Vietnam Economic Update and Forecast 2010 

Vietnam’s GDP growth in 2009 outpaced regional economies with the exception of China and India, (see graphs below). The country achieved 6.9 percent growth in the fourth quarter, bringing the overall growth rate to 5.32 percent for 2009. Vietnam is expected to have a high growth rate in 2010 as well at 7 percent, reported Vietnam News.  As this rate shows, Vietnam continues to be one of the fastest growing economies in the region.   According to the Vietnam News, Citigroup reported on January 8, 2010 that the biggest annual rebound of Vietnam's economy was in the construction sector, which expanded by 11.4 percent in 2009 from almost zero growth in 2008. The rebound has been linked to strong monetary and fiscal stimulus, also evident from the acceleration of credit growth to 37.7 percent in 2009, up from 25.4 percent from 2008. On January 15, 2010, the Director of the National Centre for Socio-Economic Information and Forecast Le Dinh An provided two forecasts for Viet Nam’s economy for 2010.  In the first forecast, the country would concentrate on growth in terms of quality. It would reduce the growth rate to focus on transforming the economy by restructuring production.  He said that under this plan, the growth rate would be 6 to 6.5 percent. Under the second plan which has less focus on transformation of the economy, Vietnam would achieve a higher growth rate inn the short term of 7 percent.  He believes that in 2010 the world economy and Vietnam’s have stepped into the first stages of recovery. As a result, import-export activities and foreign direct investment will not increase in the short term. To achieve high growth, the Government would have to increase investment and spending.  He added that the total investment would have to reach VND835 trillion (US$46 billion), accounting for 42 percent of GDP. The increase means the budget deficit would rise to 6.5 percent of GDP, he explained to Vietnam News.  The plan has the danger that it could act to cause inflation.  Under the plan, export turnover would be expected to reach $66.4 to 67.8 billion while import turnover, $77.5 to 80 billion and trade deficit, around $12 billion. Inflation Citigroup said that according to their studies, Vietnam's Year-end inflation touched 6.52 percent (year-on-year) in December 2009, with a full year average of 6.88 percent. Moreover, Bloomberg forecasted that Vietnam’s excessively overheated growth and a return to inflation in 2010 were causes for concern.  Vietnam has one of the highest inflation rates currently in the region and government action is again required to bring it under control. Market The 18th International Business Report (IBR) survey by the auditing and consultancy firm Grant Thornton surveyed over 7,400 privately held businesses across 36 nations, finding ten countries where businesses were more optimistic about their economic outlooks, including Vietnam. The survey found that expectations of increased revenues in 2010 for Vietnam is the most optimistic, with 95 percent of respondents forecasting an increase in revenue and 91 percent, an increase in profitability, in 2010. However, according to the survey, due to the global recession, average selling prices in Vietnam are expected to decrease by 13 percent.  This means total sales may increase but profitability per unit may fall. At the same time, Citigroup predicted that a mismatch between supply and demand is predicted to remain in the foreign exchange market even though the gap between market and official rates narrowed after some corrective measures were announced in November 2009. A depreciation of the dong by 5.4 percent and a narrowing of the daily trading band to 3 percent from 5 is also predicted.  In early 2010, one US dollar buys VND18,600. Over the past two weeks of January, trading has remained above the official ceiling rate of VND18,479 to one US dollar.  The market is now waiting for the rise in the dollar supply after the Prime Minister ordered major corporations to sell dollars back to the banks to shore up the dong.  With growth remaining strong, the dong will likely remain under pressure in the shadow of the 2009 trade deficit which burst out to US$12.2 billion, Citi economist Johanna Chua wrote in the report. Integration with ASEAN: Vietnam's government is rolling out the red carpet for foreign investment as Vietnam holds the role as chair of ASEAN in 2010.  Vietnam has particular interest in cooperation in scientific research, education and training with the ASEAN community, achieving remarkable results in these areas in co-operation with Singapore and Thailand. However, Vietnam, like most developing countries, suffers from poor infrastructure and Vietnam needs to rely more on its internal economic strength and less on foreign investment to capitalize on its integration into ASEAN.  If the country's internal elements are not ready, the country will not be able to take full advantage of opportunities, creating even more challenges. Former Trade Minister Truong Dinh Tuyen pointed out in a recent seminar, reported by the Bangkok Post newspaper, that Vietnam’s economic achievements and challenges as a member of ASEAN are: - The country expanded its export market by reducing import duties to zero to 5% in 2006 and has agreed to remove them completely by 2015. - It has created a bid market to attract foreign investors not only from its Asean partners but also from outside the trading bloc, especially Europe and America. - Vietnam has faced challenges, however, including intense competition from other Asean member countries. For instance, farmers have suffered from agricultural imports from China and Thailand. - Fluctuations in regional markets have had a sudden and severe impact on the domestic market, especially in the financial sectors and on petroleum and investment capital. A member of the National Assembly and former governor of the Vietnam State Bank, Cao Si Kiem, also said other challenges faced by Vietnam include: - Vietnam’s state revenues suffered from a drop in business profits and tax contributions. - The real-estate market froze and the labour market destabilized, reducing the number of employees in industrial zones, with many returning to rural areas. - Pollution has become a problem because foreign investors had transferred underdeveloped or outdated technology without proper controls, and investment had been often approved at any cost. Future of Vietnam Considering the complex mix of opportunities and challenges both in the economy and politics, the position of Vietnam has obviously strengthened vis-a-vis many of its regional competitors. Many observers have commended the government for upholding growth in the face of the recent recession.  Despite this, Vietnam, faces many challenges that will need to be faced and solved.  Traffic in major cities like Hanoi and Ho Chi Minh City is becoming increasingly congested and chaotic.  The government is investing in road improvements but investment is not occurring fast enough to help accommodate all the new motorcycles and cars being added.  Air and water pollution is a concern in many areas.  The government has expressed determination to increase spending on education and some of this is occurring but more is needed.  Some areas like Binh Duong outside of major cities offer much the better opportunities.  Vietnam in many ways offers one of the most interesting and potentially fruitful markets for investment although the reality is that investors will need to be willing to accept short-term pain in terms of traffic, pollution, lesser trained technicians and management to gain the longer term growth opportunities that Vietnam certainly has the potential of delivering those with well thought out business plans and properly researched and implemented investment and manufacturing ventures.   About the Author:   Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School. He served as Deputy General Counsel of President Gerald Ford’s Presidential Clemency Board. Mr. Runckel is the principal and founder of Runckel & Associates, a Portland, Oregon based consulting company that assists businesses expand business opportunities in Asia. (www.business-in-asia.com) Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China. Mr. Runckel lived and worked in Thailand for over six years. He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War. In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations. Mr. Runckel is one of only two non-Ambassadors to receive this award in the 200-year history of the U.S. diplomatic service.