Saturday, October 13, 2007

Vietnam economy set to keep surging

'All the fundamentals' in place to back 9% annual growth for five years


As Vietnam's success story continues to remain vibrant and the county moves closer to usurping Thailand's position as the second-largest economy in the 10-member Asean grouping, economists say economic growth could flirt with double digits for the next five years.

"The macroeconomic fundamentals of the country continue to remain very strong and we do not see any reason to doubt that their growth could be less than 9% per year for the next five years," said Sriyan Pietersz, head of research at JP Morgan Securities, who leads the Thailand, Vietnam and Pakistan research desks for the firm.

"They have all the fundamentals to support this kind of growth, be it the 37% investment-to-GDP ratio, the increased spending on infrastructure, the FDI (foreign direct investment) inflows, the lower labour costs that are nearly 50% less than China's, or the very young and hard-working population where nearly 60% of the population is less than 30 years old," he said.

During the last quarter, Vietnam reported growth for the first nine months of the year at about 8.16%. Mr Pietersz said that this was not a long-term trend that would lead to a downgrade in the country's growth forecast. Vietnam had anticipated growth to be at least 8.5%.

The 8.16% growth through September marked the fastest pace for the January-September period in the last 10 years, the General Statistics Office said in a report. In the same period a year ago, the economy grew 7.84%.

GDP, which measures the value of all goods and services produced in the country, was estimated to be worth 787 trillion dong (US$49 billion) in the first nine months.

The manufacturing and construction sector grew 10% from a year ago to 328 trillion dong ($20 billion) during the three quarters, representing 42% of total GDP. The services sector grew 8.5% to 301 trillion dong ($19 billion), accounting for 38% of GDP.

Slower farming production, however, dragged down overall growth. The agricultural sector grew 3% to 158 trillion dong ($10 billion), accounting for 20% of the economy.

The government targets economic growth of 8.5% in 2007, compared with 8.17% growth last year. The Asian Development Bank predicts Vietnam's economy could grow 8.3% this year.

Mr Pietersz said in a note to clients earlier this week that the growth seen during the third quarter was mainly due to the country's broad-based strengths, including local retail sales growth, export turnover and a surge in foreign capital inflows. Third-quarter GDP growth was 8.2%, the biggest year-on-year increase in a decade, driven by the record 8.5% growth of the services sector. The country witnessed a positive shift in its economic structure with more contribution from services (41% of GDP) and industry (42%) compared to 40% and 41%, respectively, in the third quarter of last year.

Despite this, Vietnam still depends heavily on exports, which account for close to 60% of GDP and could be a drawback in case of any downturn in the global markets, which are already jittery since the onset of the sub-prime crisis in the United States.

Commenting on the ongoing boom in the equity markets, Mr Pietersz said that the equity market continues to hold great "long-term" potential as the country is poised to be the next Asean powerhouse.

"The long-term potential for the country is very good, but the problem is that the big-capitalised stocks are already reaching their foreign shareholding limits," he said.

The Vietnamese market has been so strong that fund managers have snapped up shares over the past few years. Vietnam, he says, has a foreign shareholding limit of 49% for non-financial companies and a 30% limit on finance-related companies.

"If you look at the major companies that funds like to buy, nearly two thirds have already reached their foreign shareholding limits," he said.

Although a few initial public offerings are in the pipeline, very few carry the punch that foreign investors are looking for as most are state-owned enterprises.

"The private companies still lack that strength and are still small in size," Mr Pietersz said, adding that some good buys can be found but liquidity could be an issue.