The Vietnamese government needs to do what it has said in order to restore business confidence which saw a dramatic decline this year, Dr. Edmund Malesky told Tuoi Tre in an interview on the sidelines of the Vietnam Business Forum this week.

Dr. Malesky is the lead researcher of the Vietnam Provincial Competitiveness Index (PCI), annually published by the Vietnam Chamber of Commerce and Industry in cooperation with the U.S. Agency for International Development, to both of which he is an advisor.

The expert said that the PCI, a tool for measuring and assessing the standards of economic governance in Vietnamese provinces and cities from the perspective of private sector businesses, indicated around 75 percent of business confidence in previous years, which means three-fourths of the respondents said they wanted to expand operations in Vietnam in the next two years.

“But this year the figure was reported at 33 percent,” Dr. Malesky said. “So we looked into the reasons that caused a dramatic decline in business confidence.” Macroeconomic risks, including non-performing loans and problems of state-owned enterprises, and a lack of transparency in the introduction of new regulations all dramatically affected business confidence, he said.

Businesses had a hard time in understanding which new regulations were going to come out and how they would be implemented, the advisor said, adding that they therefore found it hard to forecast their future investment.

“Vietnamese authorities need to recognize that they have to deal with macroeconomic risks ... they need to be transparent about how they are doing it and then stick with those regulations when they come out,” the researcher advised.

“Rapid movement of making regulations is making businesses nervous.”

The issues you mentioned are not new and not the problems of 2012 alone. So why was there such a deep slump in business confidence?

At the beginning of summer 2012, this confidence was about the same as where it had been, about 47%. That is still very far down from previous years.

So there has always been a decline, and that decline is related to some other issues: macroeconomic risks, the subprime crisis affecting Vietnam, and then a lot of instability in the banking sector.

I think there are some effects from those events: firstly, there was a series of events that led people to think that they were pretty large problems in the banking sector.

Some firms would look at what happened and think: “Oh my God, something dramatic is happening and we need to be on top of that.” Because if not, why would the government be so aggressive?

Secondly, businesses had the feeling that there wasn’t a clear solution under the table, that the government seemed to deal in an aggressive fashion but did not really have a long term policy to deal with underlying structural problems.

The third thing that came out of this was the fact that there was such a shock in a short time like that, and unstable policy-making made it very hard for businesses to forecast their investment plans.

I am sure there was the fourth part, which was that people wondered how the future will be to Vietnamese government, one of the things that indicated the government was not unified in terms of how they deal with big issues.

And so, investors draw their own conclusion about what that meant for the future stability in Vietnam.

Have you ever thought Vietnam will be where it is today after spending 15 years on researching into this country?

No. What I thought was Vietnam would learn from their neighbors to deal with troubles. I would not imagine problems as cross-share holding, bad loans, etc. like what happened in Thailand, Malaysia, Indonesia,… before the 1997-1998 Asian financial crisis.

I thought the fact that Vietnam started reforms later would enable it to apply stricter regulations.

I thought Vietnam would pursue well-managed growth and they would be aware of some effects that some certain types of investment would have on the environment, labor, etc. and it would place regulations to deal with that.

I thought that Vietnam would have used the resources from its early growth period to invest more heavily in infrastructure and human capital to prepare for growth in the next period.

They are all the things that I expected. Vietnamese leaders seemed to be so dynamic about doing business and none of these were anticipated.

One area that we all knew about 15 years ago was that there were serious problems in the state sector, that the state sector was inefficient, that they were using up a disproportionate amount of capital, that they had privileged access to capital and land.

You came to Vietnam Business Forum time and time again, the government constantly said, “we’re gonna deal with the state sector, we will put the state sector on an equal footing, we will push equitisation,…” and I believed.

I still believe. But it was a shock to me that it hasn’t been dealt with so far.

What do you think will need to be done to restore business confidence?

Investors have heard a lot from the government but the real effect has yet to be seen. The solutions are easy: the government just needs to do what they have been talking about so far.

I have been in so many forums. At least, this time, I have heard a level of details in the government’s feedback that I haven’t seen before.

I am impressed with answers from the government of Vietnam because they seem to know the problems just as clearly as Vietnamese and foreign businesses.

To be more precise, I came out of this forum more confident and optimist than when I walked into it.