Viet Nam

by Emma-Kate Kunth-Symons

Mass move to cities creates new challenges

Urban Poor The millions who have flocked to the cities create a host of new development challenges
Photo by Ian Gill

When the West’s financial crisis impacted on the real economy, Viet Nam was more vulnerable than most. Oil prices, on which food costs largely depend, hit a high of $147 per barrel in July and tumbled to half of that by October.

A raft of reports indicated that Asia’s youngest “tiger” economy—which joined the World Trade Organization (WTO) last year and had originally forecast growth of 9% for 2008—was, in fact, highly exposed to the global downturn.

The Citigroup Vulnerability Index said Viet Nam’s exposure was caused by the fact that it had little room to move in the event of a sudden stop or reversal in external financing or capital inflows. Sixty-four percent of Viet Nam’s foreign exchange reserves were made up of “external financing” (defined as the current account deficit plus debt payments).

Global Insight, a United States (US)– based economic research and forecasting group, listed Viet Nam as among emerging market economies with a high banking sector risk, because of its “high potential for instability due to excessive political influence and poor risk assessment and banking practices.”

The bloated banking sector, comprising more than 40 banks plus unlisted lenders and foreign bank branches, was predicted to experience a rash of failures. However, ANZ, one of the largest international banks in the Asia and Pacific region, said it was taking a long-term view on Viet Nam’s economy. In October it was granted a license to open the third foreign bank in the country, following HSBC and Standard Chartered.

Despite this show of confidence, the scores of smaller banks in Viet Nam were struggling to compete with the size and capital base of large banking players such as Sacombank, Vietcombank, and Asia Commercial Bank. A period of mass consolidation was expected as foreign competition increases while Viet Nam complies with its WTO membership.

Standard & Poor’s issued a negative outlook on sovereign ratings for Viet Nam, along with Pakistan and Sri Lanka. The ratings agency cited inflation, national politics, and deterioration in external and fiscal indicators as factors influencing the negative outlooks for the three Asian nations.

In addition, the World Economic Forum’s (WEF) 2008 Global Competitiveness Index dropped Viet Nam two places to 68th out of 131 economies on its annual ranking of countries. The biggest problems for doing business in Viet Nam include inflation, poor infrastructure, and a poorly educated working population, the WEF said.

Could the global economic tsunami wipe out years of successful poverty reduction and achievement of key Millennium Development Goals in Viet Nam?

World Bank chief Robert Zoellick at a joint press conference in Washington, DC with International Monetary Fund boss Dominique Strauss-Kahn warned about the international fallout for developing countries from the panic and uncertainty of the meltdown.

“The poorest and most vulnerable groups risk the most serious—and in some cases, permanent—damage,” Zoellick said. “One hundred million have been driven into poverty this year and that number will grow.”

On the less gloomy side, inflation, which had reached almost 28% earlier this year, is predicted to drop significantly in 2009 to around 15%.

But the recession in Viet Nam’s key export market, the US, and an expected fall in growth in key trading partners such as the People’s Republic of China (PRC) are weighing heavily on the country’s short- to medium-term economic prospects.

The US is the number one destination for Viet Nam’s exports such as clothes, shoes, petroleum, rice, coffee, and fish.

Under such circumstances, it is difficult to forecast the outlook.

“It’s anybody’s guess, isn’t it? People are stabbing around in the dark,” says Dominic Scriven, managing director of Ho Chi Minh City-based Dragon Capital Management company. “We expect growth this year to be 6.4%. Next year, the two big imponderables are exports and foreign investment and the extent to which they will change.”

Exports are expected to fall after soaring to an “astounding” 42% for the first 8 months of 2008, with many businesses moving to Viet Nam from the PRC, says Scriven.

He is certain foreign investment inflows will slow down. “Some projects will be put on the backburner, so there will be some softness,” he says. As for the banking sector, Scriven says the government has some room to pump prime to offset the “possible slowdown in the external sector.”

Tips for Investors

Investors can take a bet on Viet Nam at a time of international contraction.

The government projection, made in October, for the growth of gross domestic product in 2009 is 7%. This would be the same as 2008 and would be among the highest in Asia.

Read the full story.

Despite the country’s susceptibility, Scriven believes Viet Nam “isn’t a bad place to be” for foreign investors. “A drop in prices, of course, is good,” he says. “The government can cut interest rates and stimulate growth but it is being advised to wait until the trend is clearly established. Perhaps they will cut in the first quarter of 2009 or after.”

What are the longer-term economic prospects for Viet Nam?

Will it go the way of its richer East Asian neighbors such as the PRC, Japan, and Republic of Korea? Or will it follow the model of its less successful Southeast Asian peers?

Viet Nam has made great strides in reducing absolute poverty in recent years, but faces a new set of challenges, according to Alex Warren-Rodriguez, an economist with the United Nations Development Programme in Ha Noi. The millions of urban poor who have flocked to Ha Noi and Ho Chi Minh City pose a host of new problems for development goals.

“There have been rapid changes in the dynamics of poverty,” says Warren- Rodriguez. “The new face of poverty in Viet Nam is more likely to be urban than rural. But the urban poor are largely unregistered and unaccounted for.”

Viet Nam needs to address the role of the state and of state-owned enterprises to realize its development potential, says the economist. Also, Viet Nam needs to improve in the field of education, he says, including the curriculum and teaching standards, as well as scientific research and publications. A third key challenge involves land use as competition grows between the agricultural, industrial, tourism, and cultural sectors, as well as pressure for housing for the urban poor. •