Vietnam: Monthly Economic and Social Overview

March 2006

Adam Fforde and Associates Pty Ltd

Diary (selective)

Reports increasingly stressed the good performance of exports, especially into the US and EU markets. Vietnam signed agreement with new Zealand on Vietnam's entry to WTO. Plans were announced for sales of an additional $1 bn of government bonds in the last three quarters of 2006. The funds were earmarked for transport and irrigation projects. The government reported that, perhaps related to the labour troubles reported in earlier VN: MESO, minimum wages for workers in FDI firms and other 'foreign' organisations would be increased (870,000 dong a month in Hanoi and HCM City; 790,000 for areas 'close' to large cities; and 710,000 for other regions). As part of the 'modernisation' of the economy, plans were announced to develop a competitive electricity market in three stages: competition would be 'developed' in 2005-20014, then a wholesale market would emerge in 2015-2022; and then a retail market. In practice, the rapid electrification of the rural areas (it was announced that only 3 'island' communes in the Mekong now lack connection to the grid) was greatly helped by a ruthlessly economic attitude to the mobilisation of popular funds into jvs to finance connection to the regional hubs.

The extremely large state commercial bank the Bank for Industry and Development, will be equitised in 2007, and in 2006 it will issue bonds so as to strengthen its financial position before equitisation. The authorities seem to be pushing for a more rapid development of financial intermediation, as the Prime Minister was reported requesting that the stock market increase its capitalisation this year by 150%. This of course is strongly linked arithmetically to the now rapid process of SOE equitisation (reports stated that by the end of the year there would only be 1,500 un-equitised SOEs). Reports are also linking this to the large amounts of capital required for more rapid economic growth (for example, nearly $ 2bn for the state oil company this year). Following the model of COFICO, the state will keep a majority stake in equitised SOEs. The equitisation of this company was nearly 200 % over-subscribed. The government and the financial system as a whole is not short of capital: the Development Assistance Fund remains troubled by its inability to get money out of the door. This year re-deposit after Tet of funds drawn before the festival has been extremely rapid and far greater than in 2005. Despite this, the Prime Minister has again been preaching to state business that soon there will be 'no more subsidies'. There is as yet no formal system for monitoring the performance of SOEs, and Ministries were ordered by the government to produce one quickly.

The quality economic press is showing signs of again waving the 'rural tensions' flag, pointing to rising social tensions associated with the fact that the existing land distribution largely reflects events in 1988-94, between Decree # 10 and the Land Law. Over the ensuing generation the population has increased, new families have formed and non-agricultural activities have grown sharply in the rural areas. This is a particular issue in the Red River delta. The impact of AFTA is also being examined, and the picture given is that whilst consumers are benefiting, the rapidly increasing imports of consumer electronics from other ASEAN members is causing major problems for Vietnamese producers. This may mean that the slow pace of WTO negotiations is being 'spun' as less of an issue. And there are reports that Vietnam and Japan will move to sign an FTA.

The widespread influence of developmentalist policies based upon targeting of favoured sectors and businesses could be seen in the announcement in mid February of investment support to four companies in rubber and engineering: two were share companies and two private businesses. The mechanisms were: remission of import tax on investment goods 'not produced domestically to adequate quality', and remission of income tax for five years on dividends paid to investments in the companies. All seem to be new companies. The large-scale Canon printer project has been granted a range of concessions.

The northern delta is increasingly suffering from drought.

The prospects of the now increasingly export-oriented wood-products industry are receiving increasing attention.

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Events

The real estate market remains in stasis, with no sign yet of positive impact from policy changes early in the year (17/2006/ND-CP). In Cam Mau province (at the very southern tip of the country), land prices have fallen by nearly a third since the market went off the boil.

The Japanese shoes and garment market, is generating increasing interest from Vietnamese producers, offsetting tensions in the US and EU markets.

Giving ground to government pressures, Toyota cut its car prices from early February. Easier imports of used vehicles helped push the change. Reports were that total new car sales (VAMA) for January were 1,517 - 66% of January 2005. Ford has also cut prices from 16/2/2006.

There have been signs of another period of shortage in the pharmaceuticals market, as prices have edged up.

The government is starting to grapple with the need for rationalisation in the steel industry, with possible closures of loss-making and poorly equipped SOEs.

The EU announced that it would impose anti-dumping tariffs on Vietnamese and Chinese imports from 7/4/2006

The government is starting to develop policies to stimulate the cocoa sector, which so far has lagged well behind coffee. This will be easier, since it start from a relatively clear slate, than dealing with sugar, where the main policy issue remains the requirement that mills purchase through contracts: this is clearly to do with preventing the emergence of a healthy but free market in sugar-cane, which comes down to permitting outsiders into the trade. There is pressure for rapid rationalisation of the sector in the second quarter of 2006 - but by this is largely meant equitisation. Tea-processing SOEs will also soon be equitised.

Vietnam now expects to have three oil refineries in operation by 2009.

The Ministry of Labour is researching ways of introducing a system of contracts and performance pay for managers in SOEs and State general Companies. It is unclear how this will relate to the Party's control over such appointments.

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Economic change in the second month of 2006: notes

Prices:

Whilst the year-on-year rate remained high, in February the month-on-month rate was 2.1% (well into double digits on a yearly equivalent basis)

Consumer electronics prices reportedly fell 10-15% in HCM retail outlets after Tet. Rice export prices have weakened, as have domestic food prices generally.

Industrial output:

Industrial output continues to race ahead, with estimates for February of a 23.7% year-on-year gain. The slowest-growing sector on this basis was surprisingly the foreign-invested sector (+19.6%) with the state sector rising +23.2% and the non-state sector +29.1%. Rapid growth was concentrated in HCM City, Haiphong and other regional centres, with striking gains in northern provinces such as Vinh Phuc, Ