vietnam analysis is updated daily; through printed subscription products ranging from newsletters to...

Country Report January 2003

Vietnam

January 2003

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Vietnam at a glance: 2003-04

OVERVIEWThe Communist Party general secretary, Nong Duc Manh, will pursue a toughcampaign to crack down on corruption. The current leadership and the newcabinet will be supportive of economic reform, but the pace and progress ofreform is unlikely to quicken significantly. Real GDP growth will strengthen in2003-04, as a recovery in the global economy, albeit sluggish, will provide aboost to inward foreign investment and exports. The current-account deficitwill widen in line with stronger domestic demand and increased imports ofkey production inputs. Consumer price inflation will also pick up in line withrising general economic activity and food prices.

Key changes from last month

Political outlook• The National Assembly (the legislature) recently approved a scaled-down

plan for the controversial Son La dam project. The assembly�s deputies hadrejected the government�s initial proposal as the result of concerns includingthat of the dam�s impact on local villagers. Under the approved plan, up to91,000 people will still have to be relocated and the risk of unrest in theregion is high.

Economic policy outlook• The National Assembly has approved plans for a budget deficit of 5% of GDP,

a level that the government believes is sufficient to sustain developmentinvestment in support of targeted GDP growth of more than 7%.

Economic forecast• The current sluggish recovery in the global economy has had a limited

impact on economic growth in Vietnam, as robust domestic privateconsumption and investment have been fuelling the economy. Officiallyreported real GDP growth for 2002 will therefore be around 7%.

The Economist Intelligence Unit

The Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where thelatest analysis is updated daily; through printed subscription products ranging from newsletters to annualreference works; through research reports; and by organising seminars and presentations. The firm is amember of The Economist Group.

LondonThe Economist Intelligence Unit15 Regent StLondonSW1Y 4LRUnited KingdomTel: (44.20) 7830 1007Fax: (44.20) 7830 1023E-mail: [email protected]

New YorkThe Economist Intelligence UnitThe Economist Building111 West 57th StreetNew YorkNY 10019, USTel: (1.212) 554 0600Fax: (1.212) 586 0248E-mail: [email protected]

Hong KongThe Economist Intelligence Unit60/F, Central Plaza18 Harbour RoadWanchaiHong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: [email protected]

Website: www.eiu.com

Electronic deliveryThis publication can be viewed by subscribing online at www.store.eiu.com

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databasesand as direct feeds to corporate intranets. For further information, please contact your nearest EconomistIntelligence Unit office

Copyright© 2003 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author's and the publisher's ability. However, theEconomist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.

ISSN 1356-403X

Symbols for tables�n/a� means not available; �� means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Vietnam 1

Country Report January 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2003-047 Political outlook8 Economic policy outlook9 Economic forecast

11 The political scene

15 Economic policy

17 The domestic economy17 Economic trends20 Agriculture and fisheries21 Manufacturing22 Energy and mining24 Infrastructure and telecommunications24 Financial and other services

26 Foreign trade and payments

List of tables9 International assumptions summary11 Forecast summary18 Industrial output18 Consumer price inflation26 Exports and imports27 Foreign direct investment

List of figures11 Gross domestic product11 Dong real exchange rates19 Exchange rates26 Merchandise trade deficit28 Official development assistance

Vietnam 3


Summary January 2003

The Communist Party general secretary, Nong Duc Manh, will pursue a toughcampaign to crack down on corruption. The current leadership and the newcabinet will be supportive of economic reform, but the pace and progress ofreform is unlikely to quicken significantly. Real GDP growth will strengthen in2003-04, as a recovery in the global economy, albeit sluggish, will provide aboost to inward foreign investment and exports. The current-account deficit willwiden in line with stronger domestic demand and increased imports of keyproduction inputs. Consumer price inflation will also pick up in line with risinggeneral economic activity and food prices.

The prime minister, Phan Van Khai, has called for the restoration of state order anddiscipline. The criminal trial of notorious gang leader, Nam Can, has moved aheadand four officials with vice-ministerial rank have been implicated. The NationalAssembly has approved a scaled-down plan for the Son La dam. Localisedprotests have become more frequent, but the government has kept a tight controlon the Central Highlands. The EU has raised concerns over restrictions on religiousand political rights. China and Vietnam, along with the other Association ofSouth-East Asian Nations (ASEAN), have signed a declaration aimed atmaintaining peace in the disputed territories in the South China Sea.

The government has made public its economic targets for 2003. A fund tosupport workers laid off by equitisation (part-privatisation) has begun to operate.Firms that were equitised before 2001 have performed well, but the equitisationprocess has advanced slowly. The World Bank�s annual report on Vietnam wasupbeat. The government has moved to prevent fraud in the value-added taxsystem. The ill-conceived imposition of motorcycle import quotas and hike inautomobile tariffs has damaged the government�s credibility.

Real GDP rose by 6.9% in the first three-quarters of 2002, according to officialestimates. Industrial output grew by 14.4% in January-November, and Ho ChiMinh City remains the country�s industrial hub. Domestic investment hasrisen robustly. Inflation reached 4.6% year on year in November. Urbanunemployment fell to 6% in mid-2002. Coffee output has dropped. Seafoodexports have risen to over US$2bn. The garment industry has boomed.Vietnam will build the Dung Quat oil refinery on its own. Gas from the NamCon Son project has come onshore.

Exports rose by 8.3% in January-November, but imports were up by 18.6% andthe trade deficit reached US$2.3bn. Vietnam has begun World TradeOrganisation-related negotiations with the EU. Foreign direct investment is downin value, but the quality of investment has been improving. International donorshave pledged US$2.5bn in aid for 2003.

Editors: Danny Richards (editor); Graham Richardson (consulting editor)Editorial closing date: December 31st 2002

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2003-04

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Vietnam


Political structure

Socialist Republic of Vietnam

One-party rule

The cabinet is constitutionally responsible to the National Assembly, which is elected for afive-year term

The president, currently Tran Duc Luong

The unicameral 498-member Quoc Hoi (National Assembly) meets biannually; an electiontakes place every five years. The assembly appoints the president and the cabinet

Centrally controlled provinces and municipalities are subdivided into towns, districts andvillages, which have some degree of local accountability through elected people�s councils

The regional people�s courts and military courts operate as courts of first and secondinstance, with the Supreme Court at the apex

May 19th 2002; the next election is due in 2007

The Communist Party of Vietnam, and in particular its politburo, controls both theelectoral process and the executive

The Communist Party of Vietnam (general secretary, Nong Duc Manh); the VietnamFatherland Front

Prime minister Phan Van KhaiDeputy prime ministers Nguyen Tan Dung

Pham Gia KhiemVu Khoan

Agriculture & rural development Le Huy NgoConstruction Nguyen Hong QuanCulture & information Pham Quang NghiEducation & training Nguyen Minh HienFinance Nguyen Sinh HungForeign affairs Nguyen Dy NienIndustry Hoang Trung HaiInterior Do Quang TrungJustice Uong Chu LuuLabour, war invalids & social affairs Nguyen Thi HangMarine products Ta Quang NgocNational defence Pham Van TraPlanning & investment Vo Hong PhucPublic health Tran Thi Trung ChienScience, technology & environment Hoang Van PhongTrade Truong Dinh TuyenTransport & communications Dao Dinh Binh

Le Duc Thuy

Official name

Form of state

The executive

Head of state

National legislature

Local government

Legal system

National elections

National government

Main political organisations

Main members of the cabinet

Key ministers

Central bank governor

Vietnam 5


Economic structure

Annual indicators1998 1999 2000 2001 2002a

GDP at market prices (D trn) 361.0 399.9 444.1 484.5 540.5GDP (US$ bn) 27.2 28.7 31.3 32.9 35.4Real GDP growth (%) 5.8 4.8 6.8 6.8 7.0Consumer price inflation (av; %) 7.3 4.1 -1.7 -0.4 3.9Population (m) 76.1 77.1 77.7 78.7 79.9Exports of goods fob (US$ m) 9,361 11,540 14,448 15,100 16,531Imports of goods fob (US$ m) 10,350 10,568 14,073 14,402 16,778Current-account balance (US$ m) -1,074 1,177 960 820 -385Foreign-exchange reserves excl gold (US$ m) 2,000 3,325 3,416 3,675 4,060Total external debt (US$ bn) 10.5 a 10.7 a 12.8 a 13.9 a 14.1Debt-service ratio, paid (%) 13.1 a 10.8 a 8.9 a 10.2 a 10.6Exchange rate (av) D:US$ 13,297 13,943 14,168 14,725 15,271

December 20th 2002 D15,398:US$1

Origins of gross domestic product 2001 % of total Components of gross domestic product 2001 % of totalServices 38.6 Private consumption 65.0Industry 37.8 Government consumption 6.2Agriculture 23.6 Gross fixed investment 28.9

Exports of goods & services 55.3Imports of goods & services -57.3

Principal exports 2001 % of total Principal imports 2001 % of totalCrude oil 21.0 Cloth & fabric 12.0Textiles & garments 13.2 Refined petroleum 11.7Fisheries products 11.9 Steel 5.9Footwear 10.1 Computers & electronic goods 4.2Rice 3.9 Motorcycles 3.6

Main destinations of exports 2001 % of total Main origins of imports 2001 % of totalJapan 17.1 Singapore 13.6Australia 7.6 China 11.9China 7.5 Japan 11.6US 7.2 South Korea 11.2Germany 6.9 Thailand 5.1Singapore 5.4 Hong Kong 3.5France 4.1 Malaysia 3.1

a Economist Intelligence Unit estimates.

