As the global search for the “new China” intensifies, focus is increasingly shifting to the recent track record and future potential of Vietnam. The integration of the communist country into the world economy has brought stellar growth in parallel with social development.
The Asian Development Bank’s economist in Hanoi, Omkar Shrestha, says watching the pace of change around him is like a flashback to his time in China in the mid-1980s when that nation first started opening up to the outside world.
“It’s the same kind of momentum,” says Shrestha, praising the balance the government has achieved in driving forward the economy and simultaneously slashing the number of its citizens living in poverty.
Following the South-east Asian country’s first ever international bond sale in October – a resounding success – and a rally that has pushed the capitalization of its stock market through the $1 billion mark, foreign investors are taking notice. Not before time: Vietnam’s economic growth has improved in each of the past four years, reaching 8.1% in 2005, a performance to rival that of its superpower neighbour.
“It’s not a new story, but the world has finally woken up,” says Rick Mayo-Smith at local securities and property firm Indochina Capital. “It’s a good example of a developing country showing how to develop in a balanced way,” he observes.
As a net oil exporter, Vietnam is a beneficiary of surging energy prices; it’s expected to join the World Trade Organization later this year, massively boosting its export potential; government debt is relatively low at about 50% of GDP. This all adds up to an economy that is well placed to continue riding the globalization boom.
And it’s not only investors who are taking an interest in the country. Tourists too are taking advantage of the stable political environment to explore the exotic Pacific coastline. Visitor numbers surged to 3.5 million last year, up from 2.3 million in 2001. The resulting capital inflow supplements remittances from Vietnamese living abroad, also on the increase. Payments sent home to friends and family jumped by $1 billion to $3.2 billion in 2005.
Private investment
What really impresses Shrestha, however, is how government efforts to encourage private investment have filtered through to all layers of society. Every other family has some kind of business, he says, and poverty levels have tumbled to below 30% from near 60% in about a decade.
Global brands like McDonald’s and Starbucks may not yet be in evidence in Vietnam, but they are on their way. In the biggest investment to date by a US company in the country, Intel won permission for a $600 million chip-assembly and testing plant in Ho Chi Minh City in February.
The communist nation is a major beneficiary of the so-called China plus one effect. International manufacturers, worried about protectionist responses to the industrial dominance of the Asian superpower, or simply wary of putting all their eggs in one basket, are increasingly choosing Vietnam over Indonesia or India as their No. 2 base.
That effect may be exacerbated when the 149-nation WTO admits Vietnam, possibly within the next six months, eliminating overnight a broad spectrum of quotas limiting exports of textiles and other products.
Vietnam has already broadened its export range from agricultural commodities like coffee and rubber to textiles and garments, and increasingly higher tech products including computers.
International optimism about future prospects resulted in the overwhelming success of Vietnam’s first dollar bond issue last year (see EM awards). As yet, foreign capital, restrained by strict laws, accounts for only about 10% of the investment which has fuelled economic growth. That’s kept out some of the biggest global funds, though locals have been happy to fill the gap. Vietnam’s savings rate is among Asia’s lowest.
Dangers
Those massive levels of domestic investment pose a couple of risks to the economy. With an output ratio of 5, Vietnam is threatened with an over-reliance on investments, which must be broken for the government to retain any hope of meeting its target of at least another four years of 8% GDP growth. The development of education and skills together with physical infrastructure requires urgent attention.
At the same time, the heavy involvement of domestic retail investors in the share buying, helping push the stock market up 70% this year, has created a bubble in valuations.
“There’s still a feeling which is unfortunately being encouraged in some areas that share prices can only go up,” warns Kevin Snowball, manager of the PXP Vietnam Fund. “I think we need a downward correction,” he adds.
Mayo-Smith envisages a drop of 20% to 30%, but both he and Snowball are confident that the strong fundamentals and bullish sentiment around the country will quickly lead to a recovery and prevent shock waves from derailing the general economic story. Anticipated initial public offerings from mobile phone company VNPT, Vietcombank and Incombank among others should help diversify a stock exchange currently limited to less than 30 stocks, helping reduce future volatility.
Of course, political risk remains. But the government has been categorical in its backing for private industry, and perhaps more importantly, it can scarcely afford to let the pace of economic and employment growth slacken. Vietnam’s youthful demographic setup will require accelerating job creation to keep a lid on unemployment among its 82 million inhabitants.
Vietnam seems to have a bright future, with the only questions over how bumpy the road there will be. If the government succeeds in underpinning the fragile banking system and improves transparency of fiscal and monetary policy, it may convince the ratings agencies that its low levels of public debt (around 50% of GDP) and compelling growth story merit an upgrade. Moody’s raised the country’s foreign currency status to Ba3 last July and S&P has a positive outlook on its BB- rating. “They’re moving on the right path, but there still could be some turbulence,” says Tom Byrne, an analyst at Moody’s. The international investing community will be watching closely.