Vietnam’s newspapers are reporting that the Hong Kong-based Dragon Best International has agreed to a partnership with a Vietnamese company, Ho Tram Tourism JSC, that envisions investing in: a $32 billion real estate development in Ho Chi Minh City, an $18 billion eco-tourism project nearby Ba Ria – Vung Tau Province, and a $50 billion economic zone.
On a global scale, these are huge projects. In Vietnam, they are head-scratching, utopian dreams that make experienced developers and economists skeptical about Vietnam investors’ capacity for realism.
Many international investors believe Vietnam is a promising frontier market, but none of them are going to pour an amount of capital into Vietnam that approaches the country’s annual GDP. Vietnam’s economy cannot absorb $100 billion in capital; moreover, it could not generate a return on the investment any time soon.
For Vietnam, the problem is that this is not the first pie-in-the-sky project that didn’t materialize. Last year Dubai investor Global Sphere announced its plans to spent $30 billion on the Hanoi Wall Street — 70 apartment blocks at heights ranging from 40 to 70 stories and housing up to 400,000 people with a 102 story central tower. Hanoi’s planners hadn’t heard about the project, and it has yet to be registered with the government.
In 2007, the US Eminence Group announced its plan to develop a $30 billion economic zone in Thanh Hoa Province. However, soon after the group made an enthusiastic presentation on the project, the investor vanished.
Ultimately, the investors who will be successful in Vietnam are those patient and disciplined enough to develop realistic, credible plans — not pipe dreams.
Vietnam financial portal StoxPlus says more than a tenth of Vietnam’s publicly traded companies (60 of 500 reporting so far) announced losses in the first quarter of this year.
At this stage in Vietnam’s slow recovery, the losses are no surprise to investors, most of whom appear to be anticipating better results later this year. Vietnam’s leading stock index is up nearly 18% so far this year.
Small banks and securities companies have been hit hardest because of bad loans and less trading in the stock markets. Brokerage revenues for most securities firms shrank — Sacombank Securities (SBS) reporting losses of $700,000, Dong A Securities (DAS) $310,000), Vina Securities $250,000 and Maritime Bank Securities $250,000.
Vietnam’s fragile economy also has been hard on the construction industry, especially building material firms. For example, six of the seven businesses under the umbrella of the Viet Nam Glass and Ceramics Corp (Viglacera) reported losses.
Shipping has been another weak sector, with Viet Nam Ocean Shipping (VOS) reporting the worst results, a $4.6 million loss, but the tide will turn.
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 foreign investors often focus their efforts on either Hanoi, the political capital, or Saigon, the financial capital — or both. But new data show the country’s more promising places to do business are far from both major cities.
The latest Provincial Competitiveness Index ranks more rural areas in the Mekong Delta, the far north and the central coast highest overall on nine critical factors such as transparency, entry costs, land access, workforce training, and support services. Ho Chi Minh City ranks 13th among Vietnam’s 63 provinces and Hanoi ranks 51st — partly because bureaucracy and corruption in the big cities stifles business.
The Vietnam Chamber of Commerce, which first published the index in 2005, found backsliding in many provinces, especially Hanoi, in the latest annual update — based on a survey of 8,053 enterprises, including 1,540 foreign companies that tended to be less optimistic than in the past.
In contrast to Hanoi and Ho Chi Minh City, this year’s best five provinces to do business in Vietnam as measured by the competitiveness index are:
- Dong Thap (1) and An Giang (2). These two relatively remote Meking Delta provinces lie on the Cambodian border west of Saigon. Dong Thap has the most proactive local government in Vietnam and also ranks ranked among the best places to deal with land access, time costs and “informal charges,” presumably a euphemism for bribery. An Giang has a well-developed legal structure and relatively low entry costs.
- Lao Cai (3). Home of a multitude of ethnic minority cultures as well as Sapa, one of Vietnam’s most popular tourist destinations, Lao Cai borders China in the northern mountains. The province ranks among the best in Vietnam when it comes to transparency, low entry costs, low informal fees; it ranks among the highest in proactivity and legal institutions.
- Binh Dinh (4). This central coastal province was highlighted in this blog last fall as one of the most attractive investment destinations. Quy Nhon, provincial capital, has forward-looking managment, an ambitious development plan, advanced transportation infrastructure and the lowest business entry costs in Vietnam.
- Vinh Long (5). Situated in the center of the Mekong Delta in southern Vietnam, Vinh Long Province ranks especially high in proactivity, land access, and time costs.
Other regions of Vietnam that are rated high among places to invest include several other provinces in the Mekong Delta (Kien Giang, Bac Lieu, Tra Vinh, Long An and Can Tho City); Bac Ninh and Thai Nguyen in the North; and the central city of Danang.
Overall, the rankings make it clear the best return on investment is likely to accrue to those who venture outside Vietnam’s largest cities.
This week’s Newsweek paints a devastating portrait of Vietnam’s economy that downplays the positives and focuses on downside. Actually, Vietnam, like most countries including the US, has been reeling since the global downturn that started in 2008, but the promise remains.
