Vietnam - iuj.ac.jp€¦ · COUNTRY REPORT Vietnam July 2000 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom At a glance: 2000-01 OVERVIEW The EIU still

COUNTRY REPORT

Vietnam

July 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2000-01OVERVIEWThe EIU still expects the existing factional balance within the leadership tosurvive the intensified political manoeuvrings in the run-up to next year’sParty Congress. Strong manufacturing and agricultural growth will driveGDP growth up to 6% in 2000, but growth will slow in 2001 as investmentweakens. The resumption of import growth will send the current accountback into deficit from 2000, but inflation will remain low throughout theforecast period.

Key changes from last monthPolitical forecast• There have been further signs of a tilt towards China as the prospects for

reaching a trade pact with the US this year recede. Changes to middle-level party and government leadership positions in recent months still donot reveal much about the political struggle between conservatives andreformists.

Economic policy outlook• Despite some amendments to the Foreign Investment Law, the prospects

for a new round of comprehensive reform remain bleak. Recent budgetarydata suggest huge fiscal deficits are likely this year and next.

Economic forecast• On the basis of a strong performance in the first half, we have revised our

forecast for GDP in 2000 up to 6%. Negative year-on-year inflation in thefirst six months of 2000 has confirmed our forecast of an average annualrate of inflation of zero in 2000, picking up to 4.5% in 2001.

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ISSN 1356-403X

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Vietnam 1

EIU Country Report July 2000 © The Economist Intelligence Unit Limited 2000

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2000-017 Political forecast8 Economic ploicy outlook9 Economic forecast

13 The political scene

18 Economic policy

23 The domestic economy23 Economic trends27 Agriculture29 Manufacturing30 Infrastructure32 Financial and other services

34 Foreign trade and payments

List of tables

10 International assumptions summary11 Forecast summary21 Estimates of budget revenue and expenditure21 Budget revenue and expenditure, Jan-May25 Industrial output25 Growth of selected industrial items, June26 Consumer prices26 Comparative operating costs34 Merchandise trade

2 Vietnam


List of figures

13 Gross domestic product13 Dong real exchange rates24 Shares of industrial output by sector35 FDI and ODA committments

Vietnam 3


Summary

July 2000

The prime goal of next year’s Party Congress of maintaining factional balanceis likely to be achieved. In the lead-up to the congress there is unlikely to bemuch progress towards economic reform. The EIU has adjusted its forecast forGDP growth in 2000 up to 6% on the basis of the government’s first-halfestimates, but still expect a slowdown next year. Inflation is expected to remainunder control, but the current account will return to deficit this year.

The struggle between reformers and conservatives has intensified in the run-upto the Ninth Party Congress, to be held in 2001. Frustrated by attacks on hisassociates and supporters, the prime minister, Phan Van Khai, offered hisresignation but it was refused by the party. He is likely to step down next year,and be replaced by a fellow southerner and economic reformer, Nguyen TanDung, currently the deputy prime minister. The party’s purification campaignhas claimed some victims, but the penalties have been light.

The National Assembly has approved a watered-down set of changes to theforeign investment law. To boost privatisation, Haiphong is experimentingwith auctioning off firms, and the government is seeking foreign aid tocushion the impact of redundancies. The 2000 budget envisages a modestgrowth of revenue. A number of licences have been abolished, but the drive fora more comprehensive overhaul of the licensing system is meeting withresistance from vested interests.

GDP grew at an annual rate of 6.2% in the first half of the year, a sharpacceleration over the 4.8% growth seen in 1999. Industrial expansion led theway with output rising 14.3%, supported by good harvests (but low prices) forrice and coffee. The expansion was stronger in the south, where it was fuelledby consumer spending and private investment. Consumer prices fell by 2.4%in the year to June, but they would have risen but for the sharp fall in the priceof rice, so Vietnam is not in a true period of deflation. Taking this into account,the State Bank has said it will not boost the money supply.

Talks are expected to resume in July on a trade agreement with the US, whichnow looks within reach. Imports and (especially) exports of oil have risen invalue on the strength higher oil prices. Non-oil exports rose by 15%, andoverall exports by 26%, in the first six months of the year. There was a largeincrease in investment goods imports. A rise in the dollar interest rate, whichcaused a large movement out of dong and into dollars, had little effect on theexchange rate. Foreign direct investment commitments of about US$60m permonth, or half the rate of 1999, are improving in quality.

Editor: Anthony GoldstoneEditorial closing date: June 30th 2000

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

July 3rd 2000

Outlook for 2000-01

The political scene

The domestic economy

Economic policy

Foreign trade andpayments

4 Vietnam


Political structure

Socialist Republic of Vietnam

One-party rule

The cabinet is constitutionally responsible to the National Assembly, which is elected forfive-year terms

The president, currently Tran Duc Luong

Unicameral 450-member Quoc Hoi (National Assembly); elections take place every fiveyears. The assembly appoints the president and the cabinet

Centrally controlled provinces and municipalities are subdivided into towns, districtsand villages, which have some degree of local control through elected people’s councils

The regional people’s courts and military courts operate as courts of first and secondinstance, with the Supreme Court at the apex

July 20th 1997; next election due in 2002

The Communist Party of Vietnam, and in particular its Politburo, controls both theelectoral process and the executive

The Communist Party of Vietnam (general secretary, Le Kha Phieu); the VietnamFatherland Front

Prime minister Phan Van KhaiDeputy prime ministers Nguyen Tan Dung

Nguyen Manh CamNguyen Cong TanPham Gia Khiem

Agriculture & rural development Le Huy NgoConstruction Nguyen Manh KiemCulture & information Nguyen Khoa DiemEducation & training Nguyen Minh HienFinance Nguyen Sinh HungForeign affairs Nguyen Dy NienIndustry Dang Vu ChuInterior Le Minh HuongJustice Nguyen Dinh LocLabour, war invalids & social affairs Nguyen Thi HangMarine products Ta Quang NgocNational defence Pham Van TraPlanning & investment Tran Xuan GiaPublic health Do Nguyen PhuongScience, technology & environment Chu Tuan NhaTrade Vu KhoanTransport & communications Le Ngoc HoanCentral bank governor Le Duc Thuy

Official name

Form of state

The executive

Head of state

National legislature

Local government

Legal system

National elections

National government

Main political organisations

Main members of the cabinet

Key ministers

5

EIU Country Risk Service July 2000 © The Economist Intelligence Unit Limited 2000

Economic structure

Annual indicators

1995 1996 1997 1998 1999a

GDP at current prices (D trn) 228.9 272.0 313.6 361.5 386.7

GDP at market prices (US$ bn) 20.9 24.5 26.7 27.2 27.8

Real GDP growthb (%) 9.5 9.3 8.2 5.8 4.8

Consumer price inflation (av; %) 16.8 5.6 3.1 8.8 4.3c

Population (m) 71.9 73.1 74.3 75.5 76.7

Exports fob (US$ bn) 5.2 7.3 9.1 9.4 11.5

Imports fob (US$ bn) 8.3 10.5 10.5 10.3 10.4

Current-account balance (US$ bn) –2.6 –2.4 –1.7 –1.1 0.1

Reserves excl gold (year-end; US$ m) 1,376 1,797 2,085 2,098 2,500

Total external debtc (US$ bn) 7.6 9.8 10.0 10.2 10.5

External debt-service ratio, paid (%) 5.0 6.8 5.9 9.2 9.3

Exchange rate (av; D:US$) 10,970 11,100 11,745 13,288 13,922d

June 23rd 2000 D14,075:US$1

Origins of gross domestic product 1999 % of total

Agriculture 25.8

Industry 33.5

Services 40.7

Total 100.0

Principal exports 1999 % of total Principal imports 1997 % of total

Crude oil 18.2 Materials & fuel 56.1

Textiles & garments 15.2 Refined petroleum 9.7

Footwear 12.1 Steel 4.7

Rice 8.9 Machinery & equipment 33.2

Marine products 8.3 Consumer goods 10.7

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total

Japan 15.8 Singapore 19.9

Singapore 11.5 Japan 12.8

Taiwan 7.1 South Korea 12.4

Germany 6.3 Taiwan 11.9

US 5.9 Sweden 6.8

China 5.1 Thailand 5.9

a EIU and official estimates. b Constant 1989 prices. c Excludes transferable rouble debt. d Actual.

6 Vietnam


Quarterly indicators

1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

PricesConsumer prices (Dec 1997=100) 76,171 78,309 79,141 80,464 83,141 82,468 81,483 83,767 % change, year on year 4.6 8.3 9.0 9.4 9.2 5.3 3.0 4.1

Financial indicatorsExchange rate D:US$ (end-period) 12,982 12,965 13,907 13,892 13,902 13,931 13,993 14,028M2 (end-period; D m) 84,102 87,239 93,586 101,116 n/a n/a n/a n/a % change, year on year n/a n/a n/a 34.0 n/a n/a n/a n/a

Sectoral trendsRice production (annual totals; m tonnes) ( 29.1 ) ( 31.4a )Rubber exports ( net; ’000 tonnes) 49 43 46 53 55 49 52 57

Foreign trade (US$ m)Exports 729 661 891 827 721 982 1,023 1,115Imports –864 –1,116 –886 –965 –800 –967 –975 –1,132Trade balance –135 –455 5 –138 –79 15 48 –17

a Estimate.Sources: FAO; International Rubber Study Group, Rubber Statistical Bulletin; Press reports, FT; State Bank of Vietnam; General Statistical Office, Statistical Yearbooks.

Vietnam 7


Outlook for 2000-01

Political forecast

A series of changes to middle-level party and government leadership positionsin recent months indicates that the initial jockeying for position in the run-upto the next party congress (scheduled for March 2001) has begun. However,despite rumours that the reformist prime minister, Phan Van Khai, who ranksnumber three in the Politburo, may be forced out of power at the congress (andwell-attested reports that he may even have already offered to resign aspremier), the changes do not present a consistent picture of the state of play inthe putative struggle between economic reformers and conservatives. Whatthey do suggest, however, is that the political climate is not conducive to boldinitiatives on economic reform. Instead it is one in which caution is likely toprevail, and individual politicians will be wary of taking risks.

The changes that have taken place in recent months do not fit comfortablyinto a framework where political players are identified as either reformists orconservatives. Various individuals identified as economic reformers have beenboth promoted and demoted in recent months, and one of the mostprominent figures to be caught up in the turbulence, Nguyen Xuan Loc, wassacked as deputy prime minister in November, only to be appointed in April toa lesser, but still important, position. Adding to the confusion, at the CentralCommittee’s most recent plenum in April three committee members werereprimanded, only one of whom, the planning and investment minister, TranXuan Gia, was clearly identifiable as a reformist. Mr Gia also had a rough rideduring the National Assembly session in May when delegates gave him agrilling on his economic stewardship, but he continues to advocate reformistideas. The new trade and foreign ministers have both espoused what might becalled reformist causes in their first months in office the streamlining of thelicensing system in the case of the former, the US trade agreement in the caseof the latterwhile the old foreign minister, Nguyen Manh Cam, remains thedeputy prime minister and continues to play an active role in economic affairs,most recently as head of the Vietnamese delegation to the donors’ mid-yearmeeting in Danang in late June.

