Many Vietnamese families want children born in the dragon year, and one survey finds more than twice as many pregnant women today than a year ago when the year of the cat began.  Lucky babies will bring a surge in business for companies that make products for children.

The last dragon year in Vietnam brought a relatively modest 8% increase in births, but a much bigger surge is likely now because both the demographics and the economy of Vietnam have changed dramatically since then; the majority of Vietnamese women are now at childbearing prime. 

This means it’s time to invest in companies like Vinamilk, the leading dairy producer in Vietnam, and one of the largest publicly traded companies; and Go Duc Thanh, a manufacturer of children’s toys.

Beyond babies, the year of the dragon promises to be a good one for investors in general because the optimism that accompanies luck in the Vietnamese zodiac  happens to coincide with economic conditions that point to a recovery after three years of sluggish returns on investment.  In other words, look for a booming Vietnamese stock market over the next few months.

Even so, as one of the world’s most promising economies, Vietnam also faces stagnation unless the government can convince global investors it is ready to control the power of state-owned companies, private conglomerates, and institutions that are content with the status quo. Optimists contend that now is the time to invest in Vietnam, partly because many investors have lost patience just when Vietnam offers exceptional value. Supporting that view are surging exports, a modest 5% budget deficit, and less foreign debt.

The question for 2012 is whether Vietnam’s homeostatic forces will allow reform needed for the country to realize its economic potential.

Five Discouraging Signs:

1.  Vietnam has been losing its battle to gain credibility with foreign investors. The World Bank lowered Vietnam’s business climate ranking from 90th to 98th among 183 world economies. A European Chamber of Commerce survey finds its members are disappointed with Vietnam.
2. Businesses within Vietnam are pessimistic too. Grant Thornton’s new global survey finds optimists among Vietnamese businesses went from 80% early last year to 34% by year’s end.
3. An HSBC economist calls Vietnam the most exposed major country in Southeast Asia to an economic downturn because of its budget deficit, low reserves, and high inflation.
4. Vietnam is the province of a small group of international investors, with 15,588 foreigners permitted to trade in Vietnam. Active traders are a shrinking fraction as the VN Index declined 27% in 2011.
5. 43% of Vietnam’s biggest corporate taxpayers are owned by the government, while private firms slid from 21% to 18% of the total. This suggests backsliding in the transition to a free market economy.

Three Signs that Encourage Optimism:

1. Rising tourism. Vietnam set a record with six million international visitors in 2011, 19% more than 2010, including 71% more foreigners making visits to relatives in Vietnam.
2. Surging exports. Vietnam’s trade deficit is much lower than expected as exports exceed the government’s target by 10% and outpaced imports.
3. Improving infrastructure. Vietnam opened its first modern deep-water harbor near Saigon. The $250 million project with a one-third-mile-long wharf receives container ships anchored up to 45 feet deep.

The Vietnomics Complete Winter 2012 Update

Nearly five years ago, in May 2007, Vietnam’s currency was pegged to the US dollar, with which you could buy 15,433 Vietnamese dong.  Since then, the government has devalued the dong multiple times, and 2011 ended with the dong 36% lower at almost 21,000 to the dollar.

For 2012 the government anticipates another decline of at least 5% as Vietnam continues efforts to get inflation down from nearly 19% to a single digit.  That is likely to continue encouraging exports out of Vietnam and discourage importers.  The continued decline in the dong also makes Vietnam a more attractive destination for tourists.

More on 2012 devaluation of Vietnam’s currency

Even so, the government approved:

• A national housing strategy that anticipates 100 million square meters of new living space per year
• An ambitious master plan for Hanoi that includes five satellite urban areas connected by modern roadways, each functioning independently to support the central capital city.
• The country’s first pilot urban railway route plan for Hanoi, including a 7-mile main route of overhead rail and subway to open in three years.
• The $2 billion Happyland entertainment complex, including a theme park, in the Mekong Delta near Ho Chi Minh City scheduled to open in two years. 

But the government decided to withdraw approval of Vietnam’s biggest software park, the $1.2 billion Thu Thiem project, that had been licensed in 2008 but failed to meet its obligations.  

More on Vietnam’s real estate plans for 2012 and beyond

The researchers say Europe’s financial challenges account for global pessimism as businesses worldwide anticipate a more difficult 2012.  Meanwhile, Vietnam faces difficulties as the government fights inflation, restricts credit growth, and tries to avoid an expected decline in exports. 

Vietnam’s survey respondents told researchers that the high cost of finance and availability of working capital are the biggest constraints to growth.  Respondents expect access to capital will be even more challenging 2012, but they tend to believe the cost of finance will decline.

More on 2012 business optimism in Vietnam

To reach the targets, the government says it will, among other things:

1.  Continue tight fiscal measures.
2. Modernize the growth model to increase productivity and competitiveness; and restructure banking.
3. Improve human, scientific and technological resources.
4. Reduce poverty and improve health care.
5. Strengthen environmental protection and the response to climate change and natural disasters.
6. Speed up legal and administrative reforms.
7. Strengthen national defense and diplomacy.

More on Vietnam’s 2012 priorities

The government says exports exceeded targets by 23% last year and helped Vietnam overtake the Philippines as the fifth largest trader in Southeast Asia after Singapore, Thailand, Indonesia and Malaysia.

Vietnam’s textiles, leather, fish, mobile phones, rubber, and coffee export revenues all surged — contributing to the brightest spot in the economy, a 25% drop in the trade deficit to $9.5 billion.

The picture isn’t so rosy for 2012 because of the turbulent global economy and, in the case of coffee, an increase in internal demand.  Vietnam is the world’s largest exporter of Robusta (well over a million tons this year), but domestic consumption in the historically tea-drinking culture is expected to grow from 5% to 10% of the crop.

Meanwhile Vietnam could surpass Thailand as the world’s largest rice exporter (well over 7 million tons).

More on Vietnam export outlook for 2012

More on Vietnam’s coffee exports for 2012

High interest rates and inflation along with Vietnam’s other considerable economic challenges caused more than a 10% drop in prices and a bigger decline in property sales — down in Ho Chi Minh City from 10,213 in the first nine months 2010 to 5,470 in 2011.  Local property investors say early 2012 is the best time in four years to buy property.

Particularly attractive from an investment standpoint are projects that were partly constructed in better times and now are struggling for financing to be completed.  

More on Vietnam’s collapsing real estate market

More derivative transactions are intended to improve product quality, cut transportation costs, and strengthen the positions of domestic producers in negotiating with foreign partners.

Vietnam’s commodities exchange has been used as a brokerage market for foreign customers since it was launched earlier this year, trading almost exclusively in just two commodities: rubber and coffee.  The government hopes to attract more investors by expanding to include a wide range of commodities and logistics.

More on the Vietnam commodities exchange

Vuong, 43, founded instant-noodle maker Technocom (now Vingroup) in Ukraine before returning to his native Vietnam a decade ago to set up Vincom and Vinpearl.  He will hold 168 million shares after the upcoming Vincom-Vinpearl merger, increasing his holdings from last year by $59 million.  His wife, Pham Thu Huong, is Vietnam’s fourth richest investor, with $140 million in stock.

Also among Vietnam’s top five stockholders are Dang Thanh Tam, Chairman of Saigon Invest Group, $309 million; and Doan Nguyen Duc, Chairman of Hoang Anh Gia Lai Group, $203 million (whose assets decreased by $357 million because of a drop in share prices); and Pham Thuy Hang, a Vincom board member.

More on Vietnam’s richest investors