Category Archives: Vietnam economy

Is Vietnam’s Economy Doomed?

Japanese economist Kenishi Ohno says Vietnam has fallen into the feared middle income trap — perpetual stagnation after stalling on the past to prosperity.
He says the country faces a social crisis because it failed to heed warnings six years ago.  Vietnam now faces:

  • Slowing economic growth
  • Low investment efficiency
  • Rising production costs
  • Little improvement in competitiveness

Ohno says productivity has grown 3% annually while wages rose 26%.  Competitiveness has dropped at an annual rate of 23%.

Vietnamese economist Nguyen Minh Phong says it’s too soon to conclude his country has fallen into the middle income trap.  He contends the government deliberately slowed Vietnam’s growth to enable economic restructuring to take place.

To stay out of the middle income trap, Phong says Vietnam needs to:

  • Prioritize development of information technology
  • Reduce exports of natural-resources
  • Support enterprises with market research
  • Explore niche markets
  • Help small enterprises get loans
  • Expand bilateral trade agreements
  • Reform education and training

Vietnam also needs to follow the examples of Japan, Taiwan, Singapore, and South Korea — all of which cultivated the private sector on their way to full economic development.

For several years, it has become increasingly obvious that Vietnam’s escape from economic mediocrity depends on the capacity of its own government to surrender control and permit the private sector to flourish.





Will Vietnam Achieve 14% Annual Growth?

Vietnam’s economy has grown 5% this quarter, slightly faster than the first quarter in 2012 and 2013, with a $1 billion trade surplus and growth especially robust in the Saigon region.  But the striking economic news in a country that was experiencing runaway inflation in recent years:  Vietnam’s consumer price index declined in 0.4% in March and now is below an annual rate of 5%.

The data suggest Vietnam is on an economic path toward reaching its long-term potential.  But what is its potential?  Some economists think Vietnam is headed toward the middle-income trap that stalls many developing countries, such as the Philippines, Indonesia, and Thailand.  Others see Vietnam as the Japan (or South Korea) of the 21st Century.

The latter viewpoint got a boost in a forum in Hanoi this week that featured Harvard’s Robert Lawrence, who forecast 13.5% economic growth for Vietnam in 2025.  That’s assuming implementation of the Trans-Pacific Partnership (TPP) agreement that is expected to dramatically increase Vietnam’s global trade.

Lawrence projected many other TPP partners (the US, Canada, Mexico, Peru, Chile, New Zealand, Australia, Singapore, Malaysia, Brunei, and Japan) would experience significantly slower growth.  His numbers suggested Vietnam’s exports would increase 37%, compared to 14% for Japan and 12% for Malaysia, and 4% for the US.

The TPP has yet to be completed, so Vietnamese officials were quick to point out their country would not necessarily benefit the most from it — because its economy is starting far behind the other partners.



The Cost of Living with Big Macs in Vietnam

Now that McDonalds opened its first restaurant in Vietnam this month, it will take a while to measure the effect on Vietnamese consumers — hungry for all things American but leery of the potential health consequences.  But the fast food giant already has made a significant contribution to anyone considering living in or visiting Vietnam — thanks to Big Macs.

The entry of the company’s trademark oversized hamburgers on the streets of Saigon has immediately made Vietnam a member of The Economist’s Big Mac Index.  The index is an elegant (though obviously imprecise) measurement of purchasing power in countries where McDonalds sells Big Macs.

So now we know that the Big Mac sells for the equivalent of $2.84 in Ho Chi Minh City, considerably less than the $4.62 price in the US.  By comparison, the extremes in Big Mac pricing are $7.80 in Norway and $1.54 in India.  The Economist arrives at those numbers by dividing the price charged at McDonald’s by the official exchange rate of the country; In Vietnam, consumers pay 60,000 Vietnamese dong for a Big Mac, and the Economist used 21,090 as the exchange rate.

What’s interesting about this is that the index indicates the actual cost of living in Vietnam — as opposed to the implied cost you get from the official exchange rate.  In this case, it suggests Vietnam is much cheaper than you’d expect.  In fact, if a Big Mac (and presumably everything else) cost as much in Vietnam as in the US, we’d be getting 12,975 VND for our dollar rather than the 21,090 the bank offers.

Purchasing Power Parity is a relatively good way of understanding the true cost of living in a foreign country, but it is tends to be subject to the biases of whoever calculates it.  The Big Mac Index is a convenient way to demonstrate that Vietnam is an inexpensive place to live — at least until McDonald’s raises its prices there.

Vietnam Rewards Patient Investors

American news organizations like the Wall Street Journal and Bloomberg are reporting this week that Vietnam ended up with a better year economically than international analysts had expected.  Meanwhile, investors who had more confidence in Vietnam have been rewarded with a 23% gain in stocks so far this year and 35% since last Dec. 1 — plus double-digit dividends for typical publicly traded companies.

