Monday, November 26, 2007

Reconstruction transforms Vietnam

Doi Moi transforms Vietnam

DECADES of hard work, commitment and continued reformation upon the launch of Doi Moi (meaning “reconstruction”) programme by the Vietnamese Government since 1986 has transformed Vietnam into one of the most dynamic emerging markets in the world.

Vietnam’s growth domestic product (GDP) growth is expected to reach 8.5% in 2007, making it the second fastest growing economy in Asia after China. Government officials have forecast GDP growth at 8.5% -10% in 2008.

Vietnam is also one of the largest recipients of foreign direct investment (FDI) in the world relative to the size of its GDP in recent years. The US, South Korea, Japan and Hong Kong are its largest FDI providers.

At a time when China and India have been dominating the spotlight on the international front coupled with potential US economic slowdown, some sceptics are questioning whether Vietnam will sustain its economic growth and transform itself into a late coming Asian tiger. I will briefly highlight the key transformation factors.

  • Favourable demographics: One of the key drivers of Vietnam’s economic growth is the availability of a young and literate labour force. Vietnam ranks 13th in the world in terms of population with 85 million people.

    The baby boom after 1975 has created an incredibly young population with a median age of just around 25. My working experience with the local Vietnamese has shown that they are eager to work, hungry for knowledge and open to changes. Furthermore, the younger generation are generally quite entrepreneurial. There are many that I have come across who want to set up their own firms in the next few years.

    China plus 1: The availability of young and low cost labour, coupled with government incentives to attract FDI, has made Vietnam an attractive manufacturing centre in the region. With increased political pressure from the US and European Union over cheap Chinese exports, many manufacturers - already well established in China - are engaging in a “China-plus-one” strategy by looking at Vietnam as a way to diversify.

  • Benefiting from the commodity boom: Unlike some of the emerging economies, Vietnam is benefiting from the upcycle in crude oil price, being the third largest oil producer in Asia. The country is also the largest exporter of pepper and the second largest exporter of rice and coffee in the world. These major resource-based exports have witnessed impressive growth over the recent years as a result of the overall commodity boom.

  • In 2006, commodity and fishery products continue to be the top export products for the country, with the combined value equivalent to 26.7% of the country’s GDP (see table).

  • Non-resource-based exports to gain momentum: With increased FDI and a “China plus 1” strategy by manufacturers as mentioned above, non-resource-based exports such as textiles, footwear and furniture are dominating as top foreign exchange earners with the country’s clear shift from agriculture to manufacturing.

    The country’s accession into the World Trade Organization (WTO) on January this year is expected to accelerate FDI inflows to the country and provide room for the country’s exports to grow. Furthermore, ever-cozy ties with the US and China will continue to support its booming trade performance.

  • Equitisation of SOE boosting the equity market: The equity market of the country has experienced a strong rally since 2005 due to the ongoing restructuring and the gradual equitisation of the state-owned enterprises (SOEs). This reform path is very similar to the privatisation of government-linked companies (GLCs) in Malaysia in the early 1990s. The stated goal is to eventually prepare the SOEs to be equitised through initial public offerings.

    The equitisation of some of the SOEs since 2005 has attracted strong foreign investors’ interests.

    Not all is rosy: History has shown us how the economies of Asian tigers overheated 10 years ago and the ultimately went through some painful corrections. Although Vietnam’s prospects look promising, there are potential risks that could adversely impact its economy going forward. Stay tuned.

    Cheah is conducting investment research in Vietnam. He was formerly head of investment research in a domestic broking firm. He welcomes feedback at