Feb 2006
Adam Fforde and Associates Pty Ltd
Website: www.aduki.com.au
Email: adam@aduki.com.au
Diary, Events, Economic change in the first month of 2006: notes, Points, Things to watch, Interesting new downloadable files
The Party Central Committee met in mid January for its 13th Plenum. 'All OK - preparing for the Xth Congress'.
The government meeting at the start of the month concluded by stressing four issues that showed the Party's focus above all upon economic development as a means to secure political support: raising and stabilising economic growth by improving the investment environment, increased privatisation of social and cultural sectors, reduced waste in the state sector, and measures to deal with Bird Flu. The system of population registration has been strengthened. Canon announced a major commitment to investment in Vietnam, expected to lead to very rapid export gains. Vedan has made similar noises. But Allianz sold off its insurance interests, which were bought by Australia's QBE. A range of economic indicators continue to show how people had 'never had it so good' - total consumer spending has approximately doubled in the past five years, FDI into tourism is rising fast, tax revenues are buoyant, and so on. The government opened its own website - www.government.gov.vn and received strong proposals from the State Bank for establishment of a Vietnam Development Bank. Other signs of a liking for large entities could be seen in the establishment of the Posts and Telecommunications Corporation and the Vietnam Coal and Minerals Corporation from a number of existing units. EVN is expecting to borrow lots of money this year, including US$ 250 mn of bonds in the second quarter. The government also received formal proposals from MPI that exports of crude oil and coal should be cut sharply. Social tensions associated with rapid inward FDI were eased by official interventions on the side of workers: the large strikes in Linh Trung EPZ (HCM City) in December last led to government approval of a 40% hike in the minimum wage. Official reports said that last year saw 1.6 mn new jobs - 330,000 in agriculture, forestry and fishery; 620,000 in industry and construction; 650,000 in trade and services. Only 260,000 were in the corporate sector of which 70,000 (less than 5%) were in the FDI sector. HCM City announced that it would finish equitisation of all its SOEs this year.
The government moved to permit imports of sugar in an important move against local producers, where provincial interests with overcapacity installed in the 1990s were pushing both to protect domestic producers and find ways of pushing down prices paid to growers. The Tri An Sugar Company was declared bankrupt by the government - a very unusual decision. In a similar direction, MARD continues to look for ways to increase wood product exports that use domestic wood supplies; the issue here being that many growers are locked into unclear and likely unfavourable contracts with state investors. The state tea sector has been told it will receive no planting budget for this year; exports are falling.
Whilst trade with the EU faltered last year (whilst exports to the US rose), exports to France (mainly of footwear and garments) rose. Reports of discussion about WTO accession with the US were 'good but unclear'. Why hurry? Exports to the US last year rose to US$ 7.6 bn, around 20% of total exports. Despite past bickering with the IMF over refusal to give over information on official foreign asset holdings, it was reported that the Fund and the government announced in January that Vietnam had complied with 'regulations applied to borrowers' (Vietnamese text).
There were a range of indicators that the liberal monetary policy continues to ease political tensions associated with the effects of rapid economic change upon state business interests (especially the problems of bad SOE loans held by the state commercial banks (SBCs)) whilst at the same time edging up inflation. As the banking sector develops SBC competition for market share increases systemic risks as they compete for business.
Tran Xuan Bach died in early January. He had been sacked from the Politburo in May 1990 for 'serious violations' perhaps associated with his advocacy of political pluralism compared with economic liberalisation (a 'Yeltsin' solution?). This marked the Party's strong commitment to economic rather than political change and the renewal if not start to the SOE focus of development through the 1990s.
The CPI reportedly rose 1.2% in January on December, giving a 8.8% increase year-on-year. Tensions remained in food staples, with this sector driving the index up a (11.1% year-on-year increase). The rate of inflation is thus steadily increasing.
Interpretations of this outcome are mixed. Some Vietnamese economists argue that the increase in prices is about the same as the increase in output (about 8.5%), so there is little to worry about. Others would argue that there continues to be a relative deterioration in Vietnam’s relative costs, driven by the strong value of the Dong, in turn driven by the export boom and high levels of ODA and FDI inflows. Underlying credit expansion, related to the political economy of the SCBs, remains a major issue.
Inflation is relatively high and is now in double-digits.
Growth remains rapid. A striking feature is the rapid growth of the FDI invested sector. Whilst the data measures gross output, rather than value-added, Jan data showed this sector with a year-on-year growth of 26.8%, compared with nearer 20% for other sectors. Employment creation in the FDI sector remains very low (see above) and much of the value of exports is imported.
Growth is rapid and now again focussed upon the southern growth zone. The import content of many sectors remains very high.
Preliminary results suggested that total exports for Jan were US$ 2.8 bn, up some 16% on the year - a bit of a slowdown. The total for the month on a seasonally adjusted basis showed a sharp increase on December. Garments and footwear showed minor but positive growth (+3.4% y-y), with spectacular growth in various lines on a year-on-year basis: instant noodles (+95%), plastic goods (+48%), precious gems and metals (+72%), rubber (+36%), coffee (+38%), electric wires and cables (+32%), wood products (+22%), pepper (+25%), coal (+22%) etc.
Globalisation continues to be rapid.
Imports grew only 10.8% on a year-on-year basis (to US$ 3.1 bn), so that the monthly trade deficit declined sharply. Big increases were seen in materials such as petrol (+49%), steel (+43%), fertiliser (+37%), chemicals (+49%) and paper (+35%).
Import substitution starts to pay off?
In Jan FDI activity was very strong - unlike previous years. Capital implemented was US$ 242 mn for the first 20 days of January, a rise year-on-year and quite different from the 'hesitant' pace of early 2005.
ODA continues to seek to underpin pro-Western alignment on China's southern border
The economy remains supercharged by the combination of rapid growth of the structures of capitalism, high levels of rents accruing from FDI and ODA, and the lack of effective regulation. So far the overall outcome is rapid growth and overall macro-economic stability. Social tensions remain high, but conservative political mechanisms remain strong enough to cope. Thus, underlying risk is mounting as the political practices required to cope with the unexpected remain weakly developed. 'Civil society' increasingly pushes against the political boundaries imposed by an unreformed and conservative system.
It is interesting to watch how the government, closely linked to state business interests (as well as MNCs) and keen to show its capacity to develop the country, is increasingly taking strategic positions across a range of sectors, especially exports. Access to foreign capital through equity and bond sales will finance much of the underlying mess, but this will lead to interesting discussions about access to profits when SOEs get into trouble - who will get paid first?
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Adam Fforde
Adam Fforde & Associates p/l (AF&A)
PO 2096
Ivanhoe E.,
Melbourne Vic 3079
AUSTRALIA