5.2 Policy implications for Vietnam
5.2.1 An overview of the relationship between financial development and economic growth in
Before reforming economy, Vietnam had remained the centrally planned economy system. The government had ruled the economy via its single tier banking system.
Almost domestic banking services were provided by the State Bank of Vietnam through its nation- wide network branches. The Bank for foreign trade (VCB), established in 1963 and the Bank for investment and development of Vietnam (BIDV), established in 1958, were known as the specialized institutions. Both of institutions were completely under the control of the government. These banks specialized in trade and infrastructure finance sectors, namely, financing for foreign trade, foreign exchange activities, managing in public expenditures, infrastructure projects and managing in purchase activities of equipment for state owned enterprises in industrial and agricultural sectors (Anwar & Nguyen, 2011).
- +
Determinants of Financial Development Determinants of Economic Growth
M2GDP
DOMCREDITGDP
Financial Development
Economic Growth
GOV
FDI
IMPORT
EXPORT +
+
+ +
+
- + GROSSDSA
BANKCREDITGDP
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The innovation policy (“Đổi Mới”) was released in 1986. This highlighted the improvement in the efficiency and competitiveness of banking sectors. This new change is essential to mobilizing the capital sources from private, public and foreign investors for enhancing the economic development. Under Decision No. 218/CT in 1987 and Decree No. 53/ND in 1988, the single tier banking system was divided into two tier banking system. This two tier banking system consists of the State Bank of Vietnam (namely the central bank of Vietnam) and four state owned banks (namely, the bank for foreign trade of Vietnam (VCB), Vietnam industrial and commercial bank (Vietinbank), the bank for investment and development of Vietnam (BIDV) and Vietnam bank for Agriculture and rural development (VBARD) (Anwar & Nguyen, 2011).
Since 1990, the financial system of Vietnam has steadily moved to a market based economy. The banking system has significantly changed in respect of structure system and service quality. At the beginning the financial system of Vietnam has operated with only four state owned banks and a few of credit cooperatives, then, it has developed and diversified more banking institutions. Up to the year of 1994, the number of banking institutions of the banking system of Vietnam was increased to nearly sixty commercial institutions in various forms, including state owned commercial bank, shareholding and joint venture banks, credit operatives, people credit fund and especially, foreign commercial banks allowed to participate in the Vietnam financial market by September 1995. As the results, the domestic investment volumes in foreign and local entities are promoted. This leads to a remarkable increase in bank credit provided to the state sector and private sector (Anwar & Nguyen, 2011).
According to Anwar & Nguyen (2011), the increase in network of commercial bank branches in the nation wide has facilitated those banking institutions in mobilizing capital resources from different investors. As a result, the gross domestic saving rate significantly increased from 3.32 percent in 1990 to 24.77% in 1999, and up to 30.79
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percent in 2011. However, this gross domestic savings rate indicator was relatively lower than that of the ASEAN countries in the same period. For example, in Thailand, the gross domestic saving rate significantly increased from 33.83 percent in 1990 to 36.33% in 1998, and to 31.16 percent in 2011. In China, the gross domestic saving rate significantly increased from 39.13 percent in 1990 to 39.39% in 1999, and up to 52.51 percent in 2011. In Singapore, the gross domestic saving rate significantly increased from 45.11 percent in 1990 to 48.5% in 1999, and up to 49.10 percent in 2011 and in Philippines, the gross domestic saving rate slightly decreased from 18.38 percent in 1990 to 15 percent in 1999, and up to 16.70 percent in 2011. In Indonesia, the gross domestic saving rate significantly decreased from 32.26 percent in 1990 to 19.45% in 1999, and up to 34.25 percent in 2011. In Malaysia, the gross domestic saving rate significantly increased from 34.47 percent in 1990 to 47.43 percent in 1999, and slowly down to 39.48 percent in 2011 (see Appendix B). The movement of gross domestic savings can be illustrated in Figure 3.
Figure 3: Gross domestic savings in Vietnam and in Asean countries
Source: World development indicators from http://data.worldbank.org/indicators
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Despite of increasing in the number of banking institutions, most of them are small size banks. The banking system of Vietnam was dominated by the four state owned commercial banks (Anwar & Nguyen, 2011). According to Anwar & Nguyen (2011), by the year of 1993, the State Bank of Vietnam had nearly recorded 45 percent of total financial assets in the banking system, meanwhile, 49.5 percent of that was accounted by the four state owned commercial banks, and nearly 5 percent was contributed by other banking institutions (Anwar & Nguyen, 2011).
Additionally, being a member of Asean in 1995 and the World Trade Organization in 2006, Vietnam gradually restructured the banking system in order to keep up with Asean countries (Anwar & Nguyen, 2011; Ha, N. P. 2010). Ha (2010) concludes that the characteristics of the financial development situation in Vietnam, Indonesia, Malaysia, the Philippines, Singapore and Thailand can be summarized as follows:
- The financial system is under repression, especially in the period of 1997 to 1998 when a financial crisis occurred.
- The financial system is controlled in line with the bank based development.
- The liberalization of the financial sector and capital movement are enhanced.
- The ability of international competitiveness is weak and inefficient.
