BASIC DATA  

After a roller-coaster decade which saw surges of interest and disappointment from foreign investors, Vietnam is enjoying a renaissance. The events of 2000 have been as significant as Hanoi's 1987 decision to begin experimenting with market-based economics.

Vietnam signed a comprehensive trade agreement with the United States that will not only open the world's largest market to Vietnamese goods, but will permanently alter the way Vietnam does business. The market liberalizing reforms that Vietnam must enact as part of the agreement will open new opportunities for foreign investors and improve conditions for investors already operating in the market.

Vietnam passed a new enterprise law that will help unleash the tremendous potential of Vietnam's private sector enterprises. Domestic private companies will determine Vietnam's economic future, so the government's willingness to improve conditions for these firms is hugely important.

Vietnam opened the country's first post-war stock exchange. The exchange may be only a pilot stock trading center with four listed companies. But for a conservative, communist government to adopt the ultimate capitalist tool only three years after witnessing the Asian Crisis symbolizes that Hanoi is committed to reform once again.

A final public relations victory will be the visit of U.S. President Bill Clinton in mid-November. The visit is the first by a U.S. president since the end of the war and will provide another opportunity for Vietnam to showcase itself in the world's media.

These seminal events could not have come a moment too soon. Vietnam has endured economic stagnation and declining investment for the past three years (largely because of government inaction.)

Vietnam averaged economic growth of over 8% through much of the 1990s, fueled largely by foreign direct investment (FDI). FDI commitments peaked at $8.6 billion in 1996, but since then dropped precipitously to $600 million in 1999.

The regional crisis was only partly responsible for the decline. Foreign investors simply found it too difficult to make money in Vietnam. During the boom years of the mid-1990s, officials in Hanoi and bureaucrats at the provincial and local level, became accustomed to foreign investors willing to do anything to get deals signed and projects licensed.

Local partners and bureaucrats held all the cards so they cut very tough deals with foreign investors. Narrow margins combined with a difficult operating environment, a small domestic market, and widespread corruption meant losses accumulated faster than expected. Companies re-evaluated their investments and many chose to pull out or to not move forward with licensed projects.

The government now appears to be taking a more accommodating approach to foreign investors. There is a greater understanding that foreign investors are in Vietnam to make money and that they can, and will, choose to invest in other more promising markets.

With a trade agreement signed and likely to go into force in mid-2001, Vietnam's economic prospects are brighter than they've been for years. The agreement will increase production by Vietnam's exporters, increasing overall economic activity and demand for inputs and services.

For investors who decided to stick it out during the tough years, and for those who can capitalize on Vietnam's new status as exporter to the U.S., the coming years in Vietnam should be rewarding.

In the first quarter of 2000, FDI levels were down 75% from 1999. The reasons for the decline are outlined in the overview above. Foreign investors have also voiced concern about the high cost of employing skilled workers. The topic has become a frequent talking point at meetings between government officials and the foreign investment community.

Vietnamese in the highest tax bracket face an 80% income tax. In practice, it is foreign companies that have to bear this burden. By law and to offer competitive salaries to senior Vietnamese managers, foreign companies must ensure that take-home pay is above a certain level. But to give a local employee take-home pay of, say, $3000 per month, the company must offer a salary of around $15,000 per month. As a result, companies do not have an incentive to promote local managers, and in many cases would just as soon hire an expatriate.

Another deterrent to foreign investment is the two-tier pricing system. Discriminatory prices are still levied against foreign invested enterprises for services such as electricity and transportation. The government recently abolished two-tier pricing for domestic telecommunications services. This will have little impact, however, since it is Vietnam's overseas call rates that are among the highest in the world. These price-gouging rates are the same for foreigners and locals alike. According to telecom authorities, these prices are due to decline in October of this year.

In general, foreign investors have found success in the following sectors:
- Export manufacturing
- Agricultural processing
- Seafood
- Consumer goods
- Protected industries

In the first quarter of 2000, industrial output grew by 13-14%. Foreign invested firms saw growth of 9.8% during this period. The non state-owned and domestic invested sector saw growth of almost 18%. During the same period in 1999, industrial growth was just under 11%.

GDP was at 4% in 1999 and may reach 5 or 6% in 2000. According to the IMF, last year's 4% growth figure may have appeared more positive than it really was. The IMF estimates that 1.7% of the growth came from oil and agricultural exports. One-off increases in export volumes or commodity prices cannot be sustained year-on-year, though Vietnam's oil export value should be up considerably this year due to the global surge in oil prices.

Other factors affecting industrial production will be Vietnam's slow reform of the state-enterprise sector, and gradual loosening of restrictions on private enterprise. Industry growth rates will be affected by the equitization, restructuring or liquidation of mid-size, unprofitable SOEs.

Meanwhile, the most promising source of industrial growth, the private sector, is just finding its feet. While the non-state sector grew around 18% in the first quarter of 2000, much higher growth is needed if the sector is to truly bolster the economy.

The government still exercises overt and covert control over the private sector through complex licensing schemes and high taxation. Widespread corruption, a weak legal framework, red tape and a history of government bias against private companies makes private sector risky.

