The new optimism over Vietnam
investments By Karl D John
HANOI - These are heady days for Vietnam,
which is fast emerging as the new darling for
Asia-destined foreign investors. An investment
forum held in Hanoi this month attracted nearly
1,000 participants, double the expected figure.
And unlike with previous such gatherings, foreign
investors left impressed, rather than depressed,
about what the country had to offer.
Growth in Vietnam's gross domestic product
(GDP) has averaged 7.4% since 2000, one of the
highest growth rates in Asia. The
five-year-old stock market has
recently gained enough depth to warrant
institutional investor interest for the first
time. A recent Merrill Lynch report estimated
Vietnam "will be the fastest-growing [Asian]
country in the next 10 years, far more exciting
[than] Thailand, far more than anywhere else in
ASEAN" (the Association of Southeast Asian
Nations).
Last October's sovereign bond
issue underscored that optimism. Originally
planned as a US$500 million flotation, the debut
deal attracted $4.5 billion worth of actual
orders, goading underwriters to increase the
issuance to $750 million to soak up the excess
demand. Similarly, the January initial public
offering of Vinamilk, a state-run dairy
conglomerate, was fully subscribed, pushing the
equity market's total value past $1.1 billion. The
planned listings of other state-owned enterprises
promise to push the stock market's capitalization
even higher.
All the good economic and
financial news gave international ratings agency
Moody's enough reason to upgrade Vietnam's
sovereign rating for the first time in seven
years, from B1 to Ba3.
Vietnam is now
calling for $25 billion in foreign direct
investment (FDI) to top up the whopping $115
billion the government has provisionally earmarked
over the next five years for a wide range of
projects, including big capital outlays for
infrastructure development.
Vietnam's
communist leaders have, for better or worse,
implemented economic reforms at their own pace,
taking carefully calibrated steps toward opening
the country's markets and dismantling the
strictures of its past centrally planned economy.
But the government's recent commitment to economic
and financial reforms, ramped-up infrastructure
spending and far-reaching market deregulation has
galvanized new investor interest, even among the
most hardened of cynics who got burned during the
government's abrupt opening-and-closing act in the
early 1990s.
Multilateral lenders, who for
years lamented the perceived slow pace of economic
reforms, are now singing the government's praises.
"There is strong investor confidence in
Vietnam's future; it has one of the fastest growth
potentials in the world," Liqun Jin, vice
president of the Asian Development Bank, said at
the recent investment forum. "The challenges ahead
are formidable but manageable if the government
continues the excellent reforms that it has
started."
He said the biggest challenge
Vietnam faces in competing in the global economy
after it enters the World Trade Organization (WTO)
would be the ongoing issue of public
administration reform.
There have already
been several noteworthy reforms, many offering
foreign investors greater legal protection than
ever before. Changes to the legal framework,
specifically the Unified Enterprise Law (UEL) and
the Common Investment Law (CIL), promise to level
the competitive playing field for foreign and
domestic businesses.
The UEL significantly
strips state-owned enterprises (SOEs) of their
past special privileges, for the first time
bringing them under strict legal obligations, and
removing a major obstacle to doing unfettered
business in the country. Time will tell, however,
whether the SOEs do fall within the law or whether
they are allowed to continue as they have in the
past.
Notes
of caution could definitely be heard at the Hanoi
forum, notwithstanding the prevailing mood of
optimism. Julie Hunter, head of debt capital
markets for the ANZ Bank, said: "International
investors will require a local rating
system/infrastructure to know more about the
viability of Vietnamese companies and markets,
which is not in place, but interestingly, they are
investing already."
Dominic Scriven,
co-founder of Dragon Capital, noted that "the
largest obstacle that the government faces is
overcoming the lack of understanding about how
progress should happen and be encouraged
throughout the government. It's not good enough
that a handful of leaders understand, but those
below them need to understand and be able to carry
out the plan."
Vietnam's leaders have
implemented reform at a snail's pace, but the
quest for WTO membership has changed that. In the
past, this was much to do with reluctance to
relinquish power and also a lack of understanding
about the needs of foreign investors. Although the
leaders were well-intentioned, the middle and
lower ranks of the bureaucracy were experienced in
delay mechanisms. Political changes expected at
next month's Communist Party Congress are crucial
in determining whether reforms continue their
momentum or old ways return.
It's not the
first time that Vietnam has gone hat in hand to
the foreign investor community. In the early
1990s, in the wake of Vietnam's first round of
economic reforms, known locally as doi moi,
the government made extensive efforts to attract
outside investment. However, after receiving
considerable amounts of foreign aid and
investment, Vietnamese authorities suddenly had
second thoughts about the desirability of opening
the economy and introduced various bureaucratic
hurdles that blatantly discriminated against
foreign interests. During this period,
bureaucratic graft and extortion topped the list
of foreign-investor complaints.
Harassed
and hustled, many foreigners headed for the exits
even before the onset of the 1997-98 Asian
financial crisis. When the crisis hit, most of the
remaining cash withdrew, draining the positive
momentum from the economy. That unhappy
experience, insiders say, changed perceptions
among Vietnam's top leadership about the future
role foreign capital should play in the country's
development. Viewing the positive impact FDI has
recently had on China's economic growth, and
learning from their past mistakes, Vietnamese
officials are now displaying an unprecedented
openness to foreign capital and commitment to
liberal economics.
