Vietnam Needs USD 25bn Per Year for New Infastructure, HSBC Says

Nhat Trung

18:37 02/08/2019

BizLIVE -

Given the government’s ambitious projects and the growing budget constraints, this raises the question on sources of funding.

Vietnam Needs USD 25bn Per Year for New Infastructure, HSBC Says

Photo: Bloomberg

Push for infrastructure Vietnam has made infrastructure a priority in recent years, with infrastructure spending sustainably accounting for at least 6% of GDP annually and supporting a high rate of headline growth. 
That said, the quality of infrastructure needs to be improved further, according to HSBC latest report. In addition to upgrading, Vietnam requires investments of much as USD25bn per year in new infrastructure. Given the government’s ambitious projects and the growing budget constraints, this raises the question on sources of funding.
PPP is an ideal source of funding, but more reforms are needed. One way is from the state budget. However, the fiscal space has been limited, as a result of Vietnam’s efforts to reduce its high level of public debt. The other option is through preferential loans, but Vietnam has become ineligible for those provided by multilateral institutions because of its lower-middle income status. 
As such, the PPP model has emerged to be a ‘sustainable’ solution to finance infrastructure projects without growing fiscal and debt burdens. To encourage private investor participation, more reforms are needed to address PPP-related issues, and create a better investment climate.
The encouraging story continues. Headline inflation rose 2.4% y-o-y in July, the second slowest pace this year. This bodes well for the inflation trajectory staying below the State Bank of Vietnam’s (SBV) 4% inflation ceiling, strengthening our view that the SBV will put its monetary policy on hold for 2019. 
Meanwhile, exports continued to grow steadily, despite a mixed picture on electronics, partly reflecting a high base. The Manufacturing PMI accelerated to the highest point so far in 2019, signalling an upbeat outlook for the country’s manufacturing sector in 3Q19.
It is no secret that the focus on infrastructure has played a central role in supporting Vietnam’s sustained high growth in recent years. Party Resolution 13 was adopted in 2012, prioritising developments from upgrading key transport infrastructure across roads, expressways and railroads to building sizeable electricity power plants.
In 2016, the government identified infrastructure developments as one of the three breakthroughs to be achieved in the five-year Socio-Economic Development Plan of 2016-20. Since then, infrastructure spending has sustainably accounted for at least 6% of GDP annually, outpacing many of its regional peers that have seen relatively inconsistent infrastructure cycles. 
Thanks to the priority placed on infrastructure, investment, therefore, grew at an average rate of c10% y-o-y, contributing as much as 40% of GDP growth over the past five years. Despite significant investments in recent years, further improvements in the quality of infrastructure are still needed. 
According to the World Economic Forum, Vietnam ranked 89th out of 137 countries in its quality of overall infrastructure in 2017-18, with low rankings almost across all transport and power sectors. It also lagged behind other Southeast Asian countries, especially in the quality of its road and air transport. 
Out-dated and overloaded infrastructure has become an impediment for Vietnam to fully realise its economic potential. Many foreign investors have voiced concerns about the impact of inefficient infrastructure (e.g., congested roads) on their businesses. 
As the majority of FDI flows into manufacturing, this poses an impediment to the production and export of manufactured goods. Meanwhile, a lack of infrastructure that better links tourism destinations also constrains its ability to attract tourists (Vietnam at a glance: Blooming tourism, 3 June). 
As such, upgrading and modernising existing infrastructure would enable Vietnam to reduce the barriers of trade, lure FDI and attract more tourists, which, in turn, will support more productive growth.

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