Since the early 1990’s when Vietnam began the process of opening up its country to the world hereby allowing foreign direct investment (‘FDI’), its national currency the ‘dong’ has exceeded expectations with a relatively stable exchange rate. Many challenges in the future for Vietnam include spreading wealth to the masses as 30 percent of Vietnam’s 81.5 million citizens live below the poverty line. Vietnam’s economy is slowly moving away from the flawed centrally planned economic model to a free market open economy although with periods of difficulties similar to other transition countries. In the late 1990’s, foreign investors were turned off by the alleged government corruption that took place with several billions in US-dollars in state assets unaccounted for supporting the current movement in Vietnam of very few getting rich and the majority working poor.
POLITICS: one-party state as the Communist Party in Hanoi is in power. President Tran Duc Luong has been leader since September 1997, Vietnam declared independence from France on September 2, 1945. Vietnam is now taking steps to modernize the economy and integrate into the world’s economic systems. On July 13, 2000, Vietnam and the United States signed a trade pact which will open up communist Vietnam to U.S. companies while Vietnam in return gains access to the United States market under the same system of low tariffs enjoyed by most nations.Vietnam and the United States normalized relations in 1995, restoring full diplomatic ties 20 years after the end of the Vietnam War in 1975 which claimed 58,000 U.S. soldiers and 3 million Vietnamese lives. With reforms, change is slowly taking place as evident with inside party elections now a reality although it remains that there is no challenge to single party rule allowed. Politically,Vietnam is similar to Iran in that the nation is divided between hard-line communists and pro-Western reformers. Although freedoms for the people have increased since totalitarian rule of the late 1970’s and 1980’s, dissent in cases is still crushed by the communist regime. Like China, this is mostly to maintain stability as the country evolves slowly and peacefully to freedom and greater democracy for this socialist market economy.
ECONOMY: quite poor but it is rapidly developing while in the full process of integrating into the global economy. The economy for the most part is sound with low inflation, real high GDP growth which will lower poverty, a current account and fiscal deficit that is low. During the 1990’s, Vietnam experienced robust economic growth averaging 5 to 10 percent per year. The economy is rebounding since mid 1999 after the 1997-98 Asian fianancial crisis after Vietnam experienced an economic slowdown during 1998 with only 3.5 percent GDP growth. During the early 1990’s, the economy suffered economic malaise following the break-up of the Soviet Union with the resulting loss of economic support from Moscow. By the mid 1990’s, early stages of structural reforms and FDI resulted in a large jump in real GDP growth to a buoyant level of 8 to 9 percent. Vietnam is now a rapidly developing nation although much of the people are poor with per capita GDP of approximately $410 USD (2002). The authorities have a goal of $1,000 USD/capita income by year 2010. It should be clarified that the statistics can be misleading as the Vietnamese receive food subsidies, free education and free health care. Exports are helping to fuel growth in Vietnam as both the United States and Japan are major trade partners.
Significant progress for global integration for Vietnam includes the lifting of United States trade embargo in 1994, year 1995 normalization of diplomatic ties with America and the signing of a historic trade pact with the United States in July 2000 giving Vietnam access to the world’s largest economy. Tariffs were accordingly slashed to 4 percent from 40 percent for Vietnamese exports which benefits large global conglomerates such as American shoe maker Nike who have large manufacturing operations in Vietnam. Next goal is admission into the WTO perhaps as early as 2005. Economy will continue with reforms, market liberalization, integration into global market, continue to cut red tape, reform inefficient state owned enterprises and strengthen the rule of law. The society will gradually evolve with more freedoms and democracy over time as Vietnam matures and becomes wealthier, hence more stability. Today, increased freedoms are noticed with relaxation of censorship with Internet access.
As a communist country albeit opening up very slowly to free-market reform, Vietnam is in full transition away from the former ‘command economy model’ with state-controlled markets to a socialist market economy similar to China. The 1997-98 Asian financial crisis coupled with disenchantment from foreign investors over the slow progress of market reforms and widespread corruption resulted in FDI plunging from $8 billion USD in 1996 to $2.7 billion USD in 1997 and to $1 billion USD in 2001. Many investors viewed Vietnam a quite a bit more coolish during this time due to concerns about its tightly controlled economy. The impact of the dong was relatively minor with no large depreciation or downward pressure as Vietnam’s more isolated economy to the world’s financial and economic systems served as a shield from the worst of the 97 Asian economic crisis. By year 1999,Vietnam began its next surge economically forward with more reforms and privatizations of 3000 state owned industries ‘SOE’ and the opening of its own stockmarket in July 2000. Today, modernization is well underway and some analysts believe Vietnam will be the next Asian tiger by 2015.