6 Vietnam


Quarterly indicators2000 2001 20023 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

PricesConsumer prices (1995=100) 118.4 119.2 119.9 118.8 118.7 119.4 123.0 123.6 Consumer prices (% change, year on year) -2.2 -0.4 -1.4 -0.8 0.3 0.2 2.6 4.0Financial indicatorsExchange rate D:US$ (av) 14,120 14,423 14,548 14,643 14,658 15,051 15,165 15,253Exchange rate D:US$ (end-period) 14,215 14,514 14,545 14,845 15,003 15,084 15,250 15,321Deposit rate (av; %) 3.54 3.89 5.24 4.96 5.20 5.82 5.90 6.39Lending rate (av; %) 10.40 10.20 10.65 9.35 9.00 8.68 8.52 8.75Refinancing rate (end-period; %) 5.40 6.00 6.00 5.40 4.80 4.80 4.80 4.80Treasury bill (av; %) 5.07 5.30 5.43 5.45 5.65 5.43 5.72 5.95M1 (end-period; D bn) 78,098 90,989 90,984 94,397 100,038 112,408 115,491 114,594 M1 (% change, year on year) 58.9 33.1 27.6 26.9 28.1 23.5 26.9 21.4M2 (end-period; D bn) 179,577 196,994 216,186 226,933 235,254 250,845 256,018 263,877 M2 (% change, year on year) 67.4 35.4 34.5 34.8 31.0 27.3 18.4 16.3Sectoral trendsRice production (annual totals; m tonnes)a ( 32.5 ) ( 31.9 ) n/a n/aRubber exports (net; '000 tonnes) 70 71 71 75 75 72 85 87Foreign trade and reserves (US$ m)Exports 3,919 4,090 3,578 4,023 3,879 3,547 3,185 4,142Crude oil 1,036 1,031 825 954 798 408 647 796Imports 3,834 -4,655 -3,652 -4,178 -3,808 -4,524 -3,767 -4,860Trade balance 85 -565 -74 -155 71 -977 -582 -718Reserves excl gold (end-period) 3,541 3,417 3,330 3,432 3,692 3,675 3,901 3,805

a Estimate for 2001.

Sources: IMF, International Financial Statistics; UN Food and Agriculture Organisation; International Rubber Study Group, Rubber Statistical Bulletin; UN Development Programme, Vietnam

Socio-Economic Statistical Bulletin.

Vietnam 7


Outlook for 2003-04

Political outlook

The Communist Party general secretary, Nong Duc Manh, is intent onstrengthening the foundations of the party in an effort to ensure its future stability.Since coming to office in April 2001, Mr Manh has fostered a less polarisedpolitical environment and his resolve to clamp down on corruption is beginningto pay dividends. Previous attempts by the party to rein in corruption have beenlargely unsuccessful, as low salaries, a bureaucratic administration in whichopportunities for bribes are widespread and light punishments for graft combineto permit a culture of corruption. Mr Manh, however, is intent on meting outsevere punishments to those found guilty, regardless of the positions held by thepersons involved. The drive to oust all those guilty of graft has already broughtabout the downfall of some high-ranking officials. The deputy minister of publicsecurity is the latest senior official to be implicated in the scandal of Nam Can�anunderworld chief in Ho Chi Minh City who bought the support of local and evennational figures. The probe, however, is unlikely to go any further than this. A totalof four high-ranking government officials, and over 150 others, includingpolicemen and journalists, will stand trial in February over links to Nam Cam.

In addition to attempting to eradicate corruption, Mr Manh will aim to maintainthe steady progress and momentum behind the economic and administrativereform programmes. He will be supported by the prime minister, Phan VanKhai, and the president, Tran Duc Luong, in a ruling triumvirate that will remainunchanged in 2003-04. With entry into the World Trade Organisation (WTO)expected by 2006, there is a growing sense that the pace of economic reformneeds to accelerate. Mr Khai is a capable economic reformer, and he will pushhard over the next few years to advance the reformist agenda. If he is successful,it will in part be owing to the performance of his deputy, Vu Khoan, a formertrade minister who was instrumental in winning approval for the bilateral tradeagreement with the US. The government�s implementation of liberal,pro-business policies will, however, be inconsistent owing to opposition fromprotectionist lobbies and conservative members of the party.

The National Assembly (the legislature) began to dispense of its reputation as arubber stamp for the ruling party under its previous chairman, Mr Manh.Although the current chairman, Nguyen Van An, has offered little evidence of hisintention to continue the work of his predecessor, there have been some positivesigns of the assembly�s emerging assertiveness. The deputies recently approved ascaled-down plan for the controversial Son La dam, but only after rejecting thegovernment�s initial proposal citing concerns including that of the dam�s impacton local villagers. Under the approved plan, up to 91,000 people will have to berelocated, down from around 120,000 under the original plan. The risk of socialunrest and protests by disaffected local villagers is, however, high. The number oflocalised protests that have recently been staged by people who feel that theyhave been unfairly disadvantaged by government projects and inadequatelycompensated for their expropriated property is therefore expected to grow.

As surviving Communist states pursuing economic reform, China and Vietnamhave much in common, and they appear keen to reconcile their differences over

International relations

Domestic politics

8 Vietnam


disputed territory. In mid-November the two sides met in Hanoi to discuss theirmaritime border, and at the Association of South-East Asian Nations (ASEAN)annual summit in Cambodia in early November, China and the members ofASEAN (including Vietnam) agreed to abide by a code of conduct over thedisputed Spratly islands in the South China Sea. Despite such positive trends, adegree of Vietnamese mistrust of China will remain, partly explaining Vietnam�skeenness to strengthen ties with the US, although these will be prickly. Tradedisputes and human-rights issues are likely to create problems, and the risk ofheated diplomatic stand-offs is high. The overall trend towards better relationswith the US is unlikely to be knocked off course entirely.

Economic policy outlook

State control of key sectors of the economy will remain high, but thegovernment has committed itself to improving the climate for the private sector.One reason for the government�s enthusiasm for developing private enterprisesis that the private sector is likely to be the key source of new job creation inVietnam in the years ahead. International aid and assistance is also linked to theprogress of economic reform, particularly that which promotes competition. Atthe recent meeting of the Consultative Group of international donors, thegovernment was urged to accelerate reforms of the banking system andstate-owned enterprises (SOEs) and to boost the development of the privateeconomic sector. The number of new private businesses has increased markedlyfollowing the implementation in January 2000 of the Enterprise Law; about1,600 new businesses are registered every month. The equitisation(privatisation) process is proceeding slowly, but the government is still intent onreducing the number of SOEs from around 5,600 at present to 2,000 by 2005. Itrecently approved a series of measures designed to make equitisations easier inan effort to reinvigorate the process. The government has moved ahead witheconomic reforms related to its pursuit of WTO membership and its obligationsunder the bilateral trade agreement with the US. However, there are doubtsabout the government�s full commitment to free trade.

The government�s proposals for the 2003 budget indicate that it plans to maintainits expansionary fiscal policy. The National Assembly recently approved plans fora budget deficit of 5% of GDP in 2003, a level that the government believes issufficient to sustain development investment in support of targeted GDP growthof more than 7%. The majority of funds for the government�s three-year US$70bncomprehensive poverty reduction and growth strategy, which was launched inMay 2002 with strong endorsement from international donors, will come fromthe state budget. The government is hoping that the expanding economy andgreater efforts to prevent tax fraud will help to prop up total revenue. (Fraudulentvalue-added tax (VAT) refunds are a major concern, with the exchequer reportedlylosing D500bn (US$33m) through VAT fraud in the first half of 2002.) However,lower tax rates and import tariffs (as a result of trade reform commitments), andother tax incentives, such as an agricultural tax exemption for poor farmerhouseholds, will place a strain on budget revenue and make it difficult for thegovernment to meet its deficit targets. Spending at administrative agencies willalso have to be reigned in, as salaries for state workers are expected to increaseunder a package of salary reforms.