It is conceivable that the target of these upheavals is Mr Khai, not in hiscapacity as a reformist but in his role as third-ranking Politburo member andpowerful faction leader. If the precedent of recent congresses is any guide, theeventual impact of this intense jockeying on the balance of power at the verytop of the political ladder could be minimal. Thus, despite the rumours of MrKhai’s replacement, the congress may well in the end confirm the positions ofthe current ruling troikawhich, apart from Mr Khai, consists of the partygeneral secretary, Le Kha Phieu, and the president, Tran Duc Luong. Howeverthe overriding concern of the leadership is that there should be no disruptionto the hard-won factional and regional balance that the troika represents. Itnow seems possible to maintain that balance by replacing Mr Khai withanother southern reformist, the deputy prime minister, Nguyen Tan Dung.

Domestic politics

8 Vietnam


Although talks are due to resume in July, the trade agreement with the US, stilllooks unlikely to win US congressional approval before this year’s US presid-ential election, a casualty of the prevailing domestic political stasis. Vietnamseems to see its sole recourse in these circumstances as being to play the Chinacard, but the perceptible warming of relations with China in recent months(marked by last December’s land border agreement, reported progress in talkson demarcation of the Tonkin Gulf and high-level contacts between the twocountries’ Communist Parties on ideological and policy issues of commonconcern) will not force the US into a strategic retreat.

The scope for rapprochement between China and Vietnam is limited byhistoric suspicions and by China’s insistence on treating Vietnam as asubordinate. More specifically deep differences between the two countries overtheir overlapping claims in the South China Sea continue to exist. China’ssuccessful bid for membership of the World Trade Organisation (WTO) willmake any serious tilt towards Vietnam and away from the US even moreunlikely. Because Vietnam’s trade agreement with the US in fact extends wellbeyond trade and into such areas as investment, government procurement andintellectual property rights, and is an important precondition for Vietnam’sown WTO membership, its successful conclusion will have effects that go wellbeyond trade with the US—it could well provide the key to reviving flaggingforeign direct investment. Vietnam’s second thoughts on the agreement, whichit initialed last July, may wring some concessions from the US, but at the costof further delays in its ratification.

Economic policy outlook

The government will continue to maintain fiscal and monetary discipline.However, the present constellation of political forces means that the long-hoped-for new round of economic reforms, which is widely believed to benecessary to return Vietnam to the growth path from which it had slippedeven before the onset of the regional economic crisis in mid-1997, will not belaunched before the party congress in May 2001. In particular, entrenchedinterests in the party will prevent a concerted effort being mounted to breakthe nexus that links the government, the banking system and the state-ownedenterprises. The acceleration of GDP growth that occurred in the first sixmonths of 2000, in the absence of significant new reforms, will strengthen theposition of these interests. The government is prepared to tinker with theoperating environment. At its May session, for example, the National Assemblyapproved some promising-sounding amendments to the foreign investmentlaw, but without more fundamental changes they are unlikely to reviveflagging foreign-investor interest.

Recently issued budget data suggest that in 1999 the government departedfrom its strict discipline that had been the hallmark of its fiscal policy in recentyears. Contrary to earlier reports, which suggested the government had failedin its mid-year plan to boost spending, the published data indicates that actualspending was more than 14% higher than the amount initially budgeted. A farmore modest increase in revenue above their initially budgeted level meant

International relations

Policy trends

Fiscal policy

Vietnam 9


that the deficit for the year was 5.1% of GDP in 1999. How the deficit wasfinanced is something of a mystery—aid disbursements and government bondissues do not seem to have been sufficient to cover it, but the governmentappears to have also avoided monetising the deficit. In the next two years theEIU expects the deficit to remain high. The trend towards a falling tax take (interms of GDP), which was briefly reversed in 1999, is expected to resume as aresult of mounting domestic and international pressure for cuts in value-addedtax, corporate income tax and import duties. However, although the modesttax take will continue to constrain the ability of the government to providecounterpart funds for foreign-assisted projects, to raise salaries to adequatelevels and to maintain social spending at existing levels, there is some evidencethat disbursement of overseas development assistance is improving, allowingthe government to sustain these larger deficits. In the ongoing debate withinthe government over the advisability of monetising the deficit with a view toreversing the current deflationary trends, advocates of fiscal rectitude willcontinue to prevail.

Monetary policy is also expected to be a fairly blunt tool. The main monetaryinstrument available to the authorities, namely interest rate adjustments, willnot impart much of a stimulus to the economy. The cut in the maximummonthly lending rate during the course of 1999 (from 19.6% to 10.6% on anannualised basis) had little impact on money supply or credit growth. This ispartly because, in real terms, the rate was more or less unchanged (by the endof 1999 year-on-year inflation had fallen to 0.1% from 9.1% at the end of1998). Credit growth was also constrained by the problems of existing debtors,especially in the state enterprise sector, and the banks’ cautious approach tonew lending as their portfolios of non-performing loans mount. Similarconstraints will exist over the next two years, as the promised banking reformsmaterialise only slowly. Against this background the governor of the State Bank(the central bank) announced in June that further interest rate cuts were noton the cards on the grounds they would only eat into bank profitability andhasten the trend for savers to move out of dong and into dollars.

Economic forecast

The global environment will be generally favourable for Vietnam over the nexttwo years. GDP growth in Vietnam’s main markets should stimulate demandfor Vietnamese exports. The Japanese economy will gradually pick up momen-tum; despite some moderation of growth in the EU next year, the region willstill keep expanding at around its trend rate; and the recovery that got underway in North-east and South-east Asia in 1999 will be consolidated. Theseunderlying strengths will be reflected in rapid world trade growth andimproving prices for manufactured exports and commodities. Average oilprices are now expected to rise by 37.2% in 2000 year on year, before fallingback by more than 18% in 2001. However, two of Vietnam’s leading exportcommodities, rice and coffee, will not benefit from the general improvementin commodity prices.

Monetary policy

International assumptions

10 Vietnam


International assumptions summary(% unless otherwise indicated)

1998 1999 2000 2001

GDP growthUS 4.3 4.2 5.0 2.9OECD 2.4 2.9 3.7 2.9EU 2.6 2.2 3.1 2.8

Exchange rates (av)US$ effective (1990=100) 119.3 116.4 117.5 112.9¥:US$ 130.9 113.9 107.5 104.3US$:€a 1.12 1.07 0.97 1.04

Financial indicatorsUS$ 3–month commercial paper rate 5.34 5.18 6.52 6.55¥ 2–month private bill rate 0.72 0.27 0.05 0.64

Commodity pricesOil (Brent; US$/b) 12.8 17.9 24.5 20.0Gold (US$/troy oz) 294.1 278.8 285.7 290.0Food, feedstuffs & beverages (% change in US$ terms) –13.9 –18.6 –2.8 5.3Industrial raw materials (% change in US$ terms) –19.6 –4.3 16.8 8.8

a Ecu before 1999.

On the basis of unexpectedly strong first-quarter data and a recent governmentestimate that the economy would register GDP growth of 6.2% in the first halfof 2000, we have revised its GDP forecast for 2000 up to 6%. At the same timewe continue to see little chance of growth being sustained at that level in 2001,particularly, as now seems likely, if the trade agreement with the US is notconcluded this year and the modest upturn in investment growth expected in2000 proves unsustainable.

GDP growth was surprisingly strong in the first half of 2000. At 6.2%, it wasfirmly higher than the 5-6% range targeted by the government for the full year.Taking the government’s GDP data at face value (something that the multi-lateral lending agencies have not been willing to do for some time), the explan-ation for this relatively robust performance lies mainly in a return to rapidindustrial sector growth. This, in turn, resulted from the emergence of non-state industry as the sector’s most dynamic component and a recovery of stateindustry after an anaemic showing in 1999, offsetting a marked slowdown inthe rate of expansion of the sector’s other component, foreign-investedindustry, which until recently had been the sector’s driving force. Meanwhile,on the basis of an 8.6% increase in output from the (main) winter-springharvest, we have revised our forecast for agricultural growth this year to 4.5%.

Although demand-based GDP data are not available, first-half growth seems tohave been driven by domestic demand, principally private consumption andinvestment. Although exports grew strongly, imports expanded even faster,and the net contribution of the external sector was probably close to zero.Large export volume increases in manufactures and some commoditiesreflected the happy conjunction of the coming on stream of past investmentsand reviving external demand. Meanwhile imports rose even more strongly,partly to meet the needs of export-oriented manufacturing, but also as a result

Economic growth

Vietnam 11


of heavy domestic demand for investment and consumer goods. Although weexpect external demand to remain strong in the next two years, flagginginvestment suggests that Vietnam will not be well placed to meet it. On thebasis of recent levels of approvals and disbursements, a further slowing offoreign direct investment (FDI) looks likely during the forecast period. Fiscaland monetary constraints will continue to limit public and state enterpriseinvestment. Meanwhile, investment in the non-state sector may well run upagainst a politically inspired rearguard action by the state sector, reflected in aslowing of the equitisation programme and a shift in the allocation of creditback to the state sector. On this basis we expect GDP growth to slow to 4.7% in2001.

Forecast summary(% unless otherwise indicated)

1998a 1999b 2000c 2001c

Real GDP growth 5.8 4.8 6.0 4.7

Industrial production growth 8.6 7.7 9.8 6.5

Agricultural production growth 3.5 5.2 4.5 3.3

Gross fixed investment growth 0.5b –9.5 6.0 4.0

Consumer price inflation Average 8.8 4.3 0.0 4.5 Year–end 9.1 0.1 3.3 5.0

Short–term interbank rated 23.0 20.0 18.0 16.0

Government balance (% of GDP) –2.0 –4.0 –5.1 –4.6

Exports of goods fob (US$ bn) 9.4 11.5 13.9 16.1

Imports of goods cif (US$ bn) –10.4 –10.4 –12.6 –14.5

Current–account balance (US$ bn) –1.1 0.3 –0.1 –0.2 % of GDP –3.9 1.0 –0.3 –0.6

Total foreign debte

(year–end; US$ bn) 10.2b 10.5 11.4 14.9

Exchange rates (av) D:US$ 13,288.0 13,922.0 14,500.0 15,425.0 D:¥100 10,151.1 12,222.2 13,486.5 14,796.2 D:€f 14,882.6 14,832.3 14,052.7 16,042.0

a Actual. b EIU estimates. c EIU forecasts. d Maximum lending rate for working capital. e Excludesrouble debt. f Ecu before 1999.

