Vietnam: Strong Economic Growth

2005

Nick Freeman

Vietnam's economy continues to display strong growth. Both the IMF and the Asian Development Bank expects the country to attain 7.5% GDP growth in 2005; slightly below the 8.5% growth rate target set earlier by Hanoi's policy-makers, but higher than the 7% registered in 2004.

Some observers have suggested that 7.5% GDP growth is not sufficient for a developing economy like Vietnam's, and that the country should be striving to attain annual growth of 9% or more. Such an assertion is debatable, as the main emphasis should be on achieving equitable and robust economic growth, which can be sustained in the long term. Notwithstanding some widening of the income gap between some urban and rural areas, Vietnam scores quite highly in this regard. Poverty levels in Vietnam have dropped massively since the onset of economic reform in the mid-80s.

But away from the headline macro-economic numbers, the main issue at present is the generation of sufficient new jobs to satiate the demand of over one million new entrants into the workforce each year. With the state sector being gradually 'right sized', it is the burgeoning domestic private firms and foreign investors that must take the lead in job creation.

Official figures for foreign direct investment suggest that there are now over 5,000 FDI projects in the country, with aggregate approved capital of almost US$47bn, although only about 56% of that capital has actually been disbursed to date. Two thirds of existing foreign investors responded in a survey that they plan to expand their operations in Vietnam in the near term. A good sign.

The prospects for new foreign investors entering the country will depend in part on the global business community's response to a new Common Investment Law, which Hanoi hopes to introduce in late 2005 or early 2006, and will pertain to both domestic and foreign investors alike. Similarly, the prospects for increased domestic investment will depend in part on a new Unified Enterprise Law, currently at the preparatory stage. The aim is to create the kind of conducive business environment that will stimulate new businesses and corporate endeavour.

Other potential fillips to business activity, and the economy as a whole, include gaining entry into the World Trade Organisation. Opinions vary as to whether Vietnam has a chance of acceding to the WTO by end-2005, as desired by Hanoi. One service sector that has been having a particularly good run of late is hospitality and tourism, with hotels showing virtually total occupancy rates and the national airline reporting a 20% increase in earnings in the first quarter of the year. Vietnam Airlines flew almost 1.6m passengers in the first quarter 2005; up 29% year on year. Industrial sector growth appears to be a laggard, with growth of 7.2% in the first three months, according to official figures.

Views also differ, albeit only slightly, on the likely inflation rate for Vietnam in 2005, with the General Statistical Office forecasting 6.5% (which is also the upper limit targeted by Hanoi) and the IMF expecting 7%. However, a number of external factors, over which Vietnam's policy-makers and economic pundits have little or no control, will impact on the end of year figure. Any large recurrence of Avian flu would be expected to have a marked effect on consumer prices, as it did in 2004 when the cost of other meats rose. So too would a continued rise in global oil and other commodity prices. The current drought in the central region may also stoke inflation slightly, as could anticipated increases in state sector salaries.

WATCHPOINT: Expect to see economic reform and business liberalisation efforts continue, as Vietnam's policy makers seek to ensure that the robust economic growth of the past is perpetuated in the coming years.

 

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