Vietnam: Mobilising Domestic Capital


Professor Carlyle A. Thayer

In the first quarter of this year Vietnam's leaders down played the likely impact of Asia's financial crisis on the Vietnamese economy. They argued that the forces of globalisation would not affect Vietnam as much as its neighbours because Vietnam was a late starter in the process of regional integration. Vietnam's currency, the dong, for example, was not convertible. Vietnam's Prime Minister, Phan Van Khai, continued to predict a GDP growth rate of 9 percent for 1998. In mid-year it was clear that Vietnam had been overly optimistic. Export growth declined by one-third compared to the previous year. Foreign investment fell to one quarter of what it had been. This represented a short fall of US $1 billion dollars from what had been expected. These downward trends reflected Vietnam's dependency on its regional neighbours with whom it conducts sixty percent of its trade and on whom it relies for seventy percent of its foreign investment. In July the National Assembly Standing Committee recommended that the official GDP growth rate be lowered to six or seven percent. It also reduced its estimates for industrial growth from fourteen to twelve percent. Inflation was predicted to rise three points from seven to ten percent. Vietnam's deteriorating economic circumstances were addressed by the party Central Committee that met from 6th-16th July. This meeting stressed the importance of mobilising internal capital resources to make up for the short fall in foreign investment. Vietnamese economists estimate that US $7 billion in private capital lies untapped in Vietnam. This figure represents one-third of Vietnam's domestic capital. Shortly after the fifth plenum, Prime Minister Phan Van Khai issued a decree authorising the creation of a securities market as the first step towards creating a stock exchange. Vietnam will open a trading floor in Ho Chi Minh City in October, and a similar centre will be established later in Hanoi. A fully fledged stock exchange is not expected until after the turn of the century. The Prime Minister's decree must now be followed up by action. Until other reforms are implemented in the banking and financial system domestic investors are likely to be cautious with their funds. Vietnam must also accelerate the equitisation of state owned companies, and ensure their viability, if it is going to have more than a handful of limited companies which qualify for listing. Finally, Vietnam will have to amend its Domestic Investment Law if it is to attract foreign investment. Presently foreign investment is limited to thirty percent for joint ventures and private firms.

WATCHPOINT: Will policy changes be sufficient to mobilise domestic, and foreign, investment?


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