We now expect a downturn in inflation over the next two years from theaverage annual rate of 4.3% recorded in 1999. We are still assuming thatslightly stronger domestic demand, a higher floor price for rice and thephasing-out of some subsidies, together with the depreciation of the dong,amplified by rises in the dollar prices of some imports, notably petroleumproducts, will boost inflation during the rest of 2000 and into 2001. But even ifmonth-on-month rates of inflation turn moderately positive from June, year-on-year rates will stay negative until August and the average annual rate ofinflation will be zero in 2000. However we expect some upturn in the rate ofinflation, to an annual average rate of 4.5%, in 2001.

Inflation

12 Vietnam


After falling to 0.1% at the end of 1999, year-on-year rates of inflation, asmeasured by the consumer price index (CPI), turned negative in each of thefirst six months of 2000, falling to –2.4% in June. The most important factorcontributing to this outcome continues to be weak food prices, which fell by5.2% year on year in June. Almost all the other categories that make up theindex recorded year-on-year increases. This suggests that fears that Vietnammay be entering a deflationary cycle, brought on by weak domestic demand,are groundless. However, falling food and other agricultural prices are certainlyhaving an impact on demand in the countryside, and the forecast reversal ofthese trends will provide an added boost to inflation in 2001.

The dong is expected to depreciate steadily over the next two years, at anannual average rate of about 5%. This may not be sufficient to stimulateforeign investment but for other reasons—in particular the desire to limitinflationary pressures and to prevent the dong value of Vietnam’s foreign debtfrom ballooning—the Vietnamese authorities will be eager to preserve thestability of the dong relative to the US dollar.

The dong has appreciated in nominal terms against most of Vietnam’s compet-itors since 1997, while in real trade-weighted terms it has depreciated, but lesssteeply than the currencies of countries such as Thailand, Malaysia andIndonesia. However, the combination of buoyant export growth and lowinflation which has now characterised the Vietnamese economy since mid-1999 is seen by the authorities as a vindication of the policy of maintainingdong stability through the crawling-peg system introduced in February 1999.That policy has been sustainable because it was associated with a particularpattern of foreign trade, where a mixture of strong export growth and importcompression sent the trade and current accounts into surplus. While we expectthat pattern to change over the next two years, as imports pick up, stronger netinflows on the capital account will actually increase Vietnam’s import cover(from 2.1 months at the end of 1999 to 3.4 months by the end of 2001),helping to underpin the currency.

During the next two years export growth will accelerate in dollar terms to anaverage annual rate of 17.5%, but import compression will cease, narrowingthe trade surplus and returning the current account to a modest deficit. Furthervolume increases in commodities exports will be partly offset by low prices oftwo of the main ones, rice and coffee, but rising dollar prices and volume salesof manufactured exports and buoyant oil prices will keep exports growing indouble digits over the forecast period. Rising demand for intermediate andcapital goods, largely to feed the expansion of export-oriented industry, willboost the average annual rate of growth of imports in 2000-01 to 18.3%.

Although this pattern was already emerging in the first six months of 2000(when exports rose by 26.2% in dollar terms year on year and imports by32.9%), it was distorted by the prominent role played by oil in the expansionof both exports and imports, and by the boost to exports from new foreign-invested manufacturing capacity. The levelling-off and eventual fall of oilprices and declining FDI realisation will temper the overall growth of exportearnings over the next two years. Rising trade turnover will widen the services

Exchange rates

External sector

Vietnam 13


deficit, even though data for the first five months suggest that last year’s strongrevival in tourism is being sustained. Workers’ remittances, transfers byoverseas Vietnamese and rising disbursement of grant aid will boost the overalltransfers surplus, but these gains will be more or less exactly offset by the effectof higher interest rates and repatriated profits on the income account. The netresult will be the prompt return of the current account to deficit in 2000. Thedeficit will widen in 2001 but, at just 0.6% of GDP, it will be well below thealarming levels of the mid-1990s.

The political scene

Preparations are already beginning for the Ninth Party Congress, which islikely to be held in March or April 2001. Formally, local-level congresses takeplace first, to discuss the "draft documents" of the congress, elect new localparty leaders, and pick deputies to attend higher-level congresses. The firsthurdle is in drafting the documents for the congress, which was supposed to bedone at the Central Committee’s plenum in April but was put off until July.

The delay reflects an intense conflict within the party, particularly about thedirection of economic reform. Until recently the economic reform wing of theparty was on the defensive. Three ministers who lost their porfolios in late1999 and early 2000 were considered to be close to the reformist primeminister, Phan Van Khai. In recent months three members of the Politburo andseven members of the party's Central Committee have been censured,transferred or sacked, for "mismanagement". Most of them were considered tobe economic liberalisers.

Frustrated by the erosion of his power, and by the constraints on his freedomof actionhe was criticised for making a speech last year for which he had notobtained clearance from his colleagues in the ruling triumvirate, the partygeneral-secretary, Le Kha Phieu, and the state president, Tran DucLuongPhan Van Khai is reported on good authority to have offered his

Internal differences slowcongress preparations

Phan Van Khai may be onthe way out

14 Vietnam


resignation in March, only to be turned down by the party. It now appearslikely that he will stand down at the time of the Ninth Party Congress. Hisheir-apparent is the 50-year-old deputy prime minister, Nguyen Tan Dung,who like Phan Van Khai is a southerner, and an increasingly visible and vocalproponent of economic reform. It is significant that Mr Dung, and not MrKhai, presented the government's review of the economy’s performance to therecent session of the National Assembly. He has also been appointed deputyhead of the influential Steering Committee for Administrative Reform. MrPhieu is expected to be confirmed as general-secretary by the Party Congress,more because his position looks unassailable than because of the warmth orbreadth of his support.

The economic reformers may be down, but they are not out, and they arefighting back. Mr Dung has spoken publicly of the need for a trade agreementwith the US, as has the deputy prime minister (and former foreign minister),Nguyen Manh Cam. The minister of planning and investment, Tran Xuan Gia,was reprimanded for "mismanagement", but he kept his job and continues tocriticise the inefficiency of state-owned enterprises. Meanwhile the formerdeputy prime minister, Ngo Xuan Loc, who lost his job because he approved aquestionable project for a recreational water park in Hanoi, has regained ameasure of influence since being appointed a prime ministerial adviser.

Nowhere is the debate between economic reformers and conservatives sharperthan in the positions they have staked out on the abolition of permits and redtape. In February, 84 sub-licences were abolished. The Working Group onImplementing the Enterprise Law, chaired by Le Dan Doanh, the head of theCentral Institute for Economic Management, has scutinised 284 sub-licences,and proposed that 42 should be abolished and 41 transformed into "businessconditions" (which are not mandatory). The group wanted to get rid of afurther 61 sub-licences, but they proved to be too contentious. To give thechanges added weight, they are to be backed up by a government decree ratherthan by a mere prime ministerial decision.

Not all ministries are happy with the changes. One task force member wasquoted as saying that the Ministry of Trade had been strongly opposed to theproposals. A Ministry of Trade official told the press that abolishing thelicences would leave the ministry with “nothing left to manage". Otherministries have apparently been trying to reintroduce the licences through theback door. The Ministry of Construction in effect restored two of the licencesthat had been abolished in February the following month by requiringbusiness certificates for those who wished to work as construction contractorsor consultants, in the form of Circular 01, a move that is considered by someto contravene the Enterprise Law.

This particular development highlights the frequent incapacity of thegovernment to implement its own policies, which are often obstructed atministry or provincial level. This is an issue that is likely to be debated at theNinth Party Congress. This at least seems to be implied by the recent statementof Dao Duy Quat, the vice-chairman of the Central Committee’s Commission

Economic reformersspeak out

Efforts to abolish morelicences bear fruit

Vietnam 15


on Ideology, that delegates will be examining how the party can maintain itsleadership of the government, while making the government more effective.

The tone of political debate has also sharpened, which represents a departurefor a country where there is a premium on seeking consensus. Some of theproceedings of the recent National Assembly session were televised, andshowed deputies sharply questioning ministers, apparently to the approval ofthe viewing public.

It has been officially acknowledged that the purification campaign, launched ayear ago to purge the Communist Party of corruption, has lost momentum.The party secretary-general, Le Kha Phieu, architect of the campaign, said inMay that a review of the campaign to date showed that its results had beendisappointing. He was not specific about the reasons, although he said that thelack of sincerity of party members, including some senior ones, in carrying out“self-criticism” was partly to blame. During the campaign 1,500 party membershad been disciplined, and 1,000 other cadres and businessmen had beencharged with corruption, although only eight people have been subject tocriminal sanctions. The party finds itself caught in an awkward position,wanting to weed out corruption, while at the same time not wanting toalienate the potentially large number of party members who have transgressedat one time or another, or to upset the collegial atmosphere among the topleadership. The campaign will now to move to the local level, where it may beequally relevant but probably also ineffective. In mid-April about 30 protestorsfrom the southern province of Dong Thap staged a noisy protest outside thelocal Communist Party headquarters, holding banners that read "Down withCorrupt People" and "Long live the Communist Party of Vietnam".

One reason that corruption thrives is because the penalties appear to be light.Of 14,200 cases of white collar crime uncovered in 1999, involving smuggling,trading in illegal goods and tax avoidance, only 79 cases were brought to court.For instance it is an open secret that bribes are standard in clearing goodsthrough customs. One "customs service provider" in Haiphong reports that toclear a container through the port requires about US$25 in bribes. A regularimporter at the same port told the weekly newsletter, Vietnam InvestmentReview, that paying bribes was cheaper than the storage and other costsincurred if he had wait for goods to be cleared without offering inducements.Making complaints about corruption was unthinkable because of theretribution such action could bring. Since the system of licensing customsclearance was first introduced last year, a total of 210 businesses have beenlicensed to provide customs services.

The rift between economic reformers and conservatives is not the only faultline in Vietnamese society. There are also divisions between north and south,which surface every year on April 30th. It was on that day, in 1975, that Saigonwas “liberated”. This year marked the 25th anniversary of the event. There wasa solemn commemoration in Hanoi, and a more festive (if poorly attended)one in Ho Chi Minh City. The brutality of the war was given more emphasis inthe celebrations this year compared to the 20th anniversary celebrations,

The tone of political debatesharpens

The penalties forcorruption are light

Reunification festunderscores national divide

The purification campaignis disappointingofficial

16 Vietnam


reflecting perhaps a less conciliatory stance towards the US than in 1995, whentalks got under way about the normalisation of diplomatic ties.

Pham Van Dong died on April 29th, at the age of 94. A close friend andcolleague of Ho Chi Minh, he served as prime minister from 1955 until 1987.His father was the private secretary of Emperor Duy Tan. As a young man, MrDong received an excellent education in Hue and at Hanoi University.Convicted of leading a student demonstration at the lycée in Hue in 1929, hewas detained in the notorious prison on Poulo Condore until 1936. Herepresented the Viet Minh in negotiations with the French in Fontainebleau in1946, and headed the delegation to Geneva in 1954, where, despite an urbaneexterior, he was considered a tough negotiator. As prime minister he found itdifficult to adjust to the peace that followed reunification in 1975, tellingvisitors that it was harder to run Vietnam in peacetime than in war, and heshares much of the responsibility for the inflexible, inward-looking andunsuccessful policies of the 1975-87 period. He remained intellectually activethroughout his life, continuing to write and to comment on public policy evenin his 90s and blind.