Policy trends

Fiscal policy

Vietnam 9


The State Bank of Vietnam (SBV, the central bank) has eased monetary restrictionsto give commercial banks more freedom to manoeuvre and deal with short-termchanges in market liquidity. The SBV recently permitted banks to increase theirholdings of US dollars from 15% of total capital to 30%. It has also lowered therequired reserve ratio on foreign-currency deposits from 8% to 5%, and hasremoved the cap on interest rates for dong loans. Banks now have more controlover their interest-rate spreads and will be better placed to take on inherentlyriskier private-sector start-up operations, enabling private enterprises to gaingreater access to capital. The move will not amount to an entirely freely floatingrate, as the government will still have some control over market rates throughstate-owned commercial banks, which account for some 80% of the sector.

Economic forecastInternational assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004Real GDP growthWorld 2.0 2.7 3.2 3.9OECD 0.7 1.6 1.9 2.6EU 1.5 0.9 1.6 2.2Exchange rates¥:US$ 121.5 125.5 128.8 130.5US$:� 0.896 0.945 1.055 1.050SDR:US$ 0.785 0.772 0.742 0.745Financial indicators¥ 2-month private bill rate 0.17 0.10 0.10 0.10US$ 3-month commercial paper rate 3.61 1.68 1.26 3.08Commodity pricesOil (Brent; US$/b) 24.5 24.9 24.5 19.1Gold (US$/troy oz) 271.1 308.0 307.5 290.0Food, feedstuffs & beverages (% change in US$

terms) -1.9 13.1 11.5 -3.1Industrial raw materials (% change in US$ terms) -9.8 2.0 3.9 5.4

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The pace of global economic recovery has slowed and looks set to remain sluggishin the first half of 2003. The Economist Intelligence Unit expects economicconditions to improve gradually during the second half of 2003, and by early 2004we expect most economies to have returned to a trend pace of economic growth.US GDP growth averaged 2.4% in 2002 and is expected to grow by 2.3% in 2003before accelerating to 3.2% in 2004. Real GDP in Japan, Vietnam�s largest exportmarket, contracted by 0.3% in 2002, but is forecast to grow by 0.4% in 2003 and by0.9% in 2004. Real GDP in the EU, an important destination for Vietnamesegarment exports, has been subdued, but will pick up by 1.6% and 2.2% in 2003 and2004 respectively. World oil prices (dated Brent Blend) averaged US$24.9/barrel in2002, but are forecast to fall to US$24.5/b in 2003 and US$19.1/b in 2004. Our softcommodities price index (which covers food, feedstuffs and beverages) hasrebounded, and will continue to grow in 2003 before levelling off in 2004.

Official estimates suggest that real GDP grew by 6.9% in the first nine months ofthe year, compared with the equivalent period of 2001. With signs of acceleration

Economic growth

International assumptions

Monetary policy

10 Vietnam


in the final quarter of the year, reported real GDP growth for the year will bearound 7%. The credibility of official GDP data is questionable, but there is nodoubt that parts of Vietnam�s economy have performed robustly. The currentsluggish recovery in the global economy has had a limited impact on economicgrowth, as robust domestic private consumption and investment have beenfuelling the economy�private-sector investment increased by over 30% year onyear in the first nine months of the year, and retail sales grew by more than 12% inJanuary-November. Despite difficult external conditions, the export sector hasperformed reasonably well, particularly in the final quarter of 2002. Also, despitethe disappointing level of foreign direct investment (FDI) commitments, down by46% in value in January-November, disbursements reached US$2.15bn in January-November, according to official estimates. In 2003 and 2004 exporters andinvestors will be in a better position to exploit the opportunities provided by thetrade agreement reached with the US in 2001, and reported GDP growth willreach around 7.1% and 7.3% respectively in 2003 and 2004.

Rising domestic demand and strengthening food prices have resulted in a firminflationary trend after two years of consumer price deflation. Consumerprices rose by 4.6% year on year in November, with food prices rising by about8%, according to official estimates. Annual consumer price inflation is expectedto have reached 3.9% in 2002, and will accelerate to 5.1 and 5.6% in 2003 and2004 respectively. Food items have a heavy weighting (47%) in the consumerprice index, and a sharp rise in world rice prices�increases of 4.7% in 2003 and8.3% in 2004 are forecast�will force up the price index. Our forecast of higherprices is also based on other inflationary pressures increasing, particularlyowing to a further depreciation in the value of the dong.

The dong is forecast to depreciate by an annual average of around 3.8% againstthe US dollar in 2003-04. By late December the dong was trading aroundD15,400:US$1 compared with D15,084:US$1 at the beginning of the year. Theauthorities are keen to allow the dong to depreciate at a rate that will enablemerchandise exports to remain competitive in international markets. Thecentral bank has widened the daily exchange-rate trading band under thecrawling peg system, to allow the dong to fluctuate in value by 0.25% per day,up from 0.1%, on either side of the previous day�s closing rate on the interbankmarket. The trading band will, however, remain tight, as the government willwant to prevent a faster depreciation, which would increase the debt-servicingburdens of state-owned enterprises that are holding unsustainably high stocksof US dollar-denominated debt.

In January-November 2002 export receipts reached US$15bn, equivalent to an 8.3%increase year on year. This reflects a strong performance from the export sector inrecent months; export revenue growth had been negative in the first eight monthsof the year on a year-on-year basis. The bilateral trade agreement with the UShelped to lift exports in late 2002, but will have a more modest effect on exportgrowth in 2003. Import demand will continue to outpace that of exports. Imports(valued on a customs basis) rose by 18.6% year on year to US$17.3bn in January-November 2002. The increase in imports reflects robust purchases of industrialand other inputs, and increased imports of investment goods. In line with awidening trade deficit, there will also be an expansion in services and income

External sector

Inflation

Exchange rates

Vietnam 11


deficits, as demand for import-related services rises and foreign investors repatriateprofits on their investments. Current transfers will remain robust, in line withexpanding remittances from Vietnamese people overseas. Net private remittancesfrom abroad rose by 20% year on year to US$1.5bn in the first nine months of theyear, and are expected to total around US$2bn for the year as a whole. Thecurrent-account deficit, which will rise to 3% of GDP in 2004, will be manageableif inflows of overseas aid continue and foreign investment picks up.

Forecast summary(% unless otherwise indicated)

2001 a 2002b 2003 c 2004 c

Real GDP growth 6.8 7.0 7.1 7.3Industrial production growth 10.3 10.2 10.0 10.2Gross agricultural production growth 2.8 3.4 3.6 3.4Consumer price inflation (av) -0.4 3.9 5.1 5.6Consumer price inflation (year-end) 0.5 4.8 5.2 5.8Lending rate 9.4 b 9.0 9.5 11.0Government balance (% of GDP) -5.1 b -5.3 -5.6 -5.5Exports of goods fob (US$ bn) 15.1 b 16.5 18.5 20.1Imports of goods fob (US$ bn) 14.4 b 16.8 19.0 21.0Current-account balance (US$ bn) 0.8 b -0.4 -0.8 -1.2Current-account balance (% of GDP) 2.5 b -1.1 -2.1 -3.0External debt (year-end; US$ bn) 13.9 b 14.3 15.3 15.7Exchange rate D:US$ (av) 14,725 15,272 15,867 16,470Exchange rate D:¥100 (av)d 12,117 12,169 12,324 12,621Exchange rate D:� (year-end)e 13,294 15,633 16,995 17,325Exchange rate D:SDR (year-end)e 18,957 20,536 21,612 22,287

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

The political scene

Addressing the National Assembly (the legislature) in November, the primeminister, Phan Van Khai, called for the restoration of state order and discipline, anoverarching theme that is likely to resonate for some time to come. The need for

The prime minister calls forstate order and discipline

12 Vietnam


greater discipline refers to several current issues, including stamping outcorruption, maintaining stability in rural areas, and reducing traffic deaths. Thelegitimacy of the ruling Communist Party rests in large measure on its ability tofoster economic growth, and its traditional image of probity. However, corruptionhas taken root over the past decade, and has resisted efforts to reduce it. This maybegin to change with the implication of four officials of vice-ministerial rank inthe scandal of Nam Can�an underworld chief in Ho Chi Minh City who boughtthe support of local and even national figures�demonstrating that even relativelyhigh-level officials are not immune from sanctions.

The Nam Can case is moving into the courts. Criminal charges have been filedagainst 155 people, including 13 police officers, for their roles in the Nam Canaffair. Now in prison awaiting trial, Nam Can is accused of running gambling,drug-trafficking, prostitution and extortion rackets in Ho Chi Minh City, and ofbribing police and other officials to turn a blind eye. Police officers had to bebrought in from other cities in order to arrest him in December 2001.

