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Very Positive Signs in Vietnam

By Michael Preiss

HONG KONG (KWR) One country to watch this year is Vietnam. Both macroeconomic developments and local political change are worthwhile paying attention to.

Some 10 years ago global investors were very excited that reforms and major economic policy changes (Doi Moi) could help Vietnam come out of its economic isolation. At that time, however the old leadership disappointed and Vietnam fell of the radar screen.

This year however the country is back with a vengeance. Today Vietnam is run by a new generation, leaders ready to let go of the past, to forget about communism, to adopt free market principles in the national economy.

Steady annual economic growth of 7 per cent, the US-Vietnam bilateral trade agreement, outsourcing from China and a dynamic private sector are all catalysts for attracting foreign investment into Vietnam.
“Hang Khong Vietnam” (Vietnam Airlines) once affectionately know as Hang On Airlines, for its low efficiency (to put it politely) now flies the most modern jets and has expanded its international network and flight frequency to bring business travelers and the world back to Vietnam’s markets.

Especially the routes, Beijing to HCMC and Hanoi are packed with Chinese manufacturers looking for further outsourcing opportunities, before more tariffs and trade sanctions get imposed by the Bush Administration and before the RMB is likely to be revalued this year.

In addition, remittances repatriated to Vietnam by the 2.5 million overseas Vietnamese (Viet Kieu) has become an important financial source of capital. The money the overseas Vietnamese repatriated has registered a 20 percent increase last year, reaching US$2.7 billion. Overseas Vietnamese also come back to invest. Latest figures show 1,274 projects and businesses have been set up by overseas Vietnamese with a total amount of registered capital of U$710 million.

Commodity exports in 2003 grew at 18.5 percent; the highest for the last three years. Export value accounted for 52.6 percent of GDP, much higher than the 46 percent for 2001 and the 47.6 percent for 2002.

The structure of Vietnamese exports has also changed. The proportion of light industrial products and handicrafts in total export values rose to 41 percent in 2003 from 33.8 percent in 2000; the exports of crude oil or semi-posed items fell to 49.5 percent in 2003 from 55.8 percent in 2000; and exports of processed items rose to 50,5 percent from 44.2 percent during this period.

Vietnamese products have entered almost all the corners of the world helped by the cheap dong. One U.S. dollar currently is around 15,715 Vietnamese dong.

Exports to America, Europe, Asia and Africa have increased considerably, especially to the US, which has become the biggest trading partner with an estimated two-way trade value of $3.7 billion, accounting for 20.2 percent of Vietnam’s total export value in 2003.

To further facilitate the new boom, the central bank has allowed foreign bank branches to mobilize dong funds from Vietnamese individuals and organizations. Foreign bank are now allowed to receive demand and term deposits in Vietnamese dong equivalent to half their equity capital.

International agencies have also renewed their commitment to Vietnam. The World Bank has pledged US$100 million for a poverty reduction program. The Asian Development Bank (ADB) has pledged US$50 million for a banking-finance program and another US$90 million for an agriculture program.

However most importantly, Vietnam has just launched far-reaching measures for the development of the stock exchange. The Government decided to complete the legal framework and foreign -invested enterprises can now officially be equitised. The big news is that the Government’s decision allows foreign-invested enterprises (FIEs) to go private.

Businesses that want to be converted into joint-stock companies can apply in the first quarter of this year. Furthermore, Prime Minister Phan Van Khai announced that the total market capitalization shall reach 3 per cent of GDP by 2005 and 10-15 per cent in 2010.

The Ministry of Finance issued a circular in December allowing individual and institutional foreign investors to buy unlimited numbers of stocks and bonds on the stock exchange and, from 2004, hold larger stakes in securities and fund management joint ventures.

Foreigners can now hold 49 per cent against 30 per cent earlier. Another decree, which came into effect in January, lowers listing eligibility for joint stock companies to a capital of VND5 billion ($319,000) from VND10 billion earlier.

In the bond markets, the government plans to issue approximately VND45,000 billion worth of Government bonds in 2004.

The new generation of Vietnamese leaders should give investors signs of optimism. The economic rules that have limited Vietnam for decades are now being dismantled and state ownership gives way to private capitalism. Once Vietnam embraces capitalism, democracy and the rule of law will follow. It could well reinvent the whole country and put Vietnam firmly on the radar screen of international investors again.

Michael Preiss is the Chief Investment Strategist for CFC Securities.