Rules and laws can be drafted in a whim and can be applied retroactively. Other obstacles include high import tariffs and taxes, which promotes another kind of private sector activity - smuggling.

The new Enterprise Law, passed earlier this year, is gradually coming into force. The Law institutionalizes a number of protections for private investors from the problems cited above. In practice, it will take time for the Law's tenets to filter down to all of the local offices with power to affect private companies.

According to the Ho Chi Minh City Department of Planning and Investment (DPI), 844 private companies in HCM City have registered their operations since the Enterprise Law took effect. The DPI estimates there are now 2580 private companies with $190 million in total capital operating in HCM City.

Through the first three quarters of 2000 exports have been Vietnam's primary economic success story. A large part of the overall increase in export value can be attributed to high oil prices at this moment.

The increases have been broader than this, however. Exports are up between 20 and 40% across a range of products including seafood, garments and textiles and footwear. More promising has been Vietnam's ability this year to export to a wider range of destinations outside of Asia. In addition the private sector's share of total exports has increased.

Footwear exports rose due to higher sales to European markets. European markets now account for 28.6% of Vietnam's exports, up from 23.8% last year. The rest of the increase can be accounted for due to increased demand from recovering Asian markets.

Some export and import trading rights have been liberalized, and even greater liberalization will be phased in once the U.S. bilateral trade agreement takes effect. The share of private firms in total exports has increased from 4 to 14% over the past four years.

Products that are relatively competitive in order of importance:
1. Coffee
2. Cashew Nuts
3. Rice
4. Pepper
5. Exotic Fruits
6. Garments
7. Seafood
8. Footwear
9. Small Diesel Engines

Products that are least competitive:
1. Sugar cane
2. Cotton
3. Oil tres
4. Soybean
5. Maize
6. Flowers
7. Milk
8. Chicken
9. Steel

Vietnam's major export partners (% of total exports)

Vietnam's trade with the U.S. is still minute, and miles away from its full potential. Exports to the U.S. in 1999 stood at $550 million, about one-fourth of the amount exported to the EU. When the trade agreement comes into force next year, Vietnam will likely export over $1 billion in goods in the first year alone. Vietnam may enjoy a brief window of quota-free access to the U.S. so trade volumes for garments/textiles should be especially large during the initial months of the new trade relationship.

Import levels in 1999 grew by only 1% over 1998. This indicated lower demand for capital goods and inputs, reflecting the overall slowdown in economic activity. Vietnam periodically places import bans or quantitative restrictions on products.

As foreign investment dropped and economic growth slowed, Vietnam faced increased pressure on its foreign currency reserves. It has tried to retain hard currency by placing restrictions on imports.

The State Bank maintains an artificially high dollar-dong exchange rate. Most bankers believe the true value of the dong should be between VND16,000 and 18,000 to the dollar. Over the past three years, the Bank has allowed the dong's value to slide gradually from VND11,000 to the VND14,000-$1 rate today.

The exchange rate is allowed to fluctuate within a daily margin of 0.1 percent. As currencies in surrounding countries have started appreciating again, the Vietnamese Dong in comparison is less overvalued than it was. As a result exports are harmed less by the artificial high value of the VND than before.

Around 68% of the population is employed in the agriculture sector. A decade ago the figure was 73%, so the foundation of Vietnam's economy hasn't changed much. What have changed are the fortunes of the farmers.

Rural incomes have increased dramatically since 1989, and there are clear signs that the rural population is benefiting from Vietnam's overall economic growth. However, GDP per head in rural areas lags far behind urban centers. In Ho Chi Minh City, for example, the per capita GDP has reached $1600. In rural areas, the figure hovers between $140-$160 per head.

Agriculture remains one of Vietnam's brightest success stories. Vietnam is perennially one of the world's top two or three rice exporters, and it has become the second largest exporter of robusta coffee. In many places in the Mekong Delta, farmers produce three crops per year, whereas Cambodians still only produce one.

Other key agricultural products are coffee, cashew nuts and rubber. The best prospects for these products, and for rice as well, lie not in increasing production, but in improving quality and investing in processing and storage facilities. Due to lack of capital and insufficient infrastructure, farmers are unable to process raw agricultural products to the standard demanded by developed-world importers.

The main destinations for Vietnam's agriculture exports, therefore, are to developing countries. Some of the largest rice shipments are part of food-for-oil counter trade with countries like Iran and Iraq.

Reform of the banking sector is by far the most important story in the services sector. Vietnam has managed to gradually start reforms of the small joint-stock banking sector. The four large state banks that account for over 80% of the country's total outstanding loans have yet to be touched.

Experimenting with restructuring, merging and closure of the joint stock banks has been a positive start at least. The worst performing of these banks have been merged with stronger ones (at times against the will of the stronger banks.)

Another positive development has been the recent entry of two foreign invested insurance companies, Prudential and Chinfon Manulife. Both companies have employed large sales teams to explain and, of course, sell insurance policies to Vietnamese who have had little knowledge of insurance in the past. This is likely to spur creativity and entrepreneurial talent towards other service industries.