Four officials with vice-ministerial rank have been implicated, including PartyCentral Committee members Bui Quoc Huy (the former deputy minister ofpublic security) and Tran Mai Hang (the former director of Voice of Vietnamradio), as well as the deputy minister of public security, Hoang Ngoc Nhat, andthe deputy director of the state prosecution service, Pham Sy Chien. The scandalmay also have cost former public security general, Le Minh Huong, his jobwhen the cabinet was reshuffled in August.

In response to criticism from the National Assembly, the government scaled backits plans for a controversial hydroelectric power station in Son La. The originalplan involved a 265-metre dam and would have displaced up to 120,000 people; itwas widely perceived to be risky, and the human cost of displacing so manypeople, many of them ethnic minorities, was considered unacceptable. At the endof its latest session in December, the National Assembly approved a resolution fora scaled-down version of the dam, up to 215 metres. The government hadproposed three alternatives to its original proposal, with dams varying in heightfrom 110 to 215 metres. The accepted proposal will generate between 7.6bn kWh to9.2bn kWh per year and will cost around US$2.5bn. The human cost of the projectwill remain high, as up to 91,000 people will have to be relocated from 2004onwards. Construction will commence in 2005.

The construction of the Son La dam is likely to add to the growing number oflocalised protests related to the impact of government projects. In Novemberfarmers battled police in Ha Tay province, 30 km south-west of Hanoi, injuringeight police officers, in a protest against government plans to reclaim 34 ha ofland. In mid-October 11 people were injured in a riot in Hai Duong city, 60 kmsouth-east of Hanoi, when residents protested against what they considered tobe inadequate compensation for giving up their houses to make way for a ringroad. Also in October 11 farmers were jailed for their role in anti-corruptionprotests that took place in Ninh Binh province, 90 km south of Hanoi, in late2001 and early 2002.

The Nam Can criminal trial ismoving ahead

Scaled-down version of Son Ladam is approved

Localised protests arebecoming more frequent

Vietnam 13


The government faces a more fundamental problem in the CentralHighlands, where there were serious riots in early 2002. Large numbers ofethnic minority farmers, many of them evangelical Protestants with a historyof suspicion towards the government, staged protests over land rights andreligious freedoms. The government responded by sending in the army,forming more than 600 �fast-deployment teams� and stationing groups of10-30 police in each village in the affected areas. In the wake of the protests,more than 1,000 people fled to Cambodia; about 700 were subsequentlyadmitted to the US, but the rest have returned to Vietnam, after a refugeerepatriation agreement between the UN, Vietnam and Cambodia fell apart.In an effort to address the root problems of the region, the government hasdecided to allocate land to ethnic minority households�400 sq metres for ahouse, and about 1 ha of hill land or equivalent, per household. The landcannot be sold or mortgaged for ten years. The land allocation has begun ona pilot basis, with the intention of completing the work by the end of 2003(which seems optimistic). Nearly 5m people live in the four Central Highlandprovinces, and about one-third of them belong to ethnic minority groups.

During the economic boom of the mid 1990s, ethnic minority households in theCentral Highlands constituted the only group in the country whose incomes didnot rise. In an implicit response to the criticism that the area has been neglected,the government is now touting the economic success of the area andemphasising its efforts at reducing poverty there. It claims that economic growthin the Central Highlands exceeded 10% in 2001 and reached 7% in 2002, but itshould be noted that a significant part of this growth is a result of the Yalihydroelectric power station coming on stream. Official attitudes towards thearea remain paternalistic�the Vietnam News Agency recently reported that thearmy had greatly contributed to boosting socio-economic growth in the area.

The EU raised the prickly issue of the Vietnam government�s record with regardsto human rights before the Consultative Group meeting of Vietnam�sinternational donors on in early December. Following two EU representativemissions to the Central Highlands in 2002, the EU remains concerned overrestrictions on religion, land rights and other social issues in the region. The EUtherefore called on the government to strengthen its respect for social freedoms,particularly political and religious freedoms. The EU has urged the governmentto ease its stranglehold on the media. Such concerns, however, are not linked tothe disbursement of official development assistance.

The government continues to restrict access to Internet sites that it considersimmoral or politically dangerous. In early November it blocked the BBC�sVietnamese language service Internet site, which had been receiving about180,000 hits per week. Shortly thereafter Le Chi Quang was jailed for four yearsfor publishing criticism of the government, and particularly the land bordertreaty that Vietnam had signed with China, on the Internet. The stiff sentence isseen as a warning to anyone considering using the Internet as a vehicle forcriticising the government. A month earlier the government had introducedregulations requiring Internet sites to be licensed.

The Central Highlands are keptunder control

The EU raises its concerns overhuman rights in Vietnam

A dissident is jailed forInternet criticism

14 Vietnam


There is an unresolved tension in the government�s attitude towards Internetusage. Nguyen Khoa Diem, a politburo member, has decried the fact thatVietnam is lagging behind other countries in the region�it has just 21 Internetnewspapers and magazines, two Internet publishing firms, and 250,000Internet subscribers. He also claimed that the government�s management ofthe Internet has been less effective. Despite the government�s cautiousapproach, it will become increasingly difficult to control the flow ofinformation in an increasingly open society.

At the Association of South-East Asian Nations (ASEAN) summit in Cambodiain November, China and the ASEAN member states signed a Declaration onthe Conduct of Parties in the South China Sea. The declaration seeks toprevent conflicts among the six countries (Malaysia, Philippines, Brunei,Vietnam, China and Taiwan) that claim some or all of the islands there.Vietnam followed up by signing a bilateral co-operation agreement with thePhilippines, reaffirming that the two countries would not take any actions thatwould complicate territorial disputes among countries in the South China Sea.Ever wary of China�s intentions, Mr Khai also took the opportunity of theASEAN summit to call for a strong ASEAN-India partnership in an effort topromote peace and prosperity in the region.

Separately from their competing claims to the Spratly and Paracel islands in theSouth China Sea, Vietnam and China have not yet resolved their disagreementsover their common maritime border. An accord was signed in December 2000setting out their sea borders in the Gulf of Tonkin, but neither side has ratifiedthe agreement. A seventh round of talks ended inconclusively in November,with both sides agreeing �to continue negotiations in a positive manner� whentalks resume in 2003.

Border negotiations with China are sensitive in Vietnam, where thegovernment has come under criticism for allegedly conceding too muchterritory to China. The 1999 land border agreement was quietly publishedrecently on the Internet site of the official party newspaper, Nhan Dan (ThePeople), accompanied by an extensive interview with Le Cong Phung, thedeputy foreign minister and head of the Border Committee. Negotiations withChina sought to re-establish the 1,375 km border that was agreed betweenFrance and the Qing Dynasty in China in 1887-89. Disagreements centred onabout one-third of the border, where the original maps were inadequate, andwhere 227 sq km were in dispute. In the end 113 sq km of this area becamepart of Vietnam, and 114 sq km part of China. Twelve joint border-markerplacement teams are now working on placing 1,533 markers along the border.

The relationship with the US remains fairly steady, despite some turbulence. Tradebetween the two countries has increased dramatically since the Bilateral TradeAgreement came into effect in December 2001, and the US Congress has renewedit for another year, with minimal opposition. The main bone of contentionbetween the two countries is also in trade policy, particularly the efforts by UScatfish and shrimp producers to get the US government to limit imports of theseproducts from Vietnam. US catfish farmers first argued that the Vietnamese fish

A regional agreement is madeover South China Sea islands

The land border agreementwith China is finally published

US trade disputes areunresolved

Vietnam 15


were not true catfish and had to be called something else; Congress agreed, andnow the Vietnamese fish that enter the country are labelled as �basa� or �tra�. Thishas had little impact, as imports of frozen catfish fillets from Vietnam rose from575,000 pounds in 1998 to 20m pounds this year, taking up to 20% of theUS$590m domestic market. US catfish producers have also filed a suit claimingthat Vietnamese farmers were dumping catfish (ie selling it at a lower cost abroadthan at home). This is now being investigated by the US commerce department,which tends to favour home producers. In November the department brandedVietnam as a �non-market economy�, a decision that was rejected by Vietnam.Such a label means that the cost of production of catfish would be determined bylooking at the costs in a �comparable� market economy, which would surely givehigher figures, and make a determination of dumping more likely.

Economic policy

The government has made public its economic targets for 2003, some of which areplausible, others not so. The government envisages GDP growth of 7.2-7.5%, whichis optimistic, as is the spuriously precise targeted increase of 5% in agricultural,forestry and fishery output, the 14.5-14.8% rise in industrial production, and the7-7.2% increase in the value of services. With such robust growth in economicactivity, the government will find it difficult to limit inflation to its target of 4%.Continued rapid economic growth will create jobs and keep the unemploymentrate low, but the targeted creation of 1.5m jobs is unrealistic, and unnecessarilylarge, as it represents almost 4% of the labour force. A reduction of the poverty rateto 12.5%, will not be easy to achieve either, unless the benefits of economic growthcan stretch to the most remote parts of the country.

