Remarkable achievements from intra-economic cooperation:
Since the passing of the AEC blueprint in 2007, ASEAN’s economy has obtained remarkable achievements. The GDP growth was 4.6% in 2014 and is forecast to reach 5.6% in the next four years.The structure of ASEAN economies has changed, with the proportion of service sector in 2014 climbing to 50.2%, while industry and agriculture have fallen to 38% and 11%, respectively. Intra-bloc trade accounted for 25% of total trade. It registered the growth of 58.9% in comparison with 2007, higher than the growth of outside-bloc trade of 51.7%. All ASEAN members attracted US$136 billion in foreign direct investment (FDI) in 2014, mainly from the EU, Japan and the USA.
New motives for economic growth from huge wave of investment inflow
Countries members expect that the establishment of the ASEAN Economic Community (AEC) - one of the three key pillars of the ASEAN Community will enable the increasing investment into Vietnam.
The presence of foreign investors in Vietnam’s financial market will bring more opportunities for improving quality and diversifying financial services. The free flow of capital in the AEC will positively impact on development of financial systems.
Analyzing the story at approach of a specific sector, for example the garment and textile industry, we can see that both the direct and indirect investment wave into the sector stem from the growth potential for textile-garment export and advantages in the stock market. According to a calculation of the Vietinbank Securities Corporation (2015), many positive factors can boost the local market such as the price-to-earning (P/E) ratio now is 12, proving that the country has a lot of investment opportunities compared to other markets such as Malaysia with P/E of 17.31 and Thailand with P/E of 16.53. Vietnam Textile and Apparel Association (VITAS) expects that the textile and garment industry will be among three industries receiving the most benefits from the free trade agreements (FTAs) that the country has or is now finalizing. FDI will provide huge additional capital for local companies, especially material producers as VITAS is trying to raise the percentage of local-made materials in textile-garment industry from the current 50% to 70% in the next three years.
But besides these opportunities, the increase of capital flow will cause concerns on the unsustainability of investment in Vietnam, like the bubble of asset value. The financial market will face challenges because the county’s financial market infrastructure and size is relatively small and incompetent in comparison with regional countries. The free flow of capital will increase the risk of sudden capital withdrawal, especially at a large scale that will be a source of instability for the financial market.
Competition among ASEAN members
Being a member of AEC, Vietnam will have more opportunities to diversify export and import market, reducing some risks in border trade with China; encourage domestic investment and attract foreign investment; involve deeper and more effectively into the global value chains and regional and global manufacturing networks from agriculture to industry and service.
The AEC aims to create low-cost business transactions and transparent policies so as to facilitate the shift of goods and labour in member economies. But apart from welcoming economic integration, each ASEAN member should deal with its internal problems to attract more investors. They have to accept also the higher competition from other ASEAN members.
We can take an example of the airline sector. The ASEAN forms a unified air transport market, which allows airlines from all countries in the region to operate air routes from one country to the remaining countries, which means competition, will increase among ASEAN members. The unified air transport market will also require all member countries to bring their air safety and security regulations up to common ASEAN standards; however, is not a big problem since Vietnam’s aviation sector has met ICAO standards.
Private sector: Loosing market shares in short term but rebounding in long term
However, due to the lower starting point, Vietnam private sector risk to lose market share in the short term to foreigners recent survey conducted by the Central Institute for Economic Management (CIEM)
To really benefit from AEC, Vietnam should give priority to boosting economic restructuring, reallocating resources, undertaking institutional reform and creating a healthy business climate by market principles, macro-economic stabilization, and human resource development. The country needs also to restructure public investment, reduce budget overspending, settle bad debts, and allocate credits in line with market mechanism in the next 3-5 years to achieve stronger growth.
To clarify the schedule, according to economic experts, the first step is to complete institutions to carry out commitments in ASEAN in all fields. Helping domestic producers and business to deal with competition from foreigners should be among priorities of the countries. They need the orientation and support from the Government to rebound over the long term and find their niche in both the domestic and regional marketplaces. But just from now, domestic businesses will have to pay more attention on accelerating corporate restructuring, innovating technology and management. They are also recommended to learn how to collaborate with partners in ASEAN to benefit from AEC.