Vietnam: Monthly Economic and Social Overview

Jan 2006

Adam Fforde and Associates Pty Ltd

Economic change in the last month of 2005: notes

Prices:

Staples prices rose by 1.4% in December (month-on-month), the overall price increase was lower, at 0.8% (a yearly equivalent of 10.0%). The overall rate of inflation for the year, thus, came in rather high at 8.4%.

Price gains for goods such as clothing, footwear, housing and construction materials were rather low, at around 0.6%. The main kick to retail prices was the sharp jump in the price of gold (7.5%) whilst the US$’s value against the Dong remained almost unchanged.

For the year, gold rose 11.3% in Dong terms and the US$ rose 0.9%.

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.

Inflation is relatively high

Industrial output:

Growth remains rapid. A striking feature is the rapid growth in the South-East South region containing HCM City, producing nearly two thirds of Vietnam’s industrial output. Whilst the City itself showed year-on-year growth in industrial output for 2005 of 15.3%, hinterland provinces showed far faster growth (Binh Duong + 32%; Binh Phuoc +24.3% etc). This was an acceleration and reflects the spread of export-oriented growth beyond HCM City’s borders.

Growth is rapid and now again focussed upon the southern growth zone.

Exports:

With December exports around $3 bn, the total for the year is reported at $32 bn, a 21.6% increase on 2004. Exports for 2001-2005 have therefore doubled compared with 1996-2000. Growth has been higher than planned (17.7% a year compared with 16.2%), and has accelerated.

Globalisation continues to be rapid.

FDI and ODA:

In 2005 rapid increases in FDI disbursement as well as approval of a number of large projects point to large further increases in FDI in the short term. Specifically, there was a 45.2% increase in agreements and capital increases in 2005, amounting to a US$5.8 bn gain, 29.7% above plan. ODA agreements were also the highest ever, at US$3.74 bn.

ODA continues to seek to underpin pro-Western alignment on China's southern border

Points:

Ø The European Commission has concluded that none of the Vietnamese companies exporting leather footwear to the EU meet the criteria for them to be said to be operating in a ‘market economy’. This opens the way to imposition of anti-dumping measures.

Ø The domestic steel market is remarkable cool, with adequate supplies at end year despite this having previously always been a period of tight supply.

Ø Domestic state paper producers remain highly dependent upon subsidies and protection. On average, a tonne of paper produced by the SOEs belonging to VINAPAPER loses around US$35. There is excess supply, and continuing issues to do with the conglomerates lack of secure pulp suppliers (which could be taken to mean that they cannot solve their problems by shifting them to the environment or their suppliers).

Ø The real estate market remains tepid and has been so for more than a year. Transactions have fallen by perhaps 2/3 in HCM City and Hanoi, which is the general picture.

Ø Wood processing continues to expand rapidly. From exports near zero at the start of the decade, 2005 is expected to have shown exports of $1.5bn.

Ø Vietnamese electronics companies are facing severe problems in the domestic market. From 1/1/2006 tariffs on ASEAN’s exports of finished electronics products to Vietnam will fall to 0-5% from 15-20%. Components will still face tariffs of 10-20%.

Ø Rice exports in 2005 benefited from good prices and international demand. Total rice exports hit 5.2mn tonnes, value US$1.3bn at an average price of US$245.8/tonne. This was an increase of US$450mn and 1.1mn tonnes compared with 2004.

Ø The car market at the end of 2005 was very weak, compared with the end of 2004 when demand remained buoyant despite rather steep price hikes.

Things to watch:

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.

Adam Fforde