The article highlights projects that have been on hold as a result of the slowdown. It says the country that had been on track to take its place as an Asian tiger is plagued by scandal and is now a pussycat.
You could draw that conclusion if you selected certain entries among the 600-plus posts on this blog over the past three years. But a more comprehensive reading would be that Vietnam’s promise remains strong despite its considerable challenges.
As Newsweek points out, the nation boasts “a large youthful population, a very high literacy rate, abundant natural resources, agricultural self-sufficiency, a stretch of coastline to rival California’s or Thailand’s, and a strategic position amid the trade routes of the Pacific.”
Is Vietnam a basket case? That depends, as this blog has been pointing out, on the government earning back the confidence of foreign investors, which will require meaningful corporate, legal and financial reforms — and probably more favorable mention in the Western media.
More from Newsweek on Vietnam’s economy
Vietnam’s government analysts say the economy is rebounding despite Moody’s downgrade of the country’s credit rating this week because of banking concerns. GDP rose 5.4% in the third quarter vs. 4.7% and 4% in the first two quarters.
Although loans and scandals this summer rattled the banking system, lending has been rising, as has inflation. Industrial production is up 9.7% in September from a year earlier. Retail sales are up 17% in the first nine months. Vietnam now has a $34 million trade surplus after an $8 billion deficit last year.
And, while Moody’s downgraded Vietnam, Standard & Poor upgraded several individual Vietnamese banks, saying the risks of economic imbalances in Vietnam have subsided.
Vietnam’s economy may be back on the road toward robust growth after inflation has been brought under control. Economic expansion improved somewhat from 4% in the first quarter to 4.4% in the second quarter of 2012. Retail and service sales are higher than last year. New companies outnumber those going bankrupt by a 7-1 ratio. Inventories are down 29%, another positive sign.
Even so, the international investment community remains skeptical about the government’s ability to solve banking problems, especially bad loans. Investors question whether Vietnam will move forward with privatization of government-owned corporations as well as business culture reforms. The mixed signals have prevented Vietnam’s 12-year-old stock markets from appearing on the radar screens of most global investors. Over the next few years, that will change. Today there are 105 securities companies in Vietnam, 1.2 million accounts, and a $40 million market capitalization. That’s still too small to merit listing in the Wall Street Journal, but Vietnam’s day is coming.
A Renewed Call for Reform
Before the global slowdown started in 2008, Vietnam was experiencing an economic miracle driven by foreign investment. Four years later, the question facing Vietnam is whether it can win the global community back. That will depend on trust. Foreign direct investment (FDI) has declined radically — from $71 billion in 2008 to just $6 billion in the first half of 2012. That reflects dissatisfaction with the openness in the country; foreign investors are not getting accurate, adequate, and trustworthy information they need to devise investment strategies and assess risk. There’s evidence Vietnam’s slowdown has hit bottom, but the country needs global investors to get back on the high growth trajectory.
Key elements must be addressed to boost confidence among international investors that the world’s most promising frontier market is on the right track. They are:
- Banking and Finance. Now that inflation has been tamed, Vietnam’s biggest current problem may be that one-third of the country’s commercial banks are said to be “critically injured” by $12 billion in bad debts – up to 10% of their aggregate loan portfolio. One real-world example of the need for reform is bankrupt Bianfishco, which owes $50 million to nine banks, partly because Vietnam doesn’t have a systematic and centralized way of measuring credit worthiness.
- Intellectual Property. Vietnam’s technology ministry identified 4,500 violations of intellectual property rights violations and collected about $1 million in fines, which helps the country gain credibility. Even so, Vietnam faces a long-term challenge reforming a culture of piracy that evolved a decade ago as its highly entrepreneurial and creative consumers were exposed to Western technology and culture they couldn’t afford.
- Corporate Scandal and Privatization. Three major corporate corruption cases have put a spotlight on Vietnam’s need to reform state-owned corporations. First was the case that resulted in long prison sentences for senior executives of shipbuilder Vinashin, next the arrest of the top executives of shipping company Vinalines. Then Vietnam’s public equity markets went into a tailspin this summer when banking executives, including one of the country’s wealthiest, were accused of regulatory violations and corruption. Vietnam’s Chamber of Commerce says half of Vietnamese companies bribe government officials to win contracts. International investors see privatization of corporations as a critical part of the solution. Vietnam says it will sell parts of 254 government-owned businesses this year. Because the government has a history of stalling privatizations, following through on that commitment will be essential.
The Vietnomics Complete Autumn 2012 Update
Posted in Vietnam business, Vietnam economy, Vietnam investing
Tagged US-Vietnam relations, Vietnam banking, Vietnam business, Vietnam culture, Vietnam development, Vietnam diplomacy, Vietnam economy, Vietnam exports, Vietnam finance, Vietnam government, Vietnam imports, Vietnam investing, Vietnam law, Vietnam manufacturing, Vietnam stock market, Vietnam technology, Vietnam tourism, Vietnam Trade, Vietnam War, Vietnam workforce