It is noted that the Vietnam economy has seen expansion since 2000. The annual GDP per capita of Vietnam gradually increased from 301 USD in 1990 to 531 USD in 2000, and up to about 946 USD in 2011. Vietnam also recognized a relatively high economic growth with the average rate of approximately 7.0 percent during the period 1990 to 2011. This indicates that Vietnam is going to overcome the status of a poor country in the next few years. However, it is rather low in comparison of that of other developing countries in the same region in the same period, such as China, Indonesia, Malaysia, the Philippines, Singapore and Thailand. For example, in Thailand, the annual GDP per capita significantly increased from 1571 USD in 1990, up to 2205 USD in 2000 to over 3158 USD in 2011. In China, annual GDP per capita significantly increased from 483
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USD in 1990 to 1122 USD in 2000, and up to 3121 USD in 2011. In Singapore, the annual GDP per capita significantly increased from 16,553 in 1990 to 24,921 in 2000, and up to 36,102 USD in 2011, and in the Philippines, the annual GDP per capital slightly increased from 1,002 USD in 1990 to 1060USD in 2000, and up to 1429 USD in 2011. In Indonesia, the annual GDP per capital slightly increased from 840 USD in 1990 to 1086 USD in 2000, and up to 1650 USD in 2011. In Malaysia, the annual GDP per capita significantly increased from 3147 USD in 1990 to 4861 USD in 2000, and go up to 6531 USD in 2011 (see Appendix B). The movement of the annual GDP per capita can be illustrated in Figure 4.
Figure 4: Annual GDP per capita in Vietnam and in Asean countries
Source: World development indicators from http://data.worldbank.org/indicators
The gross domestic saving rate in Vietnam also rose steadily from 3.3 percent in 1990 to 27.1 percent in 2000 and to over 30 percent in 2011. it is rather lower in comparison of that of China, Indonesia, Malaysia, the Philippines, Singapore and Thailand in the same period. For example, in Thailand, the gross domestic saving rate significantly decreased from 33.8 percent in 1990 to 31.4 percent in 2000, and to 31 percent in 2011.
In China, the gross domestic saving rate significantly increased from 39.1 percent in 1990 to 37.5 percent in 2000, and up to 52.5 percent in 2011. In Singapore, the gross domestic saving rate increased from 45 percent in 1990 to 46 percent in 2000, and up
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to 49 percent in 2011, and in the Philippines, the gross domestic saving rate slightly decreased from 18 percent in 1990 to 16.3 percent in 2000, and to 16.7 percent in 2011.
In Indonesia, the gross domestic saving rate slightly increased from 32 percent in 1990 to 34 percent, and remain unchange during the period from 1990 to 2000. In Malaysia, the gross domestic saving rate significantly increased from 34.4 percent in 1990 to 46 percent in 2000, and slowly go down to 39.4 percent in 2011 (see Appendix B). The movement of the gross domestic saving rate can be illustrated in Figure 5.
Figure 5: Gross domestic saving rates in Vietnam and in Asean countries
Source: World development indicators from http://data.worldbank.org/indicators Moreover, after the financial crisis, the financial system in Indonesia, Malaysia, the
Philippines, Singapore and Thailand has been under the restructuring process. The restructure formation has changed over time and across economies. For example, in Indonesia, Thailand and Malaysia, which are most affected by financial crisis in 1997- 1998, the financial institutions including non banks and bank entities were closed or merged with stronger one or companies specialized in asset management were set up to strengthen or assist in the resolution of impaired asset or capital sources invested into banking sector (Ha, 2010). Although Vietnam financial system did not suffer much from the 1997-1998 regional financial crisis, the financial system in Vietnam was also
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in under the process of restructuring, mergers and privatization, especially the four largest state owned commercial banks. The restructuring in Indonesia, Malaysia, the Philippines, Singapore and Thailand after financial crisis reflects the long standing weakness in their banking system. However, in Vietnam, its economy must transform into the market based economy in compliance with the international integration movement and commitments to liberalization of financial services required by WTO entry (Ha, 2010).
In addition, the annual growth of domestic credits to the economy and broad money to GDP (M2) in Vietnam were sharply increased in the period from 2000 to 2011. The annual average growth rate of M2 was approximately 44.6 percent in 2000 and up to 109 percent in 2011. Meanwhile, the annual growth of domestic credits to the economy of Vietnam dramatically increased from 35.2 percent in 2000 to 111.6 percent in 2011.
We can realize from the figure 5 and 6 that the growth of money supply in Vietnam has been very complicated from 1995 due to high inflation occur during the period. As a result, the banking sector in Vietnam has been grown since 1990 (Anwar & Nguyen, 2011; Ha., 2010). The movement of annual growth of domestic credits and broad money to GDP (M2) can be illustrated in Figure 6 & 7.
Figure 6: Annual growth of domestic credits in Vietnam and in Asean countries
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Source: World development indicators from http://data.worldbank.org/indicators Figure 7: Annual growth of Broad Money supply in Vietnam and Asean countries
Source: World development indicators from http://data.worldbank.org/indicators
In summary, Indonesia, Malaysia, the Philippines, Thailand and Vietnam have some similar characteristics, such as the financial system is under repression, especially in the period of 1997 to 1998 when a financial crisis occurred; the financial system is controlled in line with the bank based development; the liberalization of the financial sector and capital movement are enhanced; the ability of international competitiveness is weak and inefficient; the inadequate regulation a supervision leads to weak gorvernance. In addition, Vietnam is also under a pressure that its economy must transform into the market based economy in order to comply with the international integration movement and commitments to liberalization of financial services required by WTO entry (Ha, 2010).