The billion consumers in neighbouring China may command attention, but over the past year Vietnam has stunned on another level – through an extraordinary series of reforms that has given new momentum to its surging economy.
The economy grew 8.2% in 2006, and has maintained this pace in the first three quarters of 2007, boosted by foreign direct investment of $9.6 billion year-to-date. The benchmark VNI stock market index climbed almost 150% in 2006. That sparked talk of a bubble, and the index dropped back after the government removed tax incentives for IPOs in early 2007.
But Vietnamese equities proved uncorrelated to the US sub-prime meltdown, and by October, the VNI had almost recovered to its peak for the year. Unsurprisingly, several well-known names such as Prudential, Jardine Fleming and Deutsche Bank’s asset management arm, DWS, have recently set up dedicated funds to tap into the Vietnam story.
All of this activity reflects finance minister Vu Van Ninh’s encouragement of an increasingly open economy and financial system, typified by WTO entry in January 2007, although the transition to a full market economy is far from complete. According to Chris Freund, managing director of Mekong Capital in Ho Chi Minh City, “reforms have created a much more level playing field for the private sector, which has emerged as a significant engine for growth.”
Ninh has pushed ahead with the privatization strategy known locally as equitization, selling stakes in two insurance companies and a petrochemicals firm so far in 2007. In addition, after raising foreign ownership limits to 49% for non-banks and 30% for banks in 2006 (from 30% and 15%, respectively), the government also allowed foreign entry to the over-the-counter equity market in 2007. These factors have contributed to the surge in stock valuations, and analysts estimate as much as $3 billion in new international funds raised to invest in Vietnam as at September 2007, which should continue to support the market.
But perhaps the most striking feature of Ninh’s tenure has been his ability to learn from experience, both in Vietnam and in other Asian transition economies, says Tamara Trinh, economist at Deutsche Bank. “The country generally emulates China’s transition process from planned to market economy. It looks at Thailand’s success at becoming a major south-east Asian tourist destination and air hub. And it wants to create national champions out of its large state enterprises, perhaps along the lines of South Korea’s chaebols.”
After delays in the auction process of Bao Viet Insurance in June 2007 undermined investor confidence, the government postponed the much-awaited IPO of Vietcombank to streamline its handling of the process. The equitization is now scheduled for October, and if this is combined with a successful return to the Eurobond market – postponed from September 2007 due to the global high-yield sell-off – it would certainly re-establish Vietnam’s astute handling of investors.
The next challenge for Ninh is to integrate his goals “into a broader policy framework,” says Trinh at Deutsche. “In this context, it is positive to note that the government has an increasingly open attitude towards foreign consultation with international organizations like the IMF or World Bank as well as private businesses.”