For investors, Vietnam
looks different in significant ways from 10 years
ago. Those differences include legal reforms, the
newly established stock market and a breakneck GDP
growth record, which has consistently exceeded 7%
since 2002. Most important, there is a
philosophical understanding among the top
leadership that the country needs to engage rather
than shirk from the international community, as
witnessed by its recent efforts to undertake the
sometimes wrenching structural reforms necessary
to join the WTO.
Previously, foreign
investors were limited by the business models that
were available to them, which in essence consisted
of either joint ventures with state enterprises or
business cooperation contracts that were heavily
and at times arbitrarily regulated by the
government. Now, foreign firms can diversify into
other business models, most notably 100% wholly
foreign-owned businesses, as well as limited and
joint stock companies.
Vietnam is also
giving special emphasis to the equitization
process, opening the way for foreign businesses to
buy shares in state concerns. Sectors that were
previously off limits to foreigners, particularly
in the financial services, have recently opened up
in anticipation of entry to the WTO. Standard
Chartered, ANZ Bank and HSBC have all recently
taken stakes in local commercial banks, and there
are currently 28 different foreign bank branches
now operating in Vietnam - perhaps the most
visible indication of how deeply capitalism has
taken root here over the past decade.
Phung Khac Ka, deputy governor of
Vietnam's central bank, said recently that further
foreign participation in the banking sector will
not strictly depend on the amount of capital
injected, but also in the contribution foreign
banks are willing to make in developing human
resources, transferring technology and promoting
modern management mechanisms - similar to demands
made on foreigners by more developed regional
countries such as Thailand and Malaysia.
"Vietnam, rightly so, is considered to be
one of [Asia's] great untapped markets," said
Michael Smith, HSBC Asia Pacific's president and
chief executive officer. "Competition for capital
is becoming more intense and Vietnam will continue
to be one of the most dynamic economies - with or
without WTO membership."
Indeed, beefed-up
incentives and greater ownership rights have
recently paved the way for a number of big-ticket
foreign investments. On February 28, US technology
giant Intel announced $300 million investment
plans to build a chip testing and assembly plant
in Vietnam. As Intel enters the market, its
suppliers, service and support partners are likely
to follow to reduce shipping and transportation
costs, company executives indicated.
Microsoft head Bill Gates is scheduled to
visit Vietnam next month and meet with Prime
Minister Phan Van Khai, signaling that his firm
might be the next major global player to invest in
the country's fledgling but arguably energetic
software sector. The Vietnam Software Association
(VINASA), with support from the government, has
recently stepped up its marketing activities and
set a goal to secure 10% of Japan's software
outsourcing market by 2010.
Japan, Asia's
largest and Vietnam's third-biggest foreign
investor, has recently warmed to the opportunities
on offer. Since 2003, notably in the wake of the
anti-Japanese riots in China, Vietnam has
benefited from a new tendency among Japanese firms
to diversify their investments across the region.
Rising labor costs in China - now twice as high as
in Vietnam - and power shortages have driven some
big new Japanese investments away from China and
toward Vietnam.
In January, Japan's Nidec
raised its investment in the Ho Chi Minh
technology park to $1 billion, approximately
double the $500 million it had previously
committed. Japanese investors have also committed
combined funds of more than $250 million to
industrial parks in Haiphong, Long Binh, and Dong
Nai provinces. Camera maker Canon, meanwhile, has
recently shifted its global production to Vietnam.
Yamaha and Mabuchi Motors, too, have recently
invested heavily in manufacturing facilities here.
Vietnam's call to foreign investors comes
at a time that China and India still consume the
lion's share of Asia-directed FDI. China is
increasingly the locomotive of Asia's economic
growth, whereby its growing appetite for imports
and willingness to shoulder trade deficits is
helping to fuel the growth of its smaller regional
neighbors. But as Asia's emerging division of
labor comes into clearer view, Vietnam has plenty
of comparative advantages to leverage in
attracting new investments.
Wages in
Vietnam represent some of the least expensive -
albeit low-skilled - labor in all of Asia. With
60% of Vietnam's 82 million population born after
1975, the country has a vibrant young workforce,
with an additional 1.5 million workers each year.
A growing capitalist and fading communist ethos
has led to 20% per annum growth in domestic
consumption in recent years.
At the recent
investment forum, Deputy Prime Minister Vu Khoan
said, "Vietnam was moving from a low-income
economy to a middle-income economy." President
Tran Duc Luong echoed the same message when he
recently met with potential investors at the
presidential palace.
At the widely
anticipated 10th Communist Party Congress
scheduled for next month, it is expected that the
current prime minister will step down after
holding the post for nine years. If his successor
continues down the same reform path, as is
expected, then, yes, Vietnam is certainly headed
further up the regional economic ladder.
Karl D John is chief executive
officer ofThe TCK Group, a
Vietnam-based consulting website.
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