Vietnam is tiptoeing back towards a trade deal with the US. The two countriesinitialed an agreement in principle in July 1999, but when the accord wascirculated more widely among the leadership, Vietnam had second thoughtsabout the wisdom of proceeding. The agreement would accord normal traderelations (NTR) status to Vietnam, allowing its goods to enter the US at theusual (low) tariff rates accorded to most countries. In turn Vietnam wouldallow easier access to its economy to US investors and traders. Conservatives inVietnam are worried that the agreement would introduce too muchcompetition too quickly, and that in the long run it would erode governmentcontrol of the economy. More recently a number of senior ministers havespoken out strongly in favor of concluding an agreement, and their views nowseem to be ascendant, especially since the US House of Representatives grantedChina permanent NTR status in May, paving the way to its accession to theWorld Trade Organisation (WTO).

In March Vietnam asked for negotiations to be reopened. The US refused, butsaid that "clarifications" would be allowed. At the invitation of the US traderepresentative, Charlene Barshefsky, the trade minister, Vu Khoan, is due tovisit Washington in July to resume talks. The number of sticking points hasbeen narrowed to four, which suggests that an agreement is now feasible. Evenif an agreement were to be reached immediately, there is probably not enoughtime for the US to ratify it before the US presidential election in November. TheWorld Bank estimates that an agreement could boost Vietnam's exports by upto US$800m annually. It would open the door to a large inflow of investmentfrom the US and other countries hoping to sell to the US market, and would gosome way towards softening Vietnam's image as an unfriendly place in whichto do business.

Talks with the US on an aviation agreement are also due to resume soon. TheVietnamese side hopes that the agreement will allow carriers from both

Veteran prime minister,Pham Van Dong, dies

Trade discussions with USare to resume

Civil aviation talks with USalso continue

Vietnam 17


countries to have access to each other’s markets. Earlier talks broke down onseveral issues. Vietnam wanted to limit the number of US carriers servingVietnam; it also wanted to be allowed to fly to ten US destinations. The USwanted to limit Vietnam Airlines to three US destinations, and wanted "fifthfreedom" rights, which allow carriers to pick up passengers en route to theireventual destination.

Relations with Canada took a sharp turn for the worse after Vietnam executeda Canadian citizen of Vietnamese descent, Nguyen Thi Hiep, in April. The 44-year-old Ms Hiep and her 74-year-old mother, Tran Thi Cam, were arrested atHanoi airport in 1996 when customs officials found 5.5kg of heroin hidden inart objects they were carrying. Both women claimed to know nothing aboutthe heroin, but a Vietnamese court found the two women guilty of trafficking,sentencing Ms Hiep to death and her mother to 20 years’ imprisonment. TheCanadian government unsuccessfully sought to delay the execution. After theexecution, Canada suspended government contacts, kept its ambassador athome, suspended talks on aid and withdrew its support for Vietnamesemembership of the WTO. Tempers are now cooling because Vietnam is likelyto release Ms Cam on "humanitarian grounds" on September 2nd (Vietnam'sIndependence Day), and has allowed relatives to recover Ms Hiep's remains.The incident has however left a sour taste, showing Vietnam's criminal lawsand procedures in an unflattering light.

During its May-June session the National Assembly ratified an agreement withChina that definitively established the land border between the two countries.China is increasingly seen as an ideological soulmate, and a successfuleconomic model. In June a high-level, week-long seminar was held in China,involving Politburo members from both countries, in which the issue ofmaintaining party control while reforming the economy was discussed. Theimplicit message of the seminar was that Vietnam could learn from theChinese experience. However, one limitation on the friendship between thetwo countries is the Chinese conviction that Vietnam, which historically had atributary relationship with China, is a subordinate.

There is some evidence, although it is disputed by the government, thatVietnam is providing military support to the government of neighbouringLaos. Western diplomats claim to have seen military vehicles carryingVietnamese troops in the streets of Vientiane. Laos is attempting to put down along-running rebellion in its northern mountains, which has flared up recentlyapparently because of an influx of weapons financed by Hmong émigrés in theUS. The CIA recruited Hmong fighters into an anti-Communist militia in the1960s, but the group was eliminated in the 1970s and 1980s with Vietnamesemilitary support.

India's defence minister, George Fernandes, visited Vietnam recently, and thetwo countries have agreed to expand military co-operation. India has alsostrengthened its military ties with Japan. All three countries have a commoninterest in containing China. Vietnam will help train Indian officers incounter-insurgency; India will help repair Vietnam's MiG aircraft; and Vietnam

Execution sours relationswith Canada

China is seen as a modelto follow

Vietnamese troops supportgovernment in Laos

Defence links with Indiaare strengthened

18 Vietnam


may arrange to repair, or even build, some of its navy’s ships in Indiandockyards. Vietnam has also signed an agreement with Russia for themodernisation of its 30 MiG-21 jets, which is expected to extend the life of thejets for 15 years and increase their military capabilities.

Hong Kong's Pillar Point Vietnamese Refugee Centre was officially closed onJune 1st, but 137 boat people refused to leave, fearful that they would beunable to cope with living in Hong Kong. In February Hong Kong granted thenearly 2,000 remaining refugees the right to residency, granting social securityassistance to over 200 of them and providing "compassionate rehousing" to 70others. Since 1975, Hong Kong has housed up to 200,000 boat people, morethan all other Asian countries combined.

The Communist Party general-secretary, Le Kha Phieu, visited several Europeancountries in May, in part to help ensure that EU markets remain open forVietnamese products. He argued that political differences should not get in theway of economic co-operation, and even minimised the political differences,saying on Italy's Channel 10 television station: "I am a communist. You arenot. But there is really no difference between us, because we all want to head inthe same direction." In another interview referring to Vietnam's rice exports, hesaid: "I have not heard anyone saying that communist rice is not edible," anargument that might have carried more force if the rice had not come fromVietnam's competitive, market-driven farmers. Mr Phieu also said that Vietnamwas trying to improve conditions for foreign investors.

Economic policy

In an effort to attract more foreign investment, the National Assembly has nowapproved a revised Law on Foreign Investment. The Ministry of Planning andInvestment had originally proposed sweeping changes, but these were whittleddown by the National Assembly Standing Committee, and pruned even furtherafter debate in the National Assembly itself. The result was a revised law that islikely to make Vietnam more attractive to foreign investors, but falls well shortof what had been hoped for. This is in part because of resistance within theNational Assembly to tax concessions that could favor foreign investors and,by implication, threaten state-owned businesses. Some of the changes alreadyintroduced through administrative decree are less radical then they seem.

The main changes are as follows.

• Foreign-invested enterprises (FIEs) can use land and land-associatedproperties as collateral for bank loans—previously a barrier to borrowing fundslocally.

• FIEs can sell their “capital, rights and obligations” without having to givepriority to Vietnamese companies.

• The unanimous approval of board members will now only be required forappointing or dismissing general directors and deputy general directors, andamending corporate charters. Previously unanimity was needed for a number

Hong Kong refugee campcloses under protest

Mr Phieu plays downdifferences with Europe

Changes to foreigninvestment law approved

Vietnam 19


of other types of decisions. This still gives minority shareholders a veto overkey appointments, which means that foreign investors will continue to havean incentive to set up wholly foreign-owned firms rather than enter into jointventures with local partners.

• FIEs can open overseas bank accounts, if approved by the State Bank ofVietnam (the central bank).

• The withholding tax on repatriated profits was reduced by from 10% to 7%(for most cases).

• The government is allowed to take measures to guarantee FIE investmentsin Vietnam.

• Foreign investors can resort to international law if the relevant laws are notavailable in Vietnam.

• FIEs can transform their investment form, through separation, merger orconsolidation. This makes it easier to break up from local partners, changetheir business plans or sell assets if they are liquidated.

In the debate in the National Assembly, a number of deputies expressed theview that changing the law was all very well, but that it did not really addressthe main concerns of investors. A deputy from Ho Chi Minh City, Nguyen DucChinh, said that what foreign investors wanted was “less troubles, not moreincentives”. He also noted that Vietnam’s personal income tax is the highest inAsia. Another deputy, Pham Chuyen from Hanoi, said that it was necessary totackle harassment and red tape at the sub-national level, and that withoutadministrative reform, amendments of the law would be useless. Thissentiment was echoed in public remarks by the deputy prime minister (andformer foreign minister) Nguyen Manh Cam, who noted that two-thirds offoreign investment went to developed countries, and half of the remainder toChina, so that if Vietnam wanted to attract foreign investors, it would have tooffer a favourable investment environment by, among other things,simplifying administrative procedures.

The National Assembly also approved a number of amendments to the law onoil and gas. These lower the taxes levied on exploration and development, andallow firms more flexibility in the pace at which they develop and exploitnewly found reserves. It is hoped that the new law will rekindle interest in thesector, although high oil prices are likely to be even more of a spur todevelopment of the sector.

A recent survey by the Ministry of Planning and Industry asked 64 FIEs whatthe main problems were in doing business in Vietnam. Top of the list was dualpricing, under which foreigners pay more for such items as phone calls anddomestic airline flights. Next was of discrimination against private firms infavour of state-owned enterprises. Third on the list was the difficulty involvedin getting access to land. Other complaints concerned “unwanted” jointventuresthe need to find a local partner in order to gain access to land and tobe able to deal with all the red tapeand the expensive and cumbersome

Deputies stress need foradministrative reform

Surveys reveal continuinginvestor doubts

Fresh incentives for oil andgas exploration

20 Vietnam


process of labour recruitment. There was a sense among those surveyed thatthe process of obtaining business approvals had become easier of late.

An international comparison, based on the perceptions of about 600 informedbusinessmen was unflattering to Vietnam. On a scale of 0 (best) to 10 (worst),Vietnam in 1999 received a score of 8.5 for corruption, one of the highest inthe region. It is not entirely alone however—excluding Singapore and Japan,all the other countries in the region had corruption scores above 8 in 2000.Vietnam had the dubious distinction of being the least transparent of thecountries evaluated. In the light of these perceptions, it is hardly surprisingthat foreign investors are tending to steer clear of Vietnam and make theirinvestments elsewhere. In March the official Vietnam Investment Review ran anarticle on corruption in the region, omitting all reference to Vietnam.

A separate study by the World Economic Forum, found that Vietnam'scompetitiveness fell sharply between 1998 and 1999. Vietnam was ranked 48thout of 53 countries evaluated, down from 39th in 1998. The drop in Vietnam'sstanding was mainly because other countries improved their competitivenessmore quickly than Vietnam did. The measure of competitiveness was based ona wide variety of indicators, including the openness of the economy, the degreeto which the government intervened in business activity, the state of theinfrastructure, the legal structure and macroeconomic policy.

