HOW long is Vietnam going to remain Asia’s odd man out? While the US dollar has been losing its value against almost all other currencies in Asia, it is appreciating against the Vietnamese dong. And while the nation’s gross domestic product is expanding rapidly, Vietnam is virtually the only country in the region struggling to contain a rising trade deficit.
Many of the country’s problems can be traced to an overemphasis on growth. That strategy has produced fiscal deficits, inflation and an unstable exchange rate regime. Inflation is currently running at 10 per cent. Low interest rates and easy money have also led to a surge in imports, thus widening the trade deficit. Official statistics show that the deficit reached US$9.5 billion (S$12.4 billion) in the first 10 months of this year, up from US$8.4 billion in the same period last year. And the monetary authorities have devalued the currency thrice in the past year.
Despite this, foreign investors still seem to have confidence in the country. Direct foreign investment this year is expected to reach US$8 billion, far ahead of that projected for the Philippines.
Unfortunately, the new investment is almost entirely confined to infrastructure, with the construction of deep-water seaports, highways, hydroelectric power plants and fibre optic cable systems. Such investment is important to ensure future growth. But the more immediate problem is to find ways of boosting exports by encouraging investment in non-traditional manufactured goods.
Vietnam’s medium- and long-term prospects look good, particularly for manufacturing companies seeking an alternative to China. Wages are about a third lower than in China’s coastal industrial areas. English is widely spoken, and Vietnamese workers are generally regarded as hard-working.
Vietnam’s economic management, however, leaves much to be desired. It is a situation that may soon be weighing heavily on the minds of potential investors.
The recent revelation that a government-owned shipping company racked up debts of more than $5.2 billion, for example, has highlighted the need to reform the nation’s ailing state enterprises. Another issue is the low quality and uneven quantity of the economic data the government releases. But the most serious problem is muddle-headed policy formulation. This has made it difficult for foreigners to have confidence in the country’s future direction.
On Nov 5, the central bank raised its benchmark rate on dong-denominated loans by 1 percentage point in an attempt to support the local currency and dampen inflationary pressures. The move came as a surprise, particularly since the monetary authorities had repeatedly called on local banks to reduce their lending rates. The central bank had even stated the previous week that it intended to hold rates steady for the month.
The about-face prompted memories of a Finance Ministry circular late last year that raised the possibility of using price controls to hold down inflation. It was rescinded by the ministry in April this year without comment after foreign governments and businesses expressed concern.
The upcoming congress of the ruling Communist Party of Vietnam (CPV) in January is further complicating matters by encouraging policymakers to continue high-growth strategies in an effort to head off domestic unrest. Some senior party members have also been showing signs of nervousness, with hardliners calling for a crackdown on dissent in ways that could strain relations with major Western countries.
But the CPV congress could also see some positive change. Such congresses, which take place once every five years to elect a new central committee and politburo, often provide Vietnamese leaders with opportunities to announce important policy initiatives.
Vietnam’s opaque political system makes it difficult to say exactly what the new party leadership will look like after January’s elections. However, age ceilings mean that slightly more than a third of the political bureau’s current 15 members will have to retire. This is certainly good news for those who believe that older Vietnamese leaders have been responsible for slowing down reforms.
After the congress, concern that slower growth could undermine support for key party leaders should also ease. The CPV may therefore be more willing to allow tighter fiscal and monetary policies.
If macroeconomic stability continues to remain in doubt, Vietnam risks losing the goodwill of the foreign investors it so obviously needs. In 2006, when Intel announced its intention to build a US$1 billion semiconductor factory near Ho Chi Minh City, the move sent a strong message about the company’s comfort level with the country that other electronics companies found hard to ignore. Taiwan’s Hon Hai, the maker of Apple’s iPod, for example, subsequently invested almost US$5 billion in the country.
Such iconic investors, however, are hard to attract. Producing yet another wave of export-oriented investment may well depend upon the new party leadership formulating a more consistent economic strategy.
Copyright © 2010 Singapore Press Holdings Ltd