VNRE - Economic opportunities are returning to the country that has been touted as Asia's youngest tiger. This year, the Prime Minister's office expects Vietnam's GDP to grow by 6.7%. However, growth is not without its costs. Inflation is back at its highest level since 2008. Meanwhile, rumors circulate about the State Bank of Vietnam (SBV) devaluing its currency yet again.
One reason for rising inflation is the government's policy of easy money for the banking system, effectively maintaining low real interest rates to stimulate economic growth. But it is Vietnamese citizens and investors who bear the brunt of this policy as consumer prices have risen almost 10% since last October.
Contrary to the model of export-oriented growth, Vietnam actually runs a trade deficit. The Ministry of Planning and Investment predicts that the deficit will total $13.5 billion for 2010, much of which is the result from a widening trade relationship with China. This imbalance has put downward pressure on the value of the VND as the country's foreign currency reserves have become depleted.
In this year alone, the SBV has devalued the Vietnam Dong (VND) three times, from 18,500 to 19,500 against the US dollar. Meanwhile, the black market exchange rate for VND has reached 20,800 against the dollar according to Tuoi Tre Newspaper.
To some extent, the government's policy of easy money has stalled the country's market-oriented reforms. While many state owned enterprises have been privatized, others like the near-bankrupt Vinashin (the government-owned shipbuilding operation) continue receiving handouts of cash from state banks as a result of political selection rather than credit worthiness. Furthermore, the latest scandal from the summer revealed several Vinashin executives who were arrested for mismanaging the company's resources. Even since this summer's events, credit regulations have not improved. This does not bode well for Vietnam's sustained economic liberalization and growth. At its worst, Vietnam's relatively high real estate prices combined with the popping of a credit bubble could throw the country into financial crisis.
Similar to other developing countries, Vietnam is still limited by its weak infrastructure. Transport, energy, and communications investments are behind after decades of neglect by the Communist government. Now it is playing catch up, and all sorts of new projects are in the pipeline. Deep water seaports, airports, highways, and fiber optic lines are on the way. In April the government announced 74 new hydropower plants. Ho Chi Minh City and Hanoi are planned to have their first metro train lines by 2012 and 2014, respectively.
In the meantime, Vietnamese infrastructure is leaking, literally. Recent storms shut down roads on main trucking routes for days at a time. Each year the seasonal floods seem to get only worse. In the short-term, Vietnam's manufacturing exports are severely constrained by its transport options. In the long-term, the country also stands to be hit hard by climate change and rising sea levels. According to the United Nations, over 12,000 square miles (as large as Belgium) of Vietnam's fertile agricultural land may be underwater by 2100.
A major challenge going forward will be enabling infrastructure investments that make economic sense, not just political sense, and allowing the private sector to service the country's infrastructure needs. The government's steadfastness against the temptation to allocate huge sums of public money for low-payout projects will be an indicator of its success for generations to come.
Given these difficulties, the outlook for the Vietnamese market is remarkably positive. A recent survey by European Chamber of Commerce of 200 companies operating in Vietnam shows that 70% of respondents see business prospects as "good" or "excellent" for investment in 2011, as opposed to 30% for "average" or worse. FDI is picking back up, with disbursement this year at about $8 billion, more than 4 times as large over the same period for the Philippines.
Vietnam is also rising onto the world stage as the 2010 Chair for ASEAN, having hosted US Secretary of State Hillary Clinton and other Asian dignitaries last week in Hanoi. As trade agreements unfold, including commitments by a Japanese consortium to build Vietnam's first nuclear power plants, the economy is solidly integrating with global markets. However, the ruling Vietnamese Communist Party still has important challenges to overcome to create a sustainable environment for business. The Party Congress set for 2011 will be a key event to watch for cues into the country's direction in economic governance and whether it can live up to its image as Asia's newest tiger.
Reported by Alex Ngo/ The Wharton Journal
Alex Ngo is a 1st year MBA and dual-degree student at Harvard Kennedy School. Most recently he was a researcher with the Fulbright Economics Teaching Program in Ho Chi Minh City.