A fund to support workers made redundant by equitisation (part-privatisation)became operational in October; 20 state-owned enterprises (SOEs) applied forsupport from the fund within its first month of operation�on average thesefirms expected to make 25% of their workers redundant. It is estimated that250,000 workers will be made redundant between 2002 and 2005 as a result ofthe planned equitisation of SOEs. A total of 3,600 of the current 5,600 SOEs willfirst be converted into joint-stock companies, and then sold or transferred, inwhole or in part, to private owners.

A recent study of the 422 enterprises equitised before 2001 found that almost 90%reported that they were doing better or much better than before equitisation. As agroup, sales of the equitised enterprises are growing at 20% annually, withemployment rising by 4% and wages by 12% per year. This positive outcome is notenough to persuade other firms to follow, probably because the more problematiccases have yet to be equitised. Private firms still face some unique difficulties,including adequate access to land, and a still extensive system of business licences(despite the abolition of scores of them over the past year and a half).

According to the Steering Board of Enterprise Reform and Development, only 150firms out of the planned 502 SOEs were reformed in the first eleven months of2002. Firms are not obliged to equitise, and resistance is strong among directors,

The government targets7.2-7.5% GDP growth in 2003

A fund to support laid offworkers begins to operate

Firms equitised before 2001have performed well

Equitisation process isadvancing slowly

16 Vietnam


managers, workers, and some ministries and local governments. Some legalprocedures still need to be clarified, many SOEs are heavily indebted, and it oftentakes time to assess the value of their assets and liabilities. Even without muchfurther equitisation the state-owned sector will continue to shrink naturally (ifgradually), as the vibrant private sector gains momentum. (Although theprocedures are becoming easier and cheaper, it still takes two months to register aPrivate Limited Liability Company in Hanoi, and costs US$137, a not-insignificantsum for a small entrepreneur.) SOEs generate 38% of Vietnam�s GDP and accountfor 40% of domestic credit, but only 25% of new loans are now going to this sector,which will translate into relatively slower growth in the future.

In its most recent annual review of the Vietnamese economy, the World Bankwas optimistic about the country�s long-term growth potential. It warned,however, that reform had been slow in coming, inequality had appeared to berising, and government spending had been poorly managed. The World Bankholds out the vision of a country with high growth, inclusive development andgood governance, but warns that Vietnam runs a significant risk of vestedinterests capturing government transfers to offset their inefficiencies.

The mood at the World Bank-led Consultative Group (CG) meeting ofinternational donors in early December was also positive. Donors expressed theirsatisfaction with the government�s commitment to reform through itscomprehensive poverty reduction and growth strategy (CPRGS), but urged fasterimplementation of measures to boost the private sector and reform the bankingsector and state-owned enterprises. Some concerns were expressed over theinappropriate distribution of official development assistance (ODA) to educationand social affairs. The CG comprises 32 countries, 14 multilateral agencies and fournon-governmental organisations. The total amount of ODA pledged for 2003 wasUS$2.5m, up slightly from the US$2.4m pledged in December 2001.

It is difficult to get a clear sense of the government�s budgetary position, butgovernment revenue is expected to have risen by more than 10% in 2002,roughly in line with nominal GDP growth. The relatively good revenueperformance has allowed the government to increase the subventions to poorcommunes significantly. The government has also moved firmly to preventserious fraud in its value-added tax (VAT) system. Nine people have beenarrested for their role in a US$650,000 scam that forged receipts in order toobtain VAT repayments. Exporters will now only get VAT refunds by showingevidence that they have been paid for their exports though the banking system,a move that will make it harder for exporters fraudulently to overstate theirexport values. The general department of taxation is also insisting that 52domestic motorcycle assemblers pay US$48m in back taxes, which they tried toevade by overstating the domestic content of their products. In another movedesigned to reduce fraud, the general customs department will be merged intothe finance ministry. Mr Khai, has said that the customs department has been�satisfactorily successful� in fighting smuggling, faint praise for a unit that iswidely seen as seriously corrupt.

World Bank�s annual report onVietnam is upbeat

Government revenue is robustdespite VAT fraud

Vietnam 17


The government�s credentials as predictable, business oriented and tradefriendly have been damaged by a series of ill-conceived measures in themotorcycle and vehicle assembly sectors. On September 4th the trade ministryreduced the number of kits that motorcycle manufacturers could import in 2002from 2.5m to 1.5m; the quota for Japan�s Honda fell from 587,000 to 280,000. Themove was aimed ostensibly to reduce the number of traffic accidents, but themain effect was to raise the demand for locally produced components. WhenHonda and Yamaha, also from Japan, ran out of kits, they closed their assemblylines. On November 11th the government relented, under pressure from Japan,and allowed Honda immediately to import 185,000 kits. Less than three weekslater the trade ministry suspended the import of kits. The import tariff onmotorcycle kits (if and when they can be imported again) has been raised to100%, effective January 1st 2003.

The government also unexpectedly raised import taxes on vehicle parts inDecember. The hike in tariffs has been strongly criticised by automobileassemblers in Vietnam, as, according to estimates by the Vietnam AutomobileManufacturers� Association, it will lead to a 15% increase in car prices in 2003and a further 35% increase in 2004. The government will now have a harder jobtrying to convince other countries that it is serious about taking the measuresneeded to join the World Trade Organisation (WTO). The measures have alsoweakened the government�s credibility in Japan, the country�s main destinationof exports, its principal aid donor and third-largest foreign investor.

The domestic economy

Economic trends

Official figures show that Vietnam�s real GDP rose by 6.9% year on year in thefirst nine months of the year. This robust rate of growth was led by theindustrial and construction sector (up by 9.8%) and services (6.1%), with a moremodest contribution from the agricultural sector (3.4%). Growth appears to haveaccelerated slightly in the fourth quarter, and official GDP growth is expected tobe 7% for the year as a whole.

Following the same pattern as recent years, industrial output has risen rapidly. InJanuary-November industrial production increased by 14.4% compared with theyear-earlier period, reaching D238.7trn (US$15.6bn). There was fast growth in theoutput of assembled cars (up by 47.3%), motorcycles (44.9%), television sets (36.5%),ceramic tiles (33.7%) and ready-made clothes (32.2%). The private sector, whichconstitutes almost 25% of the total, grew by 19.1%, the foreign-invested sector by14.5%, and the state-owned sector by 11.8%. State-owned firms still produce around40% of all industrial output, although this share is gradually falling.

Over 25% of all industrial output is produced in Ho Chi Minh City, where outputgrew by 13.8% in January-November, increasingly limited by a lack of space andrising wages. The neighbouring provinces of Dong Nai and Binh Duong sawfaster industrial growth. Firms in Hanoi produced only US$1.3bn worth ofgoods, but the total rose by 24.5% during this period.

Import quotas damage thegovernment�s credibility

GDP rose by 6.9% in the firstthree-quarters of 2002

Industrial output is up by14.4% in January-November

18 Vietnam


Industrial output(% increase, year on year)

20022000 2001 Jan-Nov

State-owned industry 12.5 12.7 11.8Non-state industry 18.3 20.3 19.1Foreign-invested industry 18.6 12.1 14.5All industry 15.7 14.4 14.4

Source: Press reports.

The stockmarket plays only a marginal role as a source of capital forbusinesses, but this has not prevented domestic firms from expanding theirinvestments. Investment by newly registered small and medium-sized privateenterprises rose by more than 40% in 2002, and is expected to reach aboutUS$2.7bn, equivalent to 9% of GDP. Total investment in 2002 will be close to31% of current GDP, a high rate by global standards, and ample to sustain a realGDP growth rate of more than 7%.

Confirming a trend that began at the beginning of the year, consumer priceinflation has continued to drift upwards, and reached 4.6% year on year inNovember. This is slightly above the government�s target of 4% for the year. Earlyin the year the rise in inflation was mainly in line with a rebound in the price ofrice and other cereals, which rose by about 8% year on year in November. Amore recent element is the increase in the prices of housing and constructionmaterials, which rose by 5.4% year on year in the third quarter. Overall pricesremained stable in the south of the country, but rose by 0.9% month on monthin November in Hanoi, a reflection of the boom in the local economy. Thegentle devaluation of the dong relative to the US dollar has also contributed toinflation, by making tradeable goods more expensive in dong terms.

Consumer price inflation, 2002% change

year on year Month on monthJun 4.2 0.1Jul 4.4 -0.4Aug 4.3 0.1Sep 4.0 0.2Oct 4.5 0.3Nov 4.6 0.3

Source: General Statistics Office.

