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Economic and Political Review of Selected Asian
Countries
COUNTRY REPORT - VIETNAM
Prepared for "Asia and Pacific Review 2001"
Political developments
With the next Communist Party Congress set for May 2001, last year was a period of only minor positioning amongst the top layers of the ruling party. The top three players, including Party General Secretary Le Kha Phieu, President Tran Duc Luong and the Prime Minister Phan Van Khai appear to be reasonably secure in their positions and the Congress is expected to establish policy for the five year period through 2006.
The present leadership is a balance between both conservative hard liners and reformers (the Prime Minister) and the northern and southern regions. With the Prime Minister, a cautious reformer, as head of the executive, gradual economic liberalisation can be expected. Indeed, with the reestablishment of an IMF program in 2000, such cautious liberalisation, which had been stalled since the onset of the Asian crisis, began again.
At lower levels in the Cabinet, Le Duc Thuy, as central bank governor has an important position to play in transforming and professionalising the banking and capital markets from the existing mono-banking system of state banks. He won a useful victory when the Ho Chi Minh stock exchange finally opened for business in July.
Other younger (mid 50s) and better-educated members are being brought into lower cabinet positions in the economic and foreign policy areas. As they progress, that bodes well for the longer term.
Political liberalisation is quite another story. The Party has no intention of easing up on what is still an old-line Communist state. Effective criticism will not be tolerated especially if it comes from people who once had favoured positions. The case of General Tran Do is an example. He was expelled from the party for questioning its dogma and trying to start a newspaper. The only mildly acceptable dissent is over the endemic corruption in the system. The Party regularly purges a number of its members in an attempt to pacify the dissidents. A Deputy Prime Minister Ngo Xuan Loc was the highest level victim of these purges when he was dismissed from his position for corruption in early 2000. He has, however, maintained his position on the Central Committee.
International relations
The year just passed marked a significant milestone in Vietnam's international relations. Finally, a long delayed trade agreement with the United States was signed on 13 July. The Vietnamese has long sought this both for its political as well as its possible economic benefits but had, at the last moment, always shrunk from finalising the deal. The deal is potentially significant since it reduces US import tariffs on Vietnamese imports from an average of 40 percent to an average of 3 percent and, equally, a significant increase in US investment can be anticipated.
The clear implication is that Vietnam will be integrating further with the rest of the world in coming years. It is expected that Vietnam will take moves to join the World Trade Organisation after China has concluded it negotiations and successfully become a member.
Vietnam has historically tried to balance off the great powers. This policy was followed with a vengeance in 2000. President Clinton signalled a further normalisation of relations when he became the first US president to visit Vietnam since Richard Nixon went to Saigon in 1969. From a Vietnamese perspective Clinton's visit was the plum they had longed for made all the more delicious since it followed shortly on the heels of a visit from Chinese President Zhang Zemin.
Indian Prime Minister Vajpayee had also earlier visited Vietnam in their efforts to develop greater regional co-operation to thwart possible future Chinese expansionism. In early 2001, the great power round was completed when Russian President Putin came and negotiated a deal for continued access to the naval facility at Cam Ranh Bay.
Economic developments
After two years of distinctly sub-par economic performance in the 4 to 4.5 percent range, GDP rebounded in 2000 to over 6 percent, at the higher level of expectations. Recovery was seen across all sectors as the economy began to participate in the regional recovery. Whilst a note of warning is due about the quality of Vietnamese Government statistics with respect to absolute levels, the directions (increasing or decreasing) are reflective of the underlying realities.
The industrial and construction sector turned in the best performance growing at a 9.7 percent rate - within those sectors the stellar performances were in electrical machinery and cement, both growing at 20 percent or more. Services grew at a 4.4 percent rate and agriculture also turned in a strong performance growing at 3.5 percent, despite selective severe floods and drought.
But the main drivers of the pick-up in economic growth were two fold: very strong export performance driven by oil exports that benefited from the surge in oil prices; and, the emergence of non-state domestic industrial growth. The latter benefits from its newfound ability to export and access to credit under the new Law on Enterprises. This law, as will be noted later, is but a step in right direction - the enabling environment needs to be further improved if the private sector is to flourish and contribute to its full potential to the country's development.
