Vietnam: New Challenges Posed by Economic Success

2004

Dr Nick Freeman

The pace and consistency with which Vietnam’s economy has burgeoned over the last fifteen years has made the country one of East Asia’s ‘star performers’. Macro-economic growth exceeded 7 per cent last year, despite the poor global backdrop, and the government is aiming for 8 per cent growth in 2004. Industrial production is increasing at over 15 per cent, with the domestic private sector becoming an increasingly important engine of economic growth, and a much-needed source of employment. Export growth in 2003 was around 19 per cent, with Vietnam now one of the world’s top three exporters of rice, coffee, seafood and pepper.

State enterprise divestment – known as ‘equitisation’ in Vietnam – has been one of the weakest links in the economic reform ‘chain’, but there are very definite plans to accelerate and widen the equitisation programme this year. Big-name companies like Vietcombank, arguably the most successful of Vietnam’s big four state-owned banks, was recently instructed by the government to equitise, and to do so promptly. Some of the bank’s leasing and stockbroking subsidiaries are likely to lead the way. Other major corporates, such as PetroVietnam and Vietnam Airlines, are to issue bonds to help finance major investment projects.

The issuance of new shares and bonds will be helped by a long-awaited pick-up in the fortunes of the fledgling security market, which has helped stimulate previously weak investor appetite in portfolio investments. The equity market index is up over 50 per cent so far in 2004, making it the world’s best-performing stock market, driven in large part by active money-raising and share-buying by new investment funds, including the launch this month of Vietnam’s first ever onshore fund. Even the sleepy bond market has seen trading volumes pick up, resulting in lower yields on fixed income paper issued by local and national government.

There is also a lot of anecdotal evidence to suggest that Vietnam’s economy, especially its near-term prospects, and business sentiment have all reached levels not seen since around 1994 – a decade ago. Two new books that examine the economic reform process in Vietnam contain the alliterative terms ‘transition tiger’ and ‘dormant dragon’ in their titles. Some of Thailand’s top footballers are now playing in the Vietnamese football league, lured by better pay. The number of new private companies being registered is increasing at a remarkably rapid rate. This steep rate of trajectory is mirrored by the number of new aircraft that the national airline is buying or leasing, financed by commercial loans from major western banks, to serve new routes. Over 100 Vietnamese firms have gained official approval to invest overseas. The IMF’s Poverty Reduction and Growth Facility (PRGF) loan programme in Vietnam expired in April, and will not be extended, partly because Vietnam does not need this kind of funding right now. In terms of short-term capital, bankers agree that Vietnam actually has a surfeit of money at present, and is not able to digest all of the long-term funding being proffered by the international donor community. Credit growth by local banks was close to 30 per cent last year.

Looking ahead, Vietnam’s credit risk and standing in the international financial markets will be extremely important, as it will determine the cost at which the country can borrow funds to finance a large spectrum of major investment projects. With industrialisation occurring so rapidly, the demands being placed on the country’s infrastructure – roads, rail, water, energy, telecoms, etc. – is immense. And not all of this can be funded domestically through share and bond sales, or syndicated loans by local banks.

There has therefore been renewed speculation that Vietnam will conduct a Eurobond issue, particularly at a time when global interest rates are low, in order to: raise some long-term money overseas; ‘plant its flag’ in the global financial markets; and set a sovereign benchmark for subsequent corporate bond issues. But one reason for hesitation has been a concern in Hanoi as to how the international donor community would react. If it is clearly seen that Vietnam can raise money in the financial markets, might it prompt some donors to reconsider whether they should be providing aid and grants to the country?

While such a concern is legitimate, it should not be a major source of anxiety. Apart from the fact that most donors will wish to continue being associated with Vietnam’s economic ‘success story’, there remains a lot of assistance that the country will require in the next stage of its economic development. This includes help in translating the massive number of new company registrations into a much more efficient and robust corporate sector, able to compete for both export and domestic markets. With Vietnam widely expected to gain WTO entry in 2005, and import tariffs coming down under AFTA, the degree of competition that local firms face is going to get tougher, both at home and overseas.

WATCHPOINT: Keep an eye out for Vietnam’s first, and long-awaited, sovereign bond issue in 2004.

 

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