The dong depreciated slowly and steadily throughout 2002. In late Decemberthe dong was trading around D15,400:US$1 compared with D15,084:US$1 at thebeginning of the year. Although the dong depreciated by 2% against the USdollar over the 12 months to December 2002, the effective depreciation of thedong is much greater when taking into account the weakness of the US dollarrelative to most currencies over the same period.

Domestic investment risesrobustly

Inflation reaches 4.6% year onyear in November

The dong depreciates by 2%against the US dollar

Vietnam 19


As of July 1st (latest available data), the urban unemployment rate stood at 6%,down from 6.3% a year earlier. Overt unemployment in rural areas is low, atabout 1% of the labour force, but seasonal underemployment is still substantial.The official employment survey found, however, that �employment time� inrural areas rose from 74% to 75%; this is defined as the proportion of totalpotential working hours, usually taken to be 2,100 per year, that people areactually working.

Also as of July 1st, the labour force rose by 1.2m to reach 40.7m, an increase of2.9%. Total population is growing at around 1.5% per year, so the rapid growth ofthe labour force is mainly a reflection of the fast population growth thatVietnam experienced two decades ago. Four out of every five people in thelabour force have completed primary education, and 4% are illiterate. Comparedto its competitors in the region, the average educational level of Vietnameseworkers is only moderately good.

Consumers in Europe and the US are increasingly concerned about the conditionsunder which workers in poor countries labour, particularly in industries such asgarments and footwear. A recent World Bank fact-finding mission to Vietnamfound that foreign-invested footwear firms operated at a much higher level ofperformance with regard to labour standards than domestic firms. The footwearindustry employs 400,000 workers. Among the labour issues identified by thefact-finding team were unpaid overtime, high worker turnover, poorcommunication between workers and management, and a number of health andsafety issues related to repetitive movement and exposure to chemical solvents.The mission has written a proposal to provide technical assistance to thegovernment in an effort to improve labour conditions in all industries.

In the first 11 months of 2002, about 43,000 workers were sent abroad to work in40 countries, mainly South Korea, Taiwan, Laos, Japan and Malaysia. As many as300,000 Vietnamese are currently working outside the country, around the samenumber of Thai workers (about 350,000). Malaysia, which is host to 20,000Vietnamese workers in manufacturing and construction, recently signed amemorandum of understanding with Vietnam that would eventually allow up to

Urban unemployment fell to6% in mid-2002

World Bank reports onworking conditions

The number of Vietnameseworkers abroad is rising

20 Vietnam


200,000 Vietnamese to work there. Malaysia has over 1m foreign workers, mainlyIndonesians, and is concerned about the social problems associated with illegalforeign immigration. It is also keen to work on a government-to-government basis,to avoid possible abuses by private immigrant workforce agencies. The maindifficulty facing Vietnamese workers in Malaysia is the language barrier, and theyare now being encouraged to become fluent in either English or Bahasa Malaysia.

Agriculture and fisheries

The UN Food and Agriculture Organisation (FAO) has awarded its top honour,the Agricola medal, to Vietnam, in recognition of the rapid expansion of thecountry�s agricultural output over the past decade and a half. Among the recent,if less noticed, achievements, Vietnam is now the world�s largest exporter ofblack pepper, earning US$90m from exporting 71,000 tons in the first tenmonths of 2002, equivalent to one-third of world pepper exports. This success inexpanding output has, however, helped to push down the world price of pepperby one-third, to about US$2,000/tonne in 2002. Vietnam also now ranks as thethird-largest exporter of cassava starch, after Thailand and Indonesia. Over 300processing plants are able to handle over 900,000 tonnes of fresh cassavaannually; exports of cassava starch come to 200,000 tonnes per year, and aremainly used in food products and animal feed.

In the case of coffee, Vietnam has been a victim of its own success. Over thepast decade it rose from a small player to the second-largest exporter of coffee,but in the process helped to push coffee prices to 30-year lows. The exportvolume in 2002 is expected to fall by as much as 25%, owing in part to droughtin the Central Highlands, but also to farmers cutting back on production (and insome cases cutting down their trees). As a result, coffee prices have risen inrecent weeks. Indonesia is attempting to persuade Vietnam to join it in cuttingexports of robusta coffee, the lower-quality coffee produced primarily by thesetwo countries, but the future of this initiative is unclear.

Coffee growing may have become unprofitable, but selling cups of coffee hasnot. Trung Nguyen Coffee Enterprise now runs a popular network of more than400 cafes across Vietnam, selling its trademark coffee. It is the first localcompany to build a brand-name franchise, and has licensed its trademark tobusinesses in Japan, Singapore, Hong Kong, China, Australia and the US. Theenterprise�s managing director, Dang Le Nguyen Vu, is now branching out intothe production of instant coffee and tea.

Seafood exports are expected to have grown by 13% year on year in 2002 earningmore than US$2bn. Around 30% of exports go to the US, prompting calls forprotection there; about 25% of seafood exports go to Japan. The exports includeabout 100,000 tonnes of shrimp annually. In September the EU lifted its intensiveexaminations of all shrimp shipments from Vietnam; henceforth they will besubject to the normal customs procedures. The inspections began in September2001 when there was concern about the level of antibiotic residue in shrimpcoming from Vietnam. The intensive inspections reduced shrimp exports to theEU, which are now expected to rebound.

Vietnam wins FAO medal

Coffee output has dropped

Seafood exports top US$2bn in2002

Vietnam 21


In the early 1990s Vietnam�s most important export was rice. Now rice onlyaccounts for about 3% of exports, as sales have stagnated. The price of ricefluctuates considerably on the world market, and rebounded in 2002 from thelow levels of the previous year. The result was that despite a 14% drop in thequantity of rice exported, earnings from rise exports actually rose by 19% toUS$625m in the first nine months of the year. This was good news for farmers,particularly in the south, where most of Vietnam�s rice surplus is generated.

Manufacturing

The garment industry is booming, with exports expected to reach US$2.7bn in2002, up from US$2bn in 2001. All of the increase is attributable to the opening upof the US market, where sales rose 20-fold from US$47m in 2001 to an expectedUS$850m this year. The US does not impose any quotas on shipments fromVietnam, but this is due to change in 2003 with the signing of the US-VietnamGarment and Textile Agreement. Vietnamese firms are therefore trying to exportas much as possible to the US, in the hope that this will result in a higher quota inthe future. To some extent this has diverted attention away from other markets; forinstance, 30% of Vietnam�s quota for jacket shipments to the EU remained unfilledby early December. It has also stretched some firms, forcing them to run nightshifts and to invest heavily in new equipment. Adding to the opportunities, the EUin September increased its import quota for garments from Vietnam by 25%, whichadded an estimated US$150m to export earnings. Also, in November, Vietnamnegotiated with the Philippines to acquire some unused garment quotas in returnfor purchases of fertiliser and plastics. Increasingly, new investments in thegarment industry are taking place in rural areas, where labour is cheaper. This willhelp to moderate the trend of a widening gap between urban and rural incomes,which has been observed over the past decade.

Vietnam is changing the way in which garment export quota is allocated tofirms. Until now, quota was largely allocated based on how much the firm hadexported in the past. Now quota will be auctioned. Firms will be asked to bidfor a quota licence, based on the price they will charge for each garment theyexport. Those with the highest price per garment will win some of the quota.The auctions will be open to all firms�state-owned, private and foreign. Thepurpose of the change is to provide an incentive for firms to move into higher-priced (and presumably higher value-added) items.

Canon, a Japanese producer of electrical goods, recently inaugurated a US$77minkjet printer plant in Hanoi. The company has stated that it chose to invest inVietnam because of the quality of local human resources, political stabilityand the country�s strategic location in terms of access to markets in China,Thailand, Malaysia and Taiwan. The project received a licence in a week andemploys 800 workers.

Not all Japanese investors are as upbeat as Canon. In a recent meeting oninvestment, organised by the Japan External Trade Organisation (JETRO),Vietnam was not seen as sufficiently attractive compared with other countries inthe region. The main problems are policies relating to taxation, labour permits

Firmer rice prices are goodnews for farmers

Garment manufacturing hasrisen by a third

Garment quotas are nowbeing allocated by auction

Canon has opened a printerplant in Hanoi

22 Vietnam


and contracts, land use rights and copyright, in addition to the policy of dualpricing that charges foreign firms more for services such as telecoms and travel.Less than 7% of foreign direct investment in Vietnam in 2001 came from Japan.