Exports as a whole grew by 24 percent in value and within that crude oil exports grew in dollar value by 71 percent, but only 4 percent in volume. Other growing exports included seafood, although footwear and clothing exports to the main market the EU slowed in the face of increased competition from elsewhere in the region.
Gross domestic investment increased to 23 percent of GDP in 2000 from 20 percent. However, foreign direct investment, which reached a level of 9 percent of GDP before the Asian crisis in 1997, continued its slump and was only 3.2 percent of GDP in 2000. Whilst the country was successful in signing a USD 1.1 billion deal in late 2000 to finance the Nam Con Son sea basin oil and gas project, the rather indifferent overall performance on FDI is an important warning signal to Vietnam. The country must move more aggressively to make itself a fully competitive locale for foreign investment in the present much tougher economic environment. In particular, it must become more attractive to US and European investment since the majority of its FDI heretofore has been from other Asian countries such as Korea and Taiwan that are not likely to be as aggressive outside investors in the near future.
Despite growth broad money supply of 40 percent inflation remained subdued and, in fact, measured a slight decline on the country's CPI in 2000. That, however, primarily reflected the fact that over 60 percent of the CPI are made up of food items, primarily rice which had a bumper crop.
The budget deficit increased from 2.8 percent in 1999 to 3 percent reflecting the Government's pump priming efforts. Revenues held steady at 18.8 percent of GDP despite the economic recovery. This reflected Government cutting of oil import taxes to suppress the domestic gasoline price and minimise its effect on reported inflation. Since expenditures are programmed to grow further as a percent of GDP in the medium term, a more purposeful attack on revenues will need to be undertaken if the deficit is to be contained to reasonable levels.
The current account remained in surplus at 2 percent GDP in 2000; half the previous year's level as imports surged for restocking after a two years slump. As a result foreign exchange increased to a record USD 4 billion, 14 weeks of imports.
The external debt position improved after an agreement was finally reached with Russia over the old Soviet debt. This debt had been contentious ever since the fall of the Soviet Union. The Soviets valued the debt at the non market exchange rate set prior to the fall of the Soviet Union and originally wanted the debt repaid in dollars to reflect that exchange rate. Since all Vietnam had received were inferior Soviet goods, including military equipment, the Russian claim was unjustified. President Putin finally recognised that fact as a way of keeping a toehold of influence in Vietnam and a substantial reduction in the debt was finally negotiated in September 2000.
The economic outlook for 2001
The economic momentum generated in 2000 is expected to carry forward initially in 2001. The global slowdown originating in the United States will have an adverse impact on Vietnam as it will affect its two main trading partners, Japan and the European Union, as the year progresses. Depending on the severity of the slowdown, growth in the 5 - 6 percent range seems achievable. Eventually, greatly expanded trade with the US market also beckons with the signing of the bilateral trade agreement in 2000.
Prospects for the medium term will depend on the country's willingness to continue with economic reforms, which have costs short term in exchange for the prospect of higher growth later. The Asian crisis unsettled the leadership from it earlier reform program. With political instability increasing in other ASEAN countries there is a danger that there will be renewed foot dragging on reform.
Medium term policy issues
Vietnam has had ambitions to be seen as the next China: a communist country adjusting to the reality of the marketplace for its economic policies but with no relaxation on the political front. It has largely been achieving the political goal but falling short on its own ambitious goals of sustainable growth around 7 percent per annum. This can only be achieved if investment is raised substantially from its present levels around 23 percent of GDP to close to 30 percent. (Investment was only 15 percent in 1991 when Vietnam began its tentative opening to the West.)
Since Government and SOEs cannot increase their investment shares perceptibly - indeed, they should be reduced for efficiency purposes - any growth in investment must come from increased private sector and foreign direct investment. Whilst FDI is likely to be more subdued in coming years, with the possible exception of the oil and gas industry, a more welcoming environment involving less red tape, easier conversion of local currency (the dong) into foreign exchange, reduced corporate taxes, could all improve Vietnam's relative standing somewhat. But, ultimately, the Government can only achieve its economic growth goals if it provides the enabling environment for the domestic private sector to make up the difference, much as is now happening in China.