The government has published budget estimates for 2000, but as usual they areincomplete and lack transparency. The estimates envisage a minor (0.5%)increase in revenue, and a modest (2.6%) increase in spending compared withthe outturn in 1999. Just 11.6% of spending is budgeted for education,equivalent to 2.8% of GDP. Capital and current spending account for 79% oftotal spending. Of the remaining 21%, about one quarter will go to servicepublic debt, with the rest being channeled into items that the governmentwould not wish to itemise—such as the party.

According to the deputy prime minister, Nguyen Tan Dung, actual revenue in1999 came to D74.2trn, well above the initially projected figure of D69.5trn. Ifconfirmed, this would mean that revenue mobilisation almost kept pace withthe growth of GDP. More striking is that actual spending in 1999 exceeded thebudgeted amount by 14%. Much of this was due to efforts to boostgovernment spending in late 1999, including an attempt to pay off overduebills. The net result was a budget deficit, according to the government’sdefinition, equivalent to 5.3% of GDP, up from 1.4% in 1998. This fiscalstimulus helped maintain the growth rate of GDP in 1999 at 4.8%, when itmight otherwise have been half as large.

The government issuesunambitious budget

Vietnam 21


Estimates of budget revenue and expenditure(D trn)

2000 1999 1999Budget Budget Actual

Revenue 74.54 69.5 74.2

Expenditure 96.54 82.5 94.1 of which: Capital spending 25.70 n/a n/a Current spending 50.74 n/a n/a of which: education & training 11.24 10.23 n/a health 3.34 2.91 n/a culture & information 0.69 0.64 n/a sport 0.30 0.28 n/a employment programmes 0.10 0.05 n/a

Balance –22.0 –13.0 –19.9

Nominal GDP 418.9a 386.7 386.7

a EIU estimate.Source: Press reports.

Information on actual revenue and expenditure is available for the first fivemonths of 2000, and may be compared with the same period of 1999. Threepoints are worth noting. First, revenue is keeping up with the growth of GDP.Second, revenue from state-owned enterprises continues to decline, with theslack being taken up by higher revenue from FIEs—principally from oilproduction. Third, capital expenditure has risen particularly quickly.

Budget revenue and expenditure, Jan-May(D trn)

% change1999 2000 budgeted % of total

Revenue 28.86 30.71 6.4 100 of which: from state owned enterprises 6.6 6.00 –9.0 21 from foreign–invested enterprises 4.91 8.28 68.7 29 from non–state enterprises 2.23 2.25 0.8 8 from trade 5.07 5.11 0.8 18

Expenditure 30.65 34.27 11.8 100 of which: current 19.91 21.56 8.3 63 capital 6.57 7.50 14.2 22

Balance –1.79 –3.56 – –

Source: Press reports.

The Ministry of Finance continues to adjust the rate of value-added tax (VAT),which replaced the turnover tax in January 1999. The ministry recently halvedthe rate on 18 groups of commodities and services: it lowered the rate to 5%,from the standard rate of 10%, on coal, some mechanical products, and basicchemicals; and reduced the rate on hotel and restaurant services from 20% to10%. The Ministry of Finance introduced the changes reluctantly, concernedabout the loss of revenue that would result from further chipping away at tax

Deficit falls as revenuekeeps up with GDP

Ministry of Financereluctantly cuts VAT

22 Vietnam


rates, and is trying to draw the line at further cuts, particularly as firms that didnot benefit are now keener than ever to push for more tax concessions. Thedeputy minister of finance, Pham Van Trong, who also serves as vice-chairmanof the Tax Reform Committee, described the cuts as "a compulsory step back"in terms of reform of the tax system, and insisted that they would not berepeated.

Despite the concessions the VAT tax regime remains confusing. The problem iscompounded by fraud, particularly the widespread trading and use of fakeinvoices.

The pace at which foreign aid was disbursed rose sharply in the first fourmonths of 2000, increasing by 45% compared with the same period in 1999.This brought the total to US$550m, of which US$402m comprised loans,US$42m consisted of grants, and the remainder was from "other" sources. Theacceleration in disbursement was mainly due to improved procedures in thepayment of aid from Japan, the country’s largest single donor. If this level ofspending continues, disbursements of aid for the year will meet thegovernment’s target of US$1.6bn. Donors have pledged US$15bn in aid since1993 (US$5.8bn of it from Japan), but only about two-fifths of this total hasbeen disbursed so far. Annual pledges have averaged a little over US$2bnduring the past three years.

Much of the aid from Japan goes to large infrastructure projects. The mostrecent loan agreement, worth US$760m, was signed in April. It provides forspending on, among other things, upgrading Highway 1 (US$261m), buildingthe Thanh Tri bridge over the Red River (US$98m) and the Binh bridge inHaiphong (US$80m), creating a television centre (US$190m), and upgradingthe port of Haiphong (US$120m). The 30-year yen-denominated loans have aninterest rate of 1.8% and come with a ten-year grace period.

The government is seeking additional foreign aid to help cushion the socialcosts of restructuring state-owned enterprises (SOEs) and to ensure politicalsupport for further changes. The World Bank believes that SOEs will need toshed 600,000 workers over the next five years—the government foresees429,000 redundancies over the next three years. The cost of retraining,pensions or other compensation amounts to about US$1,800 per worker, orabout US$250m per year.

The National Enterprise Reform Commission wants 1,489 of the country's5,280 SOEs to be equities, sold or leased over the next three years, 380 to bemerged, and 368 that are effectively bankrupt to be dissolved. This last groupcurrently employs about 75,000 workers. However, the cost of restructuringdoes not stop at compensation for laid-off workers; the sum of the firms to beequitised, merged or dissolved have outstanding debts estimated at US$1.5bn,of which one third is owed to state-owned commercial banks. It is not clearhow much of this debt could be assumed by the newly equitised companies.Even after the proposed restructuring, the state-owned sector would stillemploy 1.26m workers in 2003.

Aid disbursements rise,especially from Japan

Aid to ease effects ofprivatisation

Targets for SOErestructuring are released

Vietnam 23


After a burst of activity in 1999, the equitisation process has slowed down.From 120 enterprises at the beginning of 1999 the total number of equitisedcompanies had risen to 370 by the end of the year. Since then only 40 moreenterprises have been equitised. In an effort to reinvigorate the process, thegovernment is encouraging Haiphong in an experiment to auction more thantwo dozen SOEs.

In contrast to the slow pace of equitisation, new private firms are being createdin 2000 twice as quickly as they were in 1999, thanks in part to simpler rulesfor registering businesses set out in the Enterprise Law that took effect onJanuary 1st but also to a concerted effort to reduce the number of permits andlicences required to do business. As of mid June 2000, 5,100 businesses hadregistered their operations since the beginning of the year. This total includesover 300 new joint-stock firms, or more than were registered over the entireprevious decade. Almost three quarters of all private enterprises are in thesouth of the country.

Private firms still face discrimination, relative to SOEs. The minister ofplanning and investment, Tran Xuan Gia, argued recently that there has beena worsening of discrimination in favour of SOEs, encouraged by what he calledan ingrained discriminatory attitude on the part of officials at all levels. Arecent report by the ministry and the German Development Institute notedthat Vietnam’s financial sector is characterised by the intertwining of state-owned commercial banks with SOEs, which crowds out credit to privateenterprises. Mr Gia complained recently that in "many" cases the ministry wasforced to approve projects that it knew were ineffective.

The buoyancy of private business may also be contrasted with reports of thegrowing inefficiency of some state-owned enterprises. The output per worker ofSOEs in Ho Chi Minh City fell from D220m in 1995 to D187m in 1999. Overthe same period these enterprises received subsidies from the state budgetworth US$300m. Despite a 26% increase in overall capital between 1995 and1999, turnover fell by 12% during the same period. Information on statesubsidies to SOEs is not published, but it has long been a bone of contentionfor private business.

The domestic economy

Economic trends

Boosted by good harvests and solid industrial growth, GDP grew at an annualrate of 6.2% in the first half of the year, which is appreciably faster than the4.8% rate seen in 1999. Signs of optimism, if not actual acceleration, wereevident in late 1999 and the first quarter of 2000 (April 2000, page 21). Theevidence indicates that the acceleration is stronger in the south than in thenorth.

Haiphong experimentswith auctioning off SOEs

Continued discriminationfails to deter private firms

GDP growth surpasses 6%in the first half of 2000

24 Vietnam


On the expenditure side, the acceleration in growth seems to have been drivenprincipally by rising consumer spending and private investment. The evidencefor a surge in consumer spending comes from data on retail sales in Ho ChiMinh City, which increased by 7.9% year on year in January-May, and fromhigher imports of consumer goods, most notably motorbike kits. By contrast,for the first time in almost five years, government revenue is keeping up withGDP growth. Spending after rising very rapidly in late 1999, is now growingmore modestly. The government sector is therefore no longer a source ofaccelerated demand. Although exports rose by 26% in dollar terms during thefirst six months, imports rose even more rapidly (33%), and although abreakdown of the external sector in national accounts terms is not available, itseems likely that in these terms trade did not contribute to higher aggregatedemand. Meanwhile the evidence on investment is mixed. On the one hand,new commitments of foreign investment continue to shrink, along withdisbursements. On the other hand, the banking system has plenty of fundsavailable to lend, imports of investment goods are buoyant, and the pace ofdisbursement on aid-financed projects appears to have picked up (seeEconomic policy). The engine driving higher investment appears to be smaller,private firms and households.

Industrial output growth accelerated to 14.7% in the first half of 2000, from10.2% in the year-earlier period. This is the fastest pace for at least two years,and makes it likely that the government’s target of 11.5-12% industrial growthin 2000 will be surpassed. The non-state industrial sector is emerging asincreasingly dynamic—it grew by 18.5% during the first five months of theyear, although it still accounts for less than one quarter of industrial output(compared with nearly half for state-owned industry and around 30% forforeign-invested firms).

Non-state sector leadsindustrial growth

Vietnam 25


Industrial output(% change year on year)

1999 2000 % ofYear Jan Feb Mar Apr May Jun Jan–Jun output

State–owned industry 4.5 11.7 12.4 9.2 13.8 9.1 12.1 12.0 46.0

Non–state industry 8.8 15.0 13.9 22.6 21.0 20.4 19.4 18.5 23.9

Foreign–invested industry 20.0 14.6 9.8 12.2 13.1 18.7 23.5 15.7 30.1

Total 10.4 13.4 11.7 13.0 15.0 14.9 17.6 14.7 100.0

Source: Press reports

The industrial expansion is broad-based. Output in June 2000 was at least 20%higher than in May 1999 in automobile assembly, cement, coal, motorbikes,processed seafood, soap, sugar, televisions and tiles.

Comparing May 2000 with May 1999, industrial output growth was relativelymodest in Hanoi (10%), stronger in Ho Chi Minh City (15%), and surprisinglyrobust in Can Tho in the Mekong (20%) and the country’s third largest city ofHaiphong (22%).

