The new optimism over Vietnam investments
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 ive-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.
By Karl D John - Aisa Times - March 28, 2006.
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