With the focus on China and other challenged emerging markets, Vietnam has quietly strengthened its global economic positioning over the past few years. This year its stock index has outperformed all others in Southeast Asia as its GDP rose slightly more than 6% in the fourth quarter and 5.4% for the year — ahead of last year’s 5.25% and Bloomberg’s 5.3% projection.

The main drivers of Vietnam’s recovery are exports — up 15% and now equivalent to 75% of GDP — and foreign investment, up 10% to $11.5 billion this year.  Pledged foreign direct investment was reported at $22 billion, up 55%.

Vietnam is expected to have a trade surplus of $863 million this year, up from $747 million last year.  Government statisticians also say Vietnam’s inflation rate is down from 7% last year to 6% this year.

All of this suggests Vietnam is in a strong position to continue its determined and persistent  march toward full economic development.  The government aims for a modest and achievable GDP growth of 5.8%, which will likely reward foreign investors for a third straight year.

Communist Vietnam’s Ultra Wealthy Capitalists

The official newspaper of the Communist Party of Vietnam reports the country now has 195 “ultra-high net worth individuals” (worth $30 million or more), the latest consequence of Vietnam’s 30-year transition from collectivism to capitalism.

Not only has capitalism made a strong comeback.  Vietnam leads every country in Southeast Asia except Thailand in high wealth club growth — with 15% more members than last year — according to a new UBS report.  Vietnam’s 195 (the top 0.0002% of the country’s population) are said to control an aggregate of $20 billion in assets (about 15% of GDP).

Anyone paying close attention to Vietnam wouldn’t be surprised the country surpassed Singapore, Indonesia, Malaysia, and the Philippines in growing the ultra wealthy.

But why did the Communist Party newspaper report it?  Probably because pragmatic economics are now deemed more important than political ideology in a country with bold global aspirations.  The article points out, for example, that Vietnam holds promise for private global bankers (which would help grow Vietnam’s wealth).

The UBS study attributes the ultra wealth growth to investments in infrastructure and burgeoning private consumption — driven by a growing middle class and social reforms.   But optimism and consumer confidence are just part of the story; the rise of Vietnam also is related to economic slowdown in China — where the number of ultra wealthy individuals dropped 5%.

Can Vietnam Escape the Middle Income Trap?

The International Monetary Fund says Vietnam’s economy will grow significantly slower than expected this year and next because the government is dragging its feet on needed reforms.  Vietnam may be falling into the dreaded middle-income trap that describes nations that pull themselves out of poverty but get stuck on the path to prosperity.

The IMF had projected 5.8% growth in Vietnam this year and 6.4% next year but now projects 5.2% for both years.  That may not seem like a lot, but it’s IMF’s biggest reduction in Southeast Asian other than Singapore — and it represents a big change compared to the outlook five years ago when Vietnam’s economy was flying high.

Vietnam’s problem, the IMF says, is the country is moving too slowly on the reforms everybody knows are necessary — especially privatizing state-own companies, overhauling the financial system, and creating an asset management company to manage bad debt.

The country is said to be lacking clear action steps to get its economy back on track.  The IMF says Vietnam needs to be decisive and accelerate banking and state-owned enterprise reforms.

Investors have been relatively patient so far, pushing the VN Index up 17% this year.  But Vietnam’s opportunity to replicate the economic success of Asian predecessors Japan and South Korea seems to be slipping away.

Vietnam’s Surging Trade Surplus

Vietnam, a relative newcomer to global trade, reports a $482 million trade surplus in the first quarter on this year, far above the $300 million surplus for all of 2012 — when even its economic optimists had expected a significant deficit.  Vietnam is fast becoming a leader in exports, especially food and clothes.

The country reported nearly $30 billion in exports through March, up 20% from the previous first quarter (doubling the government’s goal) — with state-owned businesses accounting for one-third and foreign-invested businesses two-thirds.

The US is Vietnam’s biggest customer as trade between the two countries has grown very rapidly (some years exponentially) for well over a decade.  In 1992, the US exported $5 million in products to  Vietnam and reported no imports.  By 1996, bilateral trade approached $1 billion, and the US enjoyed a $300 million surplus.   In the years 2001 through 2003, Vietnam’s exports to the US went from $1 billion to $2 billion to $4 billion.

By 2012, Vietnam’s exports to the US exceeded $20 billion, and this year the number could be in the $25 billion range.  US exports to Vietnam were valued at $4.6 billion for a trade deficit of nearly $16 billion.

Last year, Americans imported $10 billion in Vietnamese shoes and clothes;  and well over $2 billion in food, mostly fish and coffee.  Vietnamese imported roughly $1 billion each worth of food, building/industrial materials and computer/telecommunications technology.

In the first month of 2013, Vietnam’s exports to the US were up 13% from the previous January while US exports to Vietnam were up nearly 30%.

The pattern over the past two decades suggests the Vietnam trade momentum is just getting started.  The country seems destined to be a major player in the global economy, while bilateral trade with the US surges.  This is one of the brightest lights in Vietnam’s otherwise fragile economy.