Growth of selected industrial items, June1999 2000

Automobiles (units) 1,067 114.7

Batteries (kwh) 65,000 19.5

Beer (m litres) 65.0 10.9

Bricks (m units) 689.1 8.3

Cement (m tonnes) 1.01 31.0

Cigarettes (m boxes) 218.3 12.2

Clean coal (tonnes) 869,400 20.9

Crude oil (m tonnes) 1.372 17.5

Electricity (bn kwh) 2.284 9.2

Fertilisers (tonnes) 122,300 –4.0

Knitted garments (m units) 2.421 9.8

Ready–made garments (m units) 28.690 12.2

Motorbikes (units) 27,500 85.7

Paper (tonnes) 32,600 15.2

Processed seafood (tonnes) 14,071 28.9

Soap (tonnes) 24,444 26.9

Steel (tonnes) 123,800 19.6

Sugar (tonnes) 57,680 33.3

Televisions (units) 80,340 46.4

Tiles (m sq metres) 3.029 24.3


Consumer prices in June 2000 were 2.4% lower than in the correspondingperiod of 1999. The fall was entirely due to a sharp drop in food and foodstuffsprices, which fell by 5.2% year on year. All the non-food price categories haveactually continued to rise, some quite sharply, including housing andconstruction materials (up by 4.8% year on year) and pharmaceuticals (up by

Falling food prices drivedown inflation

26 Vietnam


3.3%). The food-price deflation reflects a sharp decline in the world price ofrice, which has pulled the domestic price of paddy down to its lowest level indong in a decade.

Consumer prices(% change)

1999 2000Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Year on year 3.0 1.4 0.1 0.4 0.1 –1.4 –1.2 –2.0 –2.1 –2.3 –2.4

Month on month –0.4 –0.6 –1.0 0.4 0.5 0.4 1.6 –1.1 –0.7 –0.6 –0.5

Source: Vietnam Investment Review.

Although labour costs in Vietnam are generally low, there are some lines ofactivity where wages are no longer in the basement. French garmentcompanies planning to open factories in Vietnam claim that labour costs ingarments and embroidery are lower in China and India, but that the productquality is higher in Vietnam and compensates for the higher labour cost. FIEsemploy 316,000 local workers, and pay an average salary of US$74 per month.

When other costs are taken into account, Vietnam is not always a cheap placein which to invest. Notable are the high costs for telephone calls and electricalpower, the elevated personal income tax rate, and the expense of shippinggoods (to Japan).

Comparative operating costs(US$)

Hanoi HCMC Shanghai Singapore Bangkok Jakarta Manila

Worker's salary/month 94 113 248 468 176 64 228

Manager's salary/month 511 488 453 2,163 727 723 620

Engineer's salary/month 251 221 447 1,313 378 190 344

Apartment rent/month, foreign rep 1,850 1,800 1,500 2,285 1,420 2,000 1,970

IDD charge(3 min to Japan) 8.52 8.52 4.3 2.23 3.11 2.59 3.78

Electricity per kwh .07 .07 .035 .05 .03 .0177 .09

Send 40' container to Yokohama 1,825 1,375 880 670 1,466 1,252 994

Petrol, price/litre 0.31 0.31 0.3 0.74 0.34 0.138 0.35

Highest personal income tax rate (%) 50 50 45 29 37 30 33

CPI (New York = 100) 96.8 97.8 144.9 109.4 n/a n/a n/a


From April 1st, the Ministries of Finance and Foreign Affairs started to collect a"management fee" of 6% on salaries paid to Vietnamese employees indiplomatic agencies. In principle the proceeds were to be spent on labourtraining. Not surprisingly the fee was strongly resented by employees, and inJune the Fosco Labour Supply Center in Ho Chi Minh City decided to suspendits collection of the fee, pending approval of a plan for spending it on labourtraining. The fee is tantamount to an additional tax on diplomatic missions.

Labour quality can offsethigher wages

Operation costs can makeVietnam expensive

Some wage wrinkles areironed out

Vietnam 27


Low and inflexible wages in the public sector continue to be a problem,because it is difficult to motivate poorly paid staff, and it creates an incentivefor corruption. The problem is relatively more serious in Ho Chi Minh City,where there are better alternative job opportunities. In an effort to address theissue, Ho Chi Minh City has been allowed to pilot a project that creates a"remuneration fund" that would link pay more closely with performance.

The National Hunger Eradication and Poverty Reduction Programme(Programme 133) claims that the proportion of households in poverty, asmeasured by whether the household could buy enough food even if it devotedall its spending to food, fell from 15.7% in 1998 to 13% in 1999. According toa report issued by Programme 133, nearly US$500m (almost 2% of GDP) wasmobilised to reduce poverty in 1999, from numerous local and foreign sources.

The companion Programme on Socio-economic Development in Mountainousand Remote Areas (Programme 135) started to operate in 1999. Under theprogramme D508bn (US$36m) has been spent to build infrastructure facilitiesand provide training in the 1,000 least-favoured communes (later expanded to1,870 poor communes in 37 of the country’s 63 provinces). The programmehas been criticised for not concentrating enough of the spending on thepoorest communes. In June the prime minister, Phan Van Khai, called on everyemployed person to donate at least one day of work per year to the nationalcampaign to alleviate poverty.

Agriculture

There has been another bumper crop of rice in the south, with the output ofthe winter-spring crop rising by 8.5% to reach 9.3m tonnes of paddy. Thisrepresents almost one-third of the annual paddy crop. About half of theincrease is due to a rise in the area cultivated, but yields also rose by a solid3.9%. Yields are also up in the northern provinces, where the winter-springcrop has been partly harvested.

The higher output is small consolation to farmers, who are facing the lowestprices in a decade. By early June paddy rice was selling for as little as D1,400/kg(US 10 cents/kg) in the Mekong Delta, and some farmers were using it to feedfish. Traders are exporting 5% broken rice for US$169/tonne, and 25% brokensfor just US$135/tonne. Farmers have responded to the low prices by reducingthe area planted for the next crop.

The government has responded to the low rice price by instructing majorexporters to stockpile 1m tonnes of rice until the world price recovers. It haspromised to pay the interest on bank loans taken out for this purpose, and bymid-May nearly 690,000 tonnes had been stockpiled. Households are alsoholding onto a large volume of rice. Despite the good harvest, as a result of thepolicy rice exports were 50% lower in the first five months of 2000 than thecomparable period of 1999. The strategy of stockpiling, however, is risky sincethe price of rice is not expected to rise significantly in the medium term.

Poverty rate falls further

Low prices detract fromanother bumper rice crop

The government askstraders to stockpile rice

28 Vietnam


Vietnam and Thailand have also agreed to export rice jointly, starting with apilot project that would sell 200,000 tonnes of 25% brokens, to which eachcountry would contribute 100,000 tonnes. The stated reason for the move is toboost the prices of Vietnamese rice to levels comparable to those of Thai rice,and to prevent Vietnamese traders from undercutting Thai prices. This isunlikely to work well, but it is possible that the two countries, which are theworld’s two largest rice exporters, are hoping to find a way to co-operate topush up world rice prices.

Coffee growers are in a similar situation to rice farmers, in that output has risenbut prices have collapsed owing to record world production. Output for the1999/2000 season (which ends in September) is expected to be as high as590,000 tonnes, with prospects for an even larger crop in the following season.Exports in the January-May period were up by 70% by volume compared withthe same period of 1999, but revenue actually fell by 1%. Some exporters havebeen hit hard by falling prices: after buying from farmers at a relatively highprice, they have found that the export price was below what they hadexpected. This has led a few traders to delay, or even default on, shipments,which may be expedient for them in the short term but is likely to squeezethem out of the market eventually.

This year Vietnam is expected to surpass Colombia as the second-largest coffeeexporter. Even at the current low prices, Vietnamese coffee growers are able tomake profit: their production costs are estimated at US$0.32/kg (comparedwith US$2.86/kg in Colombia), and they are currently receiving aboutUS$0.70/kg sold.

Although most of the attention is paid to the major crops, particularly rice andcoffee, it is hard not to be impressed by the energy and innovativeness offarmers as they look for ways to boost their incomes, as follows.

• Farmers in Vinh Phuc provinces have discovered that mushroom growingis highly profitable. About one thousand families grew 165 tonnes ofmushrooms last year, mainly for the Hanoi market. The provincial authoritiesare now encouraging more families to participate, hoping to boost output by5,000 tonnes, much of it for export, by 2005.

• Horticulturalists near Hanoi have tapped a lucrative market for lilies inChina, and have been able to gross as much as US$70 a day per farmer fromthis activity.

• In the first quarter of the year Vietnam exported 18,000 tonnes of pepper,156% more than in the year-earlier period. The country is now the world’ssecond largest exporter of pepper (after India), and some farmers are evencutting down coffee trees to plant pepper.

• Vietnam exported 16,200 tonnes of cashews in the first quarter of 2000, up81% on the same period of 1999. This gave the country a 20% share of worldexports, behind only India and Brazil. In part this represents a rebound, afterpoor weather and disease reduced the crop by a quarter in 1999.

Poor prices offset boomingcoffee output

Minor crops showdynamism

Vietnam 29


• Dalat is again becoming the "salad bowl" of Asia, exporting about 3,000tonnes of iceberg lettuce in refrigerated containers in 1999. The impetus camefrom two Australian entrepreneurs, who began to grow vegetables in Dalat in1996. Initially unsuccessful in growing the products themselves, they turned tolocal farmers, many of whom had tried over 60 vegetable seed varieties butwith little luck. Eventually they hit on the right mix of good seed, high qualityfertiliser and water, and the industry has taken off. The good transportinfrastructure, which allows the vegetables to go from being cut to reachingcustomers in Singapore within a week, has been important to this success.

Manufacturing

The EU has further increased its quotas on Vietnamese garment imports for2000-02. The limits in 16 important categories have been raised by an averageof 55% over the 1999 levels, with an overall quota increase of 26%. Thisreflects an improvement in the quality of garments made in Vietnam, and thegovernment’s effort to simplify import and export procedures. An estimated44% of garment exports are destined for the EU market.

The prime minister has decreed that all goods traded in Vietnam must belabeled, providing the name of the goods, the components or ingredients, andexpiry dates. The details for implementing the decree have yet to be issued, butthe change is being resisted by soft-drinks companies, which say they wouldlose D740bn (US$53m) if they had to replace 360m glass bottles that are ill-adapted for labels. Currently labels are printed on bottle caps.

Cement sales are booming, with demand increasing by 23% in the first half ofthe year compared with the same period of 1999 to reach 3.2m tonnes; sales inMay alone reached 1.25m tonnes. Almost all of the increase is in the southernprovinces, and reflects the acceleration in economic growth and the recoveryof investment that has been taking place there. Producers have responded byboosting output to 3.18m tonnes in the first six months of 2000, up by950,000 tonnes on 1999.