The government continues to favour heavy industry, including steel andautomobiles. The Southern Steel Company has lined up financing for a US$153msmelting workshop and steel rolling mill in Ba Ria-Vung Tau. More than half of thecost of US$80m will come from the government�s Development Assistance Fund,which provides subsidised loans for medium- to long-term investments. The fund,which was established in 2000, was designed to replace the more ad-hocprocedures that existed for providing subsidised credit (including putting pressureon the state-owned commercial banks) to state-owned enterprises and otherprojects favoured by government policy. The fund now has to mobilise its ownresources, and increasingly relies on bond issues, although more than half of itsfinancing comes from foreign aid. Loans disbursed in 2002 are expected to cometo D24trn (US$1.6bn), equivalent to more than 4% of GDP, and up from 2.9% ofGDP in 2001. Mr Khai is adamant that commercial projects will not be allowed todrain resources from the state budget, and that budget spending should go only tosocio-economic infrastructure and development programs in poor areas. Lendingby the fund will take pressure off the state-owned commercial banks to make�policy� loans, freeing them to extend credit strictly on business criteria.

The industry ministry is planning to provide additional incentives to theautomobile industry. The planned measures include removing the special salestax on domestically assembled cars, putting a 100% tax on imported smallvehicles, imposing high taxes on imported parts that could be produced locally,extending soft loans to buyers of locally made cars, and restricting productionlicenses to the 11 current joint ventures. These firms are expected to sell 25,000units in 2002, and as many as 100,000 units by 2010

These examples illustrate the fundamentally protectionist nature of much ofVietnam�s industrial policy. Although the average tariff rate is a comparativelymodest 15.7%, the effective rate of protection (ERP) is much higher, at 54% (downfrom 60% in 1997). The ERP is an indicator of inefficiency that measures theextent to which labour and capital costs in an industry could be above theworld level while still allowing the firm to compete with imports. Protectionismis low in agriculture (an ERP of 7.4%), but exceptionally high in vehicle assembly(599%), sugar (366%) and plastic products (163%).

Energy and mining

Vietnam will now build the 130,000 barrels/day oil refinery in Dung Quat on itsown, instead of with its one-time Russian partner, Zarubezhneft. PetroVietnam,the state-owned Vietnam Oil and Gas Corporation, and Zarubezhneft hadformed a joint venture, Vietross, to build the country�s first oil refinery, after twoother consortia withdrew from the project. The main disagreement was overwho should be awarded the key US$740m engineering procurement contract.Zarubezhneft has little experience in refinery construction, and was thought tobe keen on selecting contractors that were technically unqualified.

The government still favoursheavy industry

Industrial policy relies heavilyon protectionism

Vietnam will build oil refineryon its own

Vietnam 23


The government has set up a steering committee to oversee the construction ofthe refinery, which was due to cost US$1.3bn, but is now expected to cost at leastUS$1.4bn. Although the site has been cleared, the project has been delayed onseveral occasions. One persistent difficulty has been in financing the facility. Therefinery would not be profitable for a private firm, because it is located far fromthe source of crude oil, a decision that adds about US$200m to the overall cost.

Significant and unexpected new discoveries of oil and gas were made earlier thisyear. At full production the new fields, most notably Black Lion well in Block 15.1,will add at least 10% to current oil output. The discoveries are welcome in anindustry where oil output has peaked. The potential new oil reserves in the BlackLion and Golden Lion fields are equivalent to about three years� production atcurrent rates. Other recent developments include the following:

• Mekong Energy, a limited liability company, has secured financing fromSociété Générale (France) for constructing the 715 mw Phu My 2.2 gas-firedpower station. The US$480m power plant is the largest single foreign-investedproject in the country, and is being undertaken on a build-operate-transfer (BOT)basis.

• Electricity of Vietnam (EVN) has set up a joint-venture company withVietnam Coal Corporation and three other local firms to build a US$640m, 600mw, coal-fired power station in Haiphong. Construction is expected to begin in2003 and to be completed by 2006.

• Vietnam Coal Corporation has started construction of a 100 mw coal-firedpower plant in Thai Nguyen, an industrial town north of Hanoi. The cost is putat US$124m, and the plant is expected to come on line in 2005.

The first gas has come onshore from the US$1.3bn Nam Con Son project. Aconsortium of Britain�s BP, India�s ONGC Videsh and ConocoPhilips from the US,along with PetroVietnam, expects to bring 3bn cu metres of gas onshore annuallyfor an estimated 20 years. The project was initially delayed because ofdisagreements about the price that would be paid for the gas. The project has,however, advanced quickly since an agreement was reached, thereby restoring thecredibility of PetroVietnam as a business partner and rekindling interest in the oiland gas sector. The gas is sold to PetroVietnam, which delivers it to end-users inthe Phy My Industrial Park in Ba Ria-Vung Tau province, east of Ho Chi Minh City.The gas will be used to generate electricity, in addition to providing power toenergy-intensive projects such as steel rolling and urea production.

Electricity demand is rising quickly, increasing by 15% in 2001 and at an annualisedrate of 16% in the first half of 2002. Although generating capacity is currentlyadequate, at 8,000 mw, EVN expects that 34 power plants with 12,000 mw of newcapacity will be needed over the coming decade, of which seven plants (with acapacity of 2,700 mw) will be built through independent power plant and BOTprojects. The total cost of plants and distribution systems is expected to totalUS$19bn, representing almost 20% of all investment spending. To support thisinvestment, the price of electricity will need to rise further, to an estimated 7 UScents per kwh by 2005 from about 5.6 US cents now.

New oil discoveries could add10% to output levels

Gas from Nam Con Sonproject is now coming onshore

Electricity demand is rising by15% a year

24 Vietnam


By 2010 EVN expects that hydropower plants will account for 42% of allelectricity generated, down from 50% currently; coal plants will produce 20% ofthe total, up from 13%; and gas-fired plants will see their share rise from 24% to38%. Diesel plants, which are expensive to run, will be phased out. Vietnam willalso purchase significant amounts of power from Laos.

Over the longer term, Vietnam is considering the possibility of nuclear powerplants. It has signed a memorandum of understanding with South Korea forcollaboration on the planning and technical issues involved, including siteselection, the choice of technology, security, waste management, and training.The plan is to determine in 2003 whether to build nuclear plants; even then,they would only begin operations in 2017. Russia has also expressed an interestin undertaking a feasibility study of constructing a nuclear power plant inVietnam; most of the personnel in Vietnam who are knowledgeable aboutnuclear power were trained in Russia or the former Soviet Union.

Infrastructure and telecommunications

The government has recently shown great concern about the rising toll of roaddeaths�10,477 people were killed on the roads in 2001, and 9,500 in the firstnine months of this year. An estimated 70% of these deaths were related tomotorcycle accidents: Vietnam has over 10m motorcycles, up from 500,000 adecade ago. Far-reaching solutions are being considered for Hanoi, the capital.The city devotes only 6% of its area to roads, which is considered inadequate,and means that the main thoroughfares are crowded and dangerous. Hanoi hasa fleet of only 1,500 buses, capable of carrying 147m passengers annually, or asixth of the estimated demand if there were a more complete bus system. TheMetropolitan Board of Public Transport Development has proposed buildingfour tramcar lines, which would cost US$7m-12m per km, or one-tenth of theprice of a subway. In addition, Vietnam Railways would like to build anoverhead railway line and renovate some of the stations in and near the city.

In an effort to bring more competition to the telecommunications sector, thegovernment has approved the establishment of a new joint-stock company,Hanoi Telecom, making it the sixth telecoms company in the country. The newcompany will be allowed to work in all areas of telecoms, including fixed linephone services, mobile communications, and Internet service provision. Thecompany plans to start by developing a mobile-phone network using third-generation CDMA technology. Its main competitor is the state-owned VietnamPost and Telecommunications Corporation. Other businesses are the SaigonPosts and Telecom Joint Stock Company, the Army�s Electronics andTelecommunication Company, the Vietnam Maritime Electronics Company,and the Electric Telecom Company.

Financial and other services

In November the State Bank of Vietnam (SBV, the central bank) reduced thereserve ratio on US dollar call deposits from 8% to 5%. This frees up more cashfor lending, and thereby enables banks to pay a higher interest rate to depositors,

Foreign interest is expressed inbuilding nuclear power plants

Road accidents drawsattention to public transport

The government approves asixth telecoms provider

SBV cuts reserve rate on USdollar deposits

Vietnam 25


in order to attract more US dollar deposits. Currently short-term US dollardeposits earn 2.2-2.4% annual interest, compared to 8.2-8.6% on dong deposits,and this has led depositors to switch from US dollars to dong. In January-October US dollar deposits at Vietcombank, a state-owned commercial bank,rose by 2% whereas dong deposits increased by 67%. Domestic banks hold anestimated US$5bn in overseas banks, and as US dollar interest rates have fallenworldwide, they have been obliged to reduce their interest rates on US dollardeposits over the past few months.

The government is keen to see more interest in the stockmarket, and has thereforeissued a regulation guaranteeing that foreign investors, both institutional andindividual, will be able to exchange their stockmarket profits into US dollars. Thestockmarket began operations in July 2000, and so far lists just 19 relatively smallcompanies. Only 33 foreign investors have opened stock trading accounts.

