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Vietnam’s Roaring Private Sector

By Dominic Scriven

One of the more hackneyed laments of recent years has focused on the moribund state of Vietnam’s economy, and the absence of a serious private sector. A closer look is merited, however, not least since Vietnam is now established as Asia’s second fastest economy. The following comments address the power of the private sector; its problems; and a confident prognosis for the future.

First, the last few years have established a firm, and uncontested legal basis for private business: the landmark Enterprise law of 1999, the country’s first Banking law in 2000, Decree 48 on the stockmarket, and upgraded privatization legislation last year. The Constitution, reviewed in 2001, unambiguously leveled the playing field with the State-owned economy.

The effect has been dramatic: 55,000 new businesses have been registered, including more than 20,000 in 2002 alone. There now more than 1,000 privatized companies; 21 listed companies; and 40 private sector banks. This does not include more than 2,000 foreign businesses.

The private sector is the principal source of new job creation (at 1.4m school leavers per year, this dwarfs the total state-enterprise workforce of 1.8m); and is responsible for more than half of non-oil exports – including world-beating performers rice, cashews, coffee, and pepper; garments, footwear, and housewares. The private sector invests more than either the state, state enterprises, or foreign investors, equivalent to more than 6% of GDP per year; and churns out a quarter of industrial production. The private sector is the principal motor behind a doubling of bank deposits and 50% increase in bank credit in the last three years. There can be little doubt who is the pied piper in this robust economy.

But there are issues, principally as a result of growing pains. First among these is modest scale: few businesses are more than first generation, and family ownership is the norm. This leads to inexperienced management, most visible in an unwillingness to plan for the long term, and a ruthless focus on near-term profitability. Partly due to this, businesses suffer from a lack of transparency, though much of this reflects an outdated allergy to tax payment. Clearly this, in turn, impacts on the valuations that such companies attract and almost all business sales are transacted at close to book value. And lastly, all of the above lead to much distorted capital structures, over-high real interest rates, and a dysfunctional financial system: the largest listed company has not one dong of medium term debt, while half the deposits of the banking system are kept in dollars, and lent offshore at minimal margins. Vietnam is not the poor country that many believe – rather it suffers from a misallocation of resources.
They say that nothing is impossible in Vietnam, but anything can happen. Here’s a few cheerful, and entirely achievable predictions for the future:

The number of privatizations will treble in three years; the number of listed companies will double in each of the next five years; both money supply and bank credit will double in the next three years; real interest rates will halve; and asset markets will boom.

Dominic Scriven is a director and co-founder of Dragon Capital, and manager of Vietnam’s largest investment fund, Vietnam Enterprise Investments Limited.

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin,
Jonathan Lemco, Jean-Marc F. Blanchard, Barry Metzger, Russell Smith,
Ilissa A. Kabak, Andrew Novo, Jonathan Hopfner, C. H. Kwan, Dominic Scriven and Andrew Thorson

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