Sales of motor vehicles are rising rapidly, reaching 2,585 vehicles in the firstquarter of 2000, up by 101% from the 1,284 sold in the same period of 1999.Sales this year are now expected to increase to at least 8,500, up from 6,988 in1999 and 5,864 in 1998. Most of the buyers are now private-sector businesses,especially southern ones, rather than government agencies as in the past. Thecountry’s 11 joint-venture assemblers have a combined production capacity of140,000 units annually. The local industry is heavily protected by tariffs, whichprovide a strong incentive to smugglers. In late May and early June over 1,000old vans were seized at the port of Haiphong as they were being smuggled intothe country. Most of the vehicles were South Korean brands, destined to serveas taxis. The smuggling of vehicles has also occurred at the ports of Danangand Saigon.

The EU raises garmentquotas again

Soft-drinks makers objectto labelling decree

Cement sales andproduction are booming

Vehicle sales double

30 Vietnam


Special Industrial Zones

• Vietnam has 63 industrial zones (Izs), three export processing zones (EPZs) and ahigh-tech park. Collectively they have spent US$1.2bn on developing infrastructure,about one quarter of the total amount approved. One fifth of the 10,451 ha covered bythe parks has been rented out to clients, so far only 12 of the parks have an occupancyrate of more than 50%. However interest in the parks has increased, and half of the newinvestment commitments in 2000 are for projects in IZs.

• The Tan Thuan and in Linh Trung EPZs each employ more than 20,000 workers. In1999 they purchased only about 4% of their material inputs locally. The biggest barrierto more local purchasing is bureaucratic. If a firm located in one of the EPZs importsfrom abroad, it needs only a single licence, valid for one year; if it buys locally, eachshipment requires a separate licence. Local suppliers also have difficulty getting VATreimbursement for goods sold to firms in EPZs, often making it cheaper for firms in thezones to import the inputs they need.

• The 500-hectare Vietnam Singapore Industrial Park (VSIP), located 17km from HoChi Minh City in Binh Duong province is considered to be one of the most successfulindustrial zones in the country. However, it has yet to turn a profit, although it expectsto do so within two years. Run by a joint venture between a Singapore consortium(51%) and Vietnam’s state-owned Becamex (49%), the park has attracted 43 tenants, ofwhich 27 are already operating. The total investment commitments of confirmedtenants amount to US$430m. The VSIP has had close co-operation from the provincialPeople’s Committee, which has provided some infrastructure as well as an on-sitecustoms office. The VSIP board is allowed to approve investment licences for projectsworth up to US$40m, and so can provide a "one-stop” service. The VSIP consortium hasreceived a licence to build and operate a power plant, in order to provide more reliableservice to its clients. The park hopes and expects to attract clients from the US if andwhen a trade agreement is concluded between the US and Vietnam.

Infrastructure

Once again Vietnam’s heavy reliance on hydropower has led to a seasonalshortage of electricity. For much of May, Electricity of Vietnam (EVN) has beenshort of 250-450 mw of generating capacity during peak hours—about 10% oftotal capacity—as it waited for the major reservoirs to fill. Electricity demand inthe first five months of the year rose by 12% over the same period of 1999,reflecting the pick-up in economic growth. Typically, a 1% rise in GDP causes a1.7% rise in electricity demand.

Although the supply of electricity is expected to be adequate for the next yearor two, particularly as the large Yali hydroelectric power station comes on line,there is now greater uncertainty about the medium term. EVN has asked forpermission to suspend talks with foreign investors over construction of theUS$400m, 700 mw gas-fired Phu My 2.2 station, the 720 mw gas-fired Phu My3 station, the US$120m, 120 mw Wartsila project and a planned plant to bebuilt by Enron International (US) in Soc Trang province. All of these projectswere to be built on a build-operate-transfer (BOT) basis, but EVN claims that

Electricity shortages recur

EVN blocks BOT projects

Vietnam 31


the price that it would have to pay for electricity from these projects would betoo high.

The Phu My 2.2 project was awarded a year ago to a consortium led byElectricité de France after competitive bidding. An executive from theconsortium concluded after talks had stalled that Vietnam was not ready forBOT power projects at the moment, although there was some hope that ameeting between executives of Electricité de France and the party generalsecretary Le Kha Phieu, in Paris in late May, would eventually allownegotiations to resume.

The Phu My 3 power station is part of a larger US$1.5bn project that includes apipeline to bring gas ashore from the Nam Son Con basin, and includes a ureaplant. The consortium involved, headed by BP Amoco and includingPetroVietnam, claims to have reached “99% agreement", but this was beforeEVN raised problems about the price of electricity. Until the pipeline is built,there is not enough gas to operate Phu My 1, which is due to begin operationsin July. It is designed to be able to use petroleum products in the interim.

Instead of these projects EVN would like to go ahead with its own power plant,Phu My 4. If it can obtain concessional financing for such a project, this wouldbe an attractive option, but whether such financing is available is open todoubt. EVN faces a dilemma. It has been accustomed to receiving subsidisedcapital, and so charges a price for electricity that is below the cost required tobring new capacity on line. Thus any power it buys from unsubsidisedsuppliers would be sold at a loss. To address this question it is gradually raisingthe price of electricity to cover costs, in part due to pressure from the WorldBank. The next round of price increases, from US 52 cents/kwh to US 58cents/kwh, will be introduced on October 1st 2000 rather than on July 1st asoriginally planned.

The massive 3,600 mw Son La hydorelectric project is unlikely to be built ascurrently conceived. Despite the recent calls for it to go ahead from the formerprime minister Vo Van Kiet, who strongly favours the project, there are seriousdoubts about safety and financing. The project would flood 450 sq km of landand require almost 100,000 people to be relocated. The National Assembly,with support from the minister of planning and investment, Tran Xuan Gia,said that the feasibility plans submitted by EVN did not adequately address thepotential social and environmental consequences of the project. A scaled-downversion of the project is more likely to gain eventual approval.

By mid-2000 the Vietnam Post and Telecommunication Corporation (VNPT)had 2.8m subscribers, including 285,000 mobile phones and 47,000 pagers.This comes to about 36 subscribers per 1,000 people, up from 16 in 1997 and 2in 1990, making coverage significantly higher than in other low-incomecountries. International phone calls are expensive (about US$1 per minutefrom the US or Europe, more if calling from inside Vietnam), and incomingcalls exceed outgoing ones.

EVN hopes to run its ownprojects instead

The Son La hydro projectmay be scaled back

The phone network isexpanding rapidly

32 Vietnam


A full Internet service became available in mid-1998 in both Hanoi and Ho ChiMinh City. Despite being expensive, there were 67,000 subscribers (63% withVNN, 30% with FPT) by mid-2000, up from 16,000 at the end of 1998. Thereare ambitious plans to make Internet access free to the country’s 800,000university students over the next year or two, at a cost of US$100,000 peruniversity. The government blocks access to about 2,000 pornographic andpolitically sensitive sites abroad, which makes international access to the Webboth slower and less convenient.

The My Thuan bridge opened on May 21st, making access to the provinces inthe centre of the Mekong Delta easier and cheaper. Built at a cost of US$55m,the suspension bridge across the Tien river (a large effluent of the Mekong) isthe largest in the country. The bridge almost certainly fails even a basic cost-benefit test, but gets high marks as a symbol of co-operation (with Australia,which provided most of the finance) and national unity. Plans are now underway for constructing an even larger bridge over the Bassac river near Can Tho,which would make it possible to drive the length of the country withouthaving to rely on ferries.

Both Hanoi and Ho Chi Minh City have an inadequate system for supplyingand distributing water. In some districts water is trucked to residents. This isexpected to change, at least in the case of Ho Chi Minh City, when a 100,000cu metres/day water plant becomes operational in 2001. By 2003 its capacitywill rise by another 700,000 cu metres/day. The water will be provided by threeplants that are being developed under a build-operate-transfer (BOT)arrangement. The current network of pipes also needs attention, with lossesreaching up to 30% in some areas.

House sales in Ho Chi Minh City almost doubled in the first six months of theyear, compared with the same period of 1999. This has been reflected in higherprices, particularly at the lower end of the market. The Asian Commercial Bank(ACB) opened its first real-estate centre in December; since then it has brokered9,000 sales, and lent US$6.85m to 484 borrowers. Its two real-estate agencieshandle around 1,000 and inquiries daily. The ACB’s innovation has beencopied by two other banks, both of which have set up real-estate centres.

Financial and other services

After numerous false starts, it now looks as if an official stockmarket will openin Ho Chi Minh City in July. Unofficial stockmarkets in the city have beenenergised in anticipation of the opening. The shares of several former state-owned enterprises have risen in price by 10-40% since they were first offeredlast year.

The stock exchange will be a modest affair to begin with because of the dearthof stocks and bonds to list. Most of the trading is likely to be in governmentbonds, commercial bank bonds, and "project bonds of the state", as well as inbonds issued by such state-owned enterprises such as Electricity of Vietnamand Phuc Son cement.

Internet use takes off froma low base

My Thuan bridge easesaccess to the Mekong Delta

Ho Chi Minh City’s watersupply will be improved

House sales in Ho Chi MinhCity are buoyant

A firm date is set forstockmarket opening

Vietnam 33


About 50 companies have qualified for listing, including 43 out of 370privatised state enterprises. To qualify, a company must have registered capitalof D10bn (US$714,285) or more, and have reported profits for two consecutiveyears. Not all of the eligible companies will seek a listing initially As of mid-June only two joint-stock companies had been granted licences to list on theexchange, although the list is likely to grow rapidly, and will include at leastone bank (the Asia Commercial Bank). To make it easier for small investors tobuy stock, the face value of corporate shares will be D10,000 (US 71 cents),instead of the current D100,000 dong (US$7.10). At present, foreign investedfirms can not be listed.

In preparing for the stock exchange, the State Securities Commission hasallowed three banks to set up securities firms, increasing the total number offirms to six. It has also drawn up a complete set of rules, including one thatlimits daily fluctuations in prices to 5% for stocks and 1.5% for bonds.

The banking system continues to be plagued with overdue loans, although theextent of the problem is somewhat unclear. The State Bank of Vietnam (centralbank) governor, Le Duc Thuy, said that "overdue debts in financial institutions"were 9.9% (of all outstanding loans) as of the end of April. The deputy primeminister, Nguyen Tan Dung, reported that overdue debts in the banking systemwere 14.7% of loans in May (5% is considered a safe level). The overdue debtsamount to D20trn (US$1.4bn), of which D7trn are classified as bad debts.

The Ministry of Finance plans to set up a Debt Transaction Company later inthe year, to take bad loans off the books of companies that are slated forequitisation. The ministry recently wrote off loans incurred before 1995 bynow-insolvent state-owned enterprises.