Economic Statistics
GDP as measured by purchasing power parity came in at $183 billion USD (2002) with corresponding GDP/Capita at $2250 (2002). GDP measured by market prices is at $33 billion USD, GDP/Capita at $410 USD. GDP growth for 2003 projected at 6 percent of GDP, 2002 came in at 5.2 percent, year 2001 at 4.7 percent, 2000 at 5 percent. Inflation is low at 2.5 percent (2003), 2002 at 3.5 percent, year 1997 inflation at 5 percent. A sharp reversal in the current account position from a deficit in 1998 at 3.9 percent of GDP to a surplus in 1999 at 4.4 percent of GDP, year 2000 at plus 2.1 percent, year 2001 at 1.7 percent. External debt is at $14.1 billion USD. Economic aid is valued at $2 billion USD while annual remittances are worth $1 billion USD. Major exports include oil, coffee, shoes, textiles and is the world’s number three rice exporter.
POSITIVES: well-educated nation with 95 percent literacy, one of the world’s largest coffee producers, largest exporter of shoes to the European Union, IMF backed a $368 million USD poverty reduction plan in 2001 for an initial 3 year term, net energy exporter. CONCERN: high unemployment, high corporate and personal income taxes, rising drug addiction, heavy debt burden. A major problem in Vietnam is the rampant government, regional and local corruption that has taken place resulting in civil unrest in different parts of Vietnam. Ministry of Finance is implementing programs to conduct audits on state corporations to stop this abuse of missing government assets. Birth defects from toxic byproduct of Agent Orange use during Vietnam War. From 1965-70, 21 million US gallons of Agent Orange had been sprayed by the United States on Vietnam.
BANKING SYSTEM: weak, banking reforms are underway in order to develop the outdated capital markets although the banking sector encounters liquidity challenges at times. There is a very limited form of a consumer credit system in place, this has to evolve in order for the economy to propel forward although the private banking sector is growing. The insurance industry started in 1999 as modernization takes place with foreign investment most notably with Canada’s Manulife buying into a Viatnamese venture in December 2001. However, today many Viatnamese prefer to have money in real estate or other hard assets even including under the mattress rather than with banks. During year 2002, non-performing loans were measured at 30 percent of the system total. Increasing level of gross official reserves from $1.76 billion USD in 1998 to $3.7 billion USD equivalent to 9 weeks of imports for year-end 2001 which is adequate coverage.
REGIONAL ANALYSIS: China, Laos, Thailand
Vietnam has tremendous opportunity to develop and export to China its plentiful natural resources. These include exploitation of its energy resources including oil, natural gas, liquefied petroleum gas, coal which will be in great demand by China. Even with China’s large cheap labor pool, Vietnam remains one of the lowest cost production centers in all of Southeast Asia.
KNOWLEDGE: Ho Chi Minh city (formerly called Saigon when part of South Vietnam) named after Vietnam’s founding father is the business capital with modern skyscrapers. It is here where average GDP/capita is higher in the cities at approximately $1,500 USD in Ho Chi Minh city compared to a much lower figure in rural areas where fresh water and electricity are a luxury. Bicycles to motorcycles to cars - full transition to a modern economy. Cars are next, even 10 years ago very few motorcycles existed. In the cities now, tens of thousands of motorcycles today with few cars, next step. Similar pattern to Japan and South Korea on how they moved their societies to first world status. Vietnam to experience an increase in their standard of living coupled with a large demand for energy. Continued economic reforms will continue to stimulate the economy as Vietnam modernizes in order to catch up with other countries in areas of telecommunications, banking, etc. Industries of the future for Vietnam will concentrate more on computers and software applications rather than agriculture.
CURRENCY: ISO Symbol ‘VND’, Vietnam Dong. At time of review on August 29, 2003, the dong had an exchange value of 15,520 VND to 1 USD (‘US-dollar’). Exchange controls have been eased since its pegging to the USD in 1999. The currency exchange rate regime today follows that of a managed float. By July 2001, the authorities were depreciating the dong by about 4 to 5 percent per year. The dong is a non-convertible currency. The State Bank of Vietnam during 2002 provided the exchange rate with more flexibility by increasing the exchange band.
CURRENCY HISTORY: the national currency, the ‘dong’ has traded in a stable range relative to the USD over the last 5 years. Historical valuations include: August 4, 2000 at 14,098 VND to the USD, August 25, 1999 at 13,959, in year 1995 at 11,193, November 1993 at 10,800, July 1991 at 8,100.
CURRENCY FORECAST: as the economy continues to open up to the rest of the world, the dong may begin to experience more volatility. Previously, the dong escaped much of the Asian regional financial currency crashes, particularly in 1997 although the dong was devalued by 9.1 percent in August 1998 as the authorities maintained steady devaluations during the late 1990’s. However, with further economic integration into the region, this may change. Vietnam is now no longer closed off to the rest of the world and the dong will be impacted by developments in the Japanese yen, Chinese yuan and Thai baht. It is widely believed that China will have to revalue the yuan which is currently linked and significantly undervalued to the USD. The dong will experience a sizeable depreciation to the Chinese yuan in the years ahead. In 2002, Vietnam garnered a B1 sovereign rating which is a few notches just below investment grade, tapped the bond markets for first time. Over the very long term, BI.C thinks that the young majority will continue to support pro-Western lifestyle as the elder hard-line communists pass on. The future looks very bright indeed for Vietnam.
UPDATED: August 29, 2003.