Over the first nine months of the year, Vietnam bought back about US$165mworth of Brady bonds, or nearly one-third of the total. In March 1998 Vietnamissued US$550m in Brady bonds, collateralised by US Treasury bonds, as part ofthe restructuring of its international commercial debt. The repurchase of theBrady bonds will enhance Vietnam�s credibility in the international financialmarkets, but will also reduce the number of alternatives for investors wishing tolink some of their investments to Vietnam.

An estimated 2.2m visitors arrived in Vietnam in the first ten months of the year,a year-on-year increase of 11.3%, and the National Administration of Tourismnow expects more than 2.6m foreign visitors for the year. Of the total, 1.2mvisitors were tourists, up 17.3% from the year-earlier period. There were also risesin the number of business visitors (up by 10.4% to 362,000) and overseasVietnamese visiting family members (up by 9.8% to 365,000). Hotel occupancyrates have risen as a result of this expansion in visitors; the up-scale SofitelMetropole Hotel in Hanoi reported a 92% occupancy rate in November, up from72% in November 2001, and the highest rate in over five years. Other hotels inHanoi and Ho Chi Minh City have seen similar rises in occupancy.

This recent surge of tourism is partly a result of the October 12th bomb blast inBali, Indonesia, which killed 190 people, mainly tourists. Looking for alternativedestinations, more tourists are turning their attention to Vietnam, which has areputation for being safe, and less vulnerable to the unrest currently plaguingother countries in the region, such as the Philippines or Indonesia. The traveland tourism sector provides over 650,000 jobs, about 2% of total employment.

The growth in tourism has led to a resumption of investor interest in the sector. Byearly November 13 foreign-invested hotel projects worth US$48m were licensed,up from one project in 1999 and four projects worth US$10m in total in 2001. Mostof the interest has been in the central coastal areas, including Hue, Hoi An andNha Trang. The beach resort of Nha Trang is expected to grow rapidly as a touristdestination over the next few years, particularly as the Civil Aviation Authority isdeveloping a public airport at nearby Cam Ranh Bay, the site of former US andRussian military bases. This would allow large planes to fly directly to the area.

Currency convertibility fortrading profits is guaranteed

Vietnam buys back a third ofits Brady bonds

Tourism is booming despiteregional problems

Investor interest in the tourismsector has resumed

26 Vietnam


Foreign trade and payments

Confirming an acceleration that began mid-2002, Vietnam�s exports rose toUS$15bn in the first 11 months of the year, an increase of 8.3% year on year.Non-oil exports rose by 11.7%, as oil revenue fell by around 3.4%. Leading theexpansion was the garment and textile sector, with exports rising by nearly 35%year on year. There were also substantial increases in the exports of seafood,footwear, rice and coal. Faced with lower prices, the value of exports of coffeefell by 18% and of crude oil by 3.4%. Spurred by the reduction in tariff barriers inline with the trade agreement with the US that came into effect in December2001, exports to the US have doubled over the past year (led by a twenty-foldincrease in shipments of garments) and now account for 13% of all exports. Itremains the case that just over 50% of all Vietnam�s exports go to Asia. Theleading destination is Japan, which takes 14% of exports, followed in the regionby China and Singapore (over 9% each).

Exports and imports(US$ m unless otherwise indicated)

2001 2002Year Jan-Nov % change a

ExportsFootwear 1,520 1,600 18.0Textiles & garments 2,000 2,450 34.7Crude oil 3,175 2,832 -3.4Rice 588 730 22.2Coffee 385 291 -18.0Marine products 1,800 1,900 13.6Total exports incl others 15,100 15,000 8.3Imports by domestic firms n/a 11,400 14.0Imports by foreign-invested firms n/a 5,900 28.6Total imports 16,000 17,300 18.6Trade balance -900 -2,300 n/a

a Year on year.

Sources: UN Development Programme; press reports.

Exports rose by 8.3% inJanuary-November

Vietnam 27


Imports rose even more quickly than exports, rising by 18.6% year on year inJanuary-November to reach US$17.3bn. There were large increases in imports ofraw materials, machinery, equipment, and cars, although the number ofimported motorcycles dropped sharply. The strong rise in imports augurs wellfor continued rapid economic growth in 2003. This expansion has resulted in atrade deficit for the period of US$2.3bn, which is more than double the deficitrecorded in the whole of 2001.

In November Vietnam began its first round of negotiations for entry into theWorld Trade Organisation (WTO) with a delegation from the EU. As part of theapplication process, Vietnam must hold discussions with 30 member countries,and has chosen to begin with the EU. Vietnam is hoping, optimistically, to jointhe WTO by 2005. During the recent session of the National Assembly (thelegislature), Mr Khai criticised the slow pace of administrative and legal reformsneeded to prepare the way for membership.

There are mixed signals on foreign direct investment (FDI). The number of newlicensed projects rose to 607 in January-November, up by 30% compared withthe year-earlier period. Most of these are in light industry (264 projects), heavyindustry (168 projects) and hotels/tourism (19 projects). However, the value ofcommitments fell by 47% to US$1.17bn. This does not tell the whole storybecause the value of actual FDI inflows is expected to exceed US$2bn for thefirst time in five years. The best interpretation is that there is solid but low-keyinterest in investing in Vietnam, but no return to the exuberance of themid-1990s. Part of the challenge is to remain competitive with China, whichbecame a WTO member in December 2001, and saw its FDI commitments risefrom US$41bn in 2001 to US$47bn in 2002. The growth of FDI in China givesadded impetus to the Vietnamese government�s push for WTO membership.

The quality of FDI commitments is improving, with much of it now gearedtowards export-oriented projects. This is likely to generate more benefits forVietnam than the earlier wave or largely import-substituting industrialinvestment, in such capital-intensive sectors as cement, automobile andmotorcycle assembly, and sugar refining.

The most attractive destination for FDI continues to be Ho Chi Minh City (21% ofcommitments by value) and the nearby provinces of Binh Duong (20%) and DongNai (19%), with about 10% going to Hanoi. This year marks a return by regionalinvestors; the most important sources of new FDI commitments in 2002 havebeen Taiwan and South Korea (around 20% each) and Hong Kong (12%).

Foreign direct investment(Commitments made in Jan-Nov 2002)

No. of projects Value of projects (US$ m)Main sourcesTaiwan 162 235South Korea 121 218Hong Kong 54 136US 26 104Japan 42 96Malaysia 23 91

Robust imports push up thetrade deficit

Vietnam begins WTO-relatednegotiations with the EU

FDI commitments are up inquantity, but down in value

Most FDI flows to the south ofVietnam

28 Vietnam


Main destinationsHo Chi Minh City 195 243Binh Duong 118 235Dong Nai 74 219Hanoi 52 114

Source: Press reports.

Firms from the US have been relatively slow to invest in Vietnam, with the USranking 13th among foreign investors. US investors have cited cumbersomeadministrative procedures, a lack of legal transparency, and the inadequateprotection of intellectual property rights. However, interest is increasing, and islikely to translate into significantly more commitments over the next few years.The Boeing corporation is financing a campaign to call for more US investmentin Vietnam, and the increasingly warm welcome for overseas Vietnameseinvestors will tend to favour the US, home of half of all overseas Vietnamese(Viet Kieu). The government recently allowed Viet Kieu to own houses; a draftordinance would give them the choice of being treated as domestic land users ifthey invest under the law on domestic investment, or as foreign land lessors ifthey invest under the law on foreign investment.

Vietnam continues to attract the interest of aid donors, led by Japan, which hasagreed to increase its official development assistance (ODA) further in 2003.During the 10th Consultative Group meeting of international donors in earlyDecember, Vietnam�s donors pledged US$2.5bn in ODA for 2003. The grouppledged US$2.4bn in December 2001, but only US$1.5bn is likely to have beendisbursed in 2002 owing to delays in implementing projects. Japan has pledged atotal of US$7bn in aid (including loans) so far, and provided an estimatedUS$750m in 2002. There may be some quid pro quo. South Korean firms havecomplained that they are being squeezed out of major construction projects byJapanese firms (for example, building the oil refinery, supplying water todowntown Hanoi, improving the airport in Ho Chi Minh City, constructing abridge in Hanoi) and attribute it to pressure from Japan. The World Bank is thesecond-largest donor, committing US$4bn since 1993, of which US$1.7bn has beendisbursed. The World Bank has approved a US$3bn programme of support forVietnam over the 2003-06 period, and frequently expresses admiration forVietnam�s achievements in reducing poverty in the 1990s.

US investment remains modest

Vietnam remains a favouritewith aid donors

vietnam analysis is updated daily; through printed subscription products ranging from newsletters to...

Documents