The number of foreign visitors—both tourists and others—rose by 7.3% yearon year to reach 860,000 in the first five months of the year. Total touristspending was higher by 8.2% over the same period. A number of niche marketsare emerging. For instance Star Cruises now makes a weekly visit to Phu Quocisland (off the south-west coast), attracting 34,000 visitors annually. And theFurama beach resort near Danang has had rave reviews and is planning todouble its capacity. A construction boom in the mid-1990s resulted in about55,000 new hotel rooms being built, over half of which are of internationalquality. Occupancy rates, while recovering, are low at about 50%, and pricesfor high quality accommodation are currently low by international standards.

The high expense of visas is a deterrent for some visitors, so the tourismindustry was pleased when Vietnam got rid of the visa requirement for visitorsfrom Thailand who tend to stay for less than a month. Vietnamese visitors toThailand will be similarly exempt.

Overdue loans continue tohurt the banking system

Tourist arrivals are up

Visas for Thai visitors areabolished

34 Vietnam

EIU Country Forecast July 2000 © The Economist Intelligence Unit Limited 2000

Foreign trade and payments

The value of exports and imports continues to rise very rapidly, although at aslightly slower pace than at the beginning of the year. Exports for January-Junewere 26.2% higher than in the comparable period in 1999 while imports roseby 32.9%. These figures are inflated by the doubling of the price of oil sinceearly 1999, which affected the value of both exports and imports. Afterstripping out this effect, non-oil exports rose by 15.3% and non-oil imports by26.4%, in the January-June period. Exports of handicrafts rose particularlyrapidly (88.2%), as did electrical appliances and computer accessories (44.8%),and non-traditional agricultural crops including pepper, tea, cashews, fruit andvegetables. Although coffee exports rose by 69.2% in volume, their value barelyrose at all, a consequence of the collapse in the world price. The value of riceexports in the January-June period fell by 47.9%.

The robust growth of non-oil imports points to both a pick-up in consumerspending (imports of Completes knocked-down—CKD—motorbikes rose by191.3% in volume terms) and in economic activity. This is reflected in bigjumps in the imports of investment goods such as machinery and equipment(up 37.5% in dollar terms), iron and steel (up 27.4% in volume terms) as wellas inputs for production including raw materials for garments, textiles andfootwear (which rose by 20%).

Merchandise trade(US$ m unless otherwise indicated)

Jan-Jun1999 1999 2000 % change

Exports 11,523 5,093 6,427 26.2 of which: footwear 1,392 675 749 11.0 textiles & garments 1,747 764 804 5.2 fine arts & handicrafts 165 76 143 88.2 crude oil (m tonnes) 14.74 7.04 7.14 1.4 crude oil 2,092 763 1,439 88.6 coal (‘000 tonnes) 3,276 1577 1,610 2.1 rice ('000 tonnes) 4,508 2,400 1,440 –40.0 rice 1,025 562 293 –47.9 coffee (‘000 tonnes) 488 208 353 69.2 coffee n/a 288 291 0.9 rubber (‘000 tonnes) 263 98 105 7.1 rubber n/a 58 65 11.3 pepper (‘000 tonnes) n/a 24 31 30.3 pepper 35 93 128 37.6 cashew nuts (‘000 tonnes) n/a 7 11 57.0 cashew nuts n/a 42 58 38.1 aqua products (US$ m) 951 430 551 28.1 electronic products & computers 590 268 388 44.8

continued

Imports have been growingfaster than exports

Vietnam 35


Jan-Jun1999 1999 2000 % change

Imports 11,622 5,345 7,104 32.9 of which: petroleum products 7.40 3.98 4.24 6.4 petroleum products 1,054 459 927 101.9 steel and ingots (’000 tonnes) 2,264 1,065 1,357 27.4 steel and ingots 587 279 398 42.8 chemicals n/a 123 135 9.8 fertiliser (’000 tonnes) 3,782 2,014 1,847 –8.3 fertiliser 464 252 229 –9.3 plastics n/a 171 216 26.2 cloth 505 268 170 –36.6 cotton ('000 tonnes) n/a 33 43 30.3 other fabrics n/a 506 624 23.3 machinery & accessories 2,005 930 1,279 37.5 motorcycles ('000 units) 383 153 447 191.3 motorcycles n/a 132 250 89.0 automobiles (units) 17,203 7,635 10,200 33.6 automobiles n/a 61.3 93.3 52.1 computers & electronics 630 263 396 50.3

Sources: United Nations Development Programme (UNDP); press reports.

Foreign direct investment (FDI) commitments have continued to fall, and theaverage project is becoming smaller. Over the first five months of 2000, 104new projects were approved, down by 5% on the comparable period in 1999.More significantly, the amount committed fell by 30% to US$292m. Inaddition, 34 existing projects applied to raise their investment capital byUS$86m, an amount that is 54% lower than in the previous year.

The fall in commitments is undoubtedly real, but should not be overstated.Some of the largest investments that were approved in earlier years were ofquestionable value or viability, including the chimerical US$997m City Horseand the South Thang Long property development projects, which wereapproved in 1996 only to be cancelled two years later (1st quarter 1999, page18), and the Dung Quat refinery project that got a green light in 1998 but has

FDI commitments continueto fall

The quality of the inflowshas improved

36 Vietnam


made little progress. The quality of recent investments appears to be high—half(54) of the new projects are located in industrial zones, representing 72% moreinvestment than in the same period of 1999. Most of these firms aremanufacturers, and many of them have a strong export orientation. They areattracted to the industrial zones by the relative ease of setting up operations,and the lower fees and better facilities that the best of the zones are now ableto offer.

The biggest drop in foreign investment commitments has been in largeprojects (worth over US$5m-10m each), which have to be approved by theMinistry of Planning and Industry (rather than by the industrial zones, or bycity or provincial governments). Just eight such projects were approved inJanuary-May 2000, and they represented 60% less capital than in 1999. Theslowdown in large projects is not surprising. This is because earlier investmentshave led to adequate capacity in high-profile sectors as hotels, office buildings,sugar refineries, automobile assembly plants, and cement and steel factories.Many small projects also go ahead without permission, channeling foreignfunds through relatives and associates in Vietnam.

For the moment, disbursements of foreign investment are running at about thesame pace as in 1999, or at about US$100m per month, according to officialfigures—World Bank estimates put the inflow at about half this level. There is alag of 1-2 years between commitments and disbursements, so the slowdown incommitments is likely to be reflected in lower disbursements by late 2000 orearly 2001.

Although investment inflows may be slowing, outflows are rising. In the 12months to the end of April, Vietnamese firms undertook 11 projects abroad,worth US$4.9m. This lifts total overseas investments to US$13m in 29 projects.Most of the investments are in nearby countries, and many of them are infishery projects, sea transport, wood processing and information technology.The growth in investment abroad accelerated after the government easedregulations on outflows in April 1999.

There has been a slight relaxation of import restrictions over the past fewmonths. The Ministry of Trade has reduced the number of items that requirean import licence from 20 to nine. These include bicycles, electric fans, alcoholand fertilizers. In addition, a number of important goods may not be importedat all, including cigarettes, second-hand consumer goods and "products of adepraved culture".

Despite the easing of restrictions, and an average tariff rate of about 14% in1999 which is relatively low by regional standards, some manufacturingindustries benefit from very high tariff barriers. They include motorcycles(which enjoy a tariff of 59%), non-alcoholic drinks (50%), bricks and tiles(48%), and sugar (32%) as well as motor vehicle assembly, steel and cement.These industries also benefit from non-tariff barriers. The Ministry of Planningand Industry has criticised the strategy of import-substituting industrialisation,arguing that it diverts resources into uncompetitive sectors of the economy

FDI disbursements areholding up to 1999 levels

Import restrictions areeased slightly

Tariffs remain high forfavoured industries

Vietnam 37


(where state-owned enterprises often dominate) and works against thedevelopment of labor-intensive export-oriented sectors.

Phan Thanh Ha, deputy head of the macroeconomics division of thegovernment-supported Central Institute for Economic Management, adds thathighly-protected firms often try to gain licences, quotas, subsidies and othersupport instead of giving attention to prices and the quality of their products.An example of this type of rent-seeking behaviour arose recently from theJapan External Trade Organisation (JETRO), which argued that many of theJapanese companies operating in Vietnam are struggling because they are notadequately protected from imports, and that if Vietnam wants to developinfant industries, it should offer proper protection.

Despite robust export earnings, a shortage of US dollars emerged in late Mayand the black-market exchange rate rose to D14,250:US$1 compared with anofficial rate of D14,067:US$1. This prompted calls for the faster depreciation ofthe dong, and for the State Bank of Vietnam (the central bank) to requireexporters to surrender more of their foreign exchange in return for dong.Under current rules, 50% of foreign exchange earnings must be converted,down from 80% until September 1999. The State Bank resisted making thesechanges, on the grounds that adequate foreign exchange was available. It alsostressed that it did not want to undermine enterprises’ freedom of action byimposing restrictions on them in this way.

The main immediate cause of the shortage was that importers needed moreforeign exchange because of the higher price of oil, while the buoyant earningsfrom oil exports had not yet been deposited into the banking system. The StateBank helped ease the situation by borrowing US$128m in dollars from theMinistry of Finance (in a large part from oil export earnings) and making themavailable to the banking system.

More fundamentally, over the past year there has been a rise in the interest ratepaid on dollar deposits relative to dong deposits. Interest rates on most dollaraccounts rose by another percentage point in April. As a result, firms andhouseholds are acquiring dollars and placing them in deposits in Vietnam (oroverseas). This has caused a temporary surge in the demand for dollars. In thefirst half of the year foreign-exchange bank deposits rose by 20.6%, while dongaccounts grew by just 7.8%. Dong lending rose by 13.1% while dollar loansincreased by only 3.5%. Local banks have put their surplus dollars to work bydepositing them in overseas banks, and had accumulated US$2bn in suchbalances by early May. The State Bank is said to be drafting changes to agovernment decree on foreign-exchange management, which would allowbanks to lend foreign exchange to exporters and investors, and not only toimporters as is the case currently.

The ease with which dong and dollars may be substituted for one anotherreduces the State Bank's margin of manoeuvre. If the State Bank increases thesupply of dong, in an effort to keep interest rates low and boost credit, peoplewill shift into dollars, and the result will mainly be a burst of dong inflation. Ifthe supply of dong is reduced, in an attempt to prevent a flight into dollars,then this will push up dong interest rates and run the risk of slowing down

Rising dollar interest ratesleads to a dollar shortage

The State Bank has limitedroom for manoeuvre

38 Vietnam


economic growth. So it is not surprising that the central bank governor, Le DucThuy, affirmed, at a press briefing in June, that the State Bank would not tryand expand the dong money supply. He went on to say that it would beimpossible to reduce Vietnamese dong interest rates on both loans anddeposits without cutting off the supply of personal and other savings to thebanks and igniting inflation. In April the State Bank lowered the rediscountrate, at which it lends dong to commercial banks, from 0.5% per month (6.2%per year) to 0.45% (5.5% per year).

Documents

Vietnam - iuj.ac.jp€¦ · COUNTRY REPORT Vietnam July 2000 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom At a glance: 2000-01 OVERVIEW The EIU still