The private sector has been constrained heretofore by very poor access to financing that the Enterprise Law has only begun to address. The inefficient, loss making SOEs have had preferential access to capital and crowded-out the private sector. As a consequence of this policy, the state banks have a growing book of non-performing SOE loans. The Government is attempting to address this dilemma by instituting a so-called "policy bank" - the National Development Assistance Fund (NDAF) - which would absorb these politically directed credits as a straight budget item. The state banks, in turn, are then supposed to be professionally managed with loans going to the best credits.
If instituted credibly this could free up more resources for the private sector. However, achieving this will be easier said then done. First, adequate resources need to made available for the NDAF in an always tight fiscal situation, and second, the ingrained culture of the state banks needs to be reformed.
Ultimately, more aggressive privatisation or equitisation of the SOEs and the growth of dynamic private sector banks is likely to be the only really effective answer. The World Bank estimates that cost of SOE and banking reform to be 12 -13 percent GDP over a four-year period an amount that could be financed with multilateral credits if the program is credible. The fear will be that the transactions will not leave the players fully autonomous and they will revert to old habits after completion of the privatisation transactions. It would not be the first country that has occurred.
Stock Market
The long promised, oft delayed, opening of the Ho Chi Minh Stock exchange finally occurred on 15 July 2000. It is a strange contrast in cultures. Set in what is still a communist country but in the country's most thrusting entrepreneurial city, it is a throwback to the gentlemanly practices of a bygone era.
The Saigon stock exchange has one similarity with Wall Street. At present, some over the counter trading occurs in Ho Chi Minh much as occurred in the coffee-houses around Wall and Broad before the New York Stock Exchange was established over two hundred years ago. Prior to the opening of the market, there was some limited trading in the over the counter market.
Trading began with just two companies and government bonds although 40 state companies are eligible for listing eventually. In addition, several commercial banks could list once the State Bank of Vietnam issues the relevant regulations. By early 2001, five companies had their shares listed.
It is hardly a challenge to Wall Street; the market is only open on Mondays, Wednesdays and Fridays for an hour each time. Five companies are licensed brokers.
The listing requirements are two years of profitable operations, registered capital of about USD 750,000 and at least 20 percent of the equity held by at least 100 shareholders. The first two companies licensed to trade were the Refrigeration Electrical Engineering Company (REE) and the Cable and Telecommunication Company (Sacom). Sacom is a growth company in the communications sector, which experienced average pre-tax earnings growth in 1996-9 of 47 percent per annum.
The restricted supply of shares, the limited trading times and a daily limit on price movements and other restrictive practices have combined to create a mini-bull market, albeit on minuscule volume. Indeed, the demand so overwhelms the supply at the restricted price that the lucky buyers are drawn by lot from the willing bidders.
It has been described as capitalism with Vietnamese characteristics. But, at least, it is a start.
Conclusion
Vietnam, since beginning its limited opening a decade ago, has fumbled many of its chances and frustrated many that expected it to be the next ASEAN tiger or next China. The leaders who beat the French and then the United States had one objective and that is to consolidate their power and keep the country whole. Despite ethnic tensions and the desire of the Chinese in the old South Vietnam for greater freedom and faster movement, that aim has been largely achieved. As the old, old guard leave the scene to be replaced by a younger, old guard the transition continues as the new players have greater confidence in the country's stability. The ability finally to conclude a trade deal with the United States is an important symbol of this confidence.
Unfortunately, in the post Asian crisis era, the outlook for foreign investment is far more restrained and the market more competitive, even if the leadership is more willing to open up.
On the political front, the country still looks warily towards a China that is increasing its military budget and taking a more aggressive posture towards the South China Sea. With that in mind, Vietnam, always eager to play of the big powers, has been willing also to conclude a largely symbolic relationship with Russia by extending the lease on Cam Ranh Bay naval facility.
William R. Thomson 10 March 2001
Wt@momentum-asia.com.hk
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