (over $352.7 million) had been raised, and even this represented a fall by half from the previous month.

According to the National Financial Supervisory Committee, by August the Treasury had raised only VND94.3 trillion, or 37.7 per cent of its target for the year.

The question is why government bonds have suddenly become much less attractive.

National Assembly Resolution No 78 stipulates that from 2015 the government can only issue long-term bonds (for five years or more) and cannot borrow money for the short term to offset overspending.

Elsewhere, the central bank has capped banks' buying of government bonds.

Its Circular No 36 mandates that public banks can use no more than 15 percent of their short-term funds to buy the bonds.

The limits are 35 percent for joint stock, joint venture and fully foreign-owned banks incorporated in Viet Nam, 15 percent for foreign bank branches, and 5 percent for non-banking financial institutions.

Resolution 78 and Circular 38 have both played a part in the sharp fall in bond issuance.

According to the National Financial Advisory Committee, the tight money policy has also caused banks to focus on lending and reduce purchase of government bonds.

The Government has decided enough is enough, and, at a regular meeting in September, to again start the issuance of bonds for various terms starting in November.

It however needs approval from the National Assembly at its 8th session on October 20. — VNS

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