Vietnam: high potential, high risks

While the nation has indeed embarked on a pace of rapid economic growth, Vietnam remains relatively poor, with under-developed infrastructure, a lack of high-tech industry and also suffers from excessive intervention by the Communist government.

“Vietnam is normally considered a frontier market,” said David Dapice, an economist with the Vietnam Program at Harvard University’s John F. Kennedy School of Government.

“Many companies listed on the exchanges are still partly state-owned and have a degree of state influence in their operations. But about half of the listed stocks are private firms.”

For example, the government holds big stakes in some prominent firms like Vinamilk (the country’s largest dairy company), Vietcombank and Baoviet Holdings, an insurance and financial services company.

State-directed investments such as those in the Dung Quat refinery or Vinashin, a recently reorganized shipbuilding firm, are highly inefficient, Dapice said. He estimates that 40-50 percent of investments are state-directed.

Although foreigners can buy shares on the Vietnamese exchanges (with certain limits), most stocks are small-cap and illiquid.

“Foreign investors currently own about 30 percent of all stocks, but they recognize that there are macroeconomic risks to investing in Vietnam,” he added.

Foreign exporters can go into many provinces of Vietnam and not face much interference from the state, Dapice indicated.

“However, foreign companies that sell mainly in Vietnam often have to put up with more of the state’s complex rules and regulations,” he said.

Dapice, who also serves as a professor of economics at Tufts University, said Vietnam’s economic system is dualistic: the export and domestic sector are quite efficient and use capital pretty efficiently; while some government-controlled enterprises are largely inefficient.

In fact, through the first eight months of 2010, exports have climbed 19.7 percent to $44.52 billion while imports have jumped 24.4 percent to $52.68 billion.

“Most industries in Vietnam are still low-tech: for example, milk producers, fish, shrimp, textiles, shoes, etc.” Dapice said. “However, the state and a few foreign firms are now rapidly expanding in heavy industries like cement, steel and oil refining. In addition, Intel (NASDAQ: INTC) has invested in a chip-testing and assembly plant. But overall, industry is not yet very sophisticated.”

In addition, China has won bids for building dams and other infrastructure, while other wealthier Asian nations like Korea, Taiwan, Japan and Singapore have invested in property and factories.

Dapice conceded that poverty in Vietnam had been dramatically reduced over the past twenty years, due both to reforms and investments in agriculture and the expansion of private firms after 2000, along with labor-intensive foreign direct investment.

“TV and cell phone use are very widespread and in a country of 20 million families there are more than 20 million motorcycles and scooters,” he noted. “Internet penetration rivals that of China and is higher than that of Thailand.”

Indeed, mass consumption is rising in the country, but spending power remains somewhat modest. According to the United Nations and World Bank, per capita annual income is about $1,010 and about 12 percent of residents live below the poverty line.

Moreover, economic growth, while much higher than averages in the Western economies, has actually slowed down in recent years.

“Vietnam’s GDP grew by about 6 percent in 2008, then 5.3 percent in 2009 and should advance about 6 percent this year,” Dapice indicated. “But in 2007 and before, Vietnam was annually delivering growth in excess of 8 percent. Those days of heady growth are probably over until further reforms are made and take effect.”

Dapice said that while Vietnam has great potential to become a substantial economic power in the long-term, it must first resolve a number of issues in the near-term.

“Credit growth each year has averaged over 30 percent for a decade, so it is not surprising that inflation is high and the country’s trade deficit is large,” he explained. “The effective fiscal deficit has been running at 8-10 percent of GDP for some years as well.”

Indeed, Vietnam’s consumer prices climbed by 8.18 percent in August from a year earlier, matching the 8.19 percent figure recorded in July.

Vietnam’s trade deficit amounted to $900 million in August from $978 million in July, according to the General Statistics Office in Hanoi. For the eight months through August, the deficit totaled $8.16 billion.

Vietnam actually runs a trade a surplus with the wealthy countries in the West; but its trade relations with China (from whom it imports much needed consumer and industrial goods) push the overall trade picture into a considerable deficit.

The high trade deficit has led to the devaluation of the nation’s currency, the dong, which has slumped more than 5 percent so far this year.

Moreover, the International Monetary Fund (IMF) recently warned that Vietnam’s foreign-exchange reserves had fallen to the equivalent of seven weeks of imports from less than two-and- a-half months in December — raising the remote potential for a balance of payments crisis.

In fact, fears about the country’s weak balance of payments position was one of the reasons cited by Fitch Ratings when it downgraded Vietnam’s foreign currency debt rating to B+ from BB-, at the end of July. Fitch also cited “inconsistent” economic policies and its worries over asset quality in the banking sector.

While Vietnam has a highly-educated population (the literacy rate is over 90 percent), the country’s higher education system is rather poor.

But perhaps the most difficult problem has, Dapice notes, is the government’s erratic economic management.

“Their macroeconomic management is not coordinated or is trying to do too much, while many investments are made with more of political considerations than with a concern for efficiency,” he said.

However, Mark Sidel, professor of law at the University of Iowa in Iowa City, and international legal adviser to the United Nations Development Programme Legal Reform Project in Hanoi, is more optimistic about Vietnam.

For one thing, he believes the country has graduated from ‘frontier’ status to the emerging markets, citing its 20-plus year history of trade and investment activities with the outside world, a functioning stock exchange, bilateral trade agreements and its highly-educated work force.

And despite the sometimes heavy hand of the Communist officials upon economic policy, Sidel points out that Vietnam remains a “freewheeling and dynamic” economic entity.

“I don’t think the policies coming out of Hanoi are generally stifling economic activity,” he said. “Anyone who visits the cities of Vietnam will immediately notice it is an open, thriving and vibrant economic environment.”

Conceding that industry in Vietnam remains under-developed and low-tech, Sidel nonetheless believes the country may become a significant high-tech player in the years to come.

“It will take time to build a powerful high-tech industrial complex – as it did in China – but the elements are coming together for this to happen,” he said. “The Vietnamese have realized the importance of making the transition to a high-tech-centered economy.”

The Vietnamese diaspora around the world (particularly in the U.S., Canada, Australia and France) is a big player in the country’s economic fortunes.

Between 2001 through 2008, foreign remittances to Vietnam more than tripled, to $7.2 billion, or about 8 percent of the country’s GDP, according to the World Bank and the IMF. These billions are being used to finance construction of new homes, business, factories and real estate.

And they’re not just sending money either. Each year, about 500,000 Vietnamese émigrés (or ‘Viet Kieu’) return to their homeland for a visit, often during Tet, the lunar new year.

In essence, Vietnam is a country of superb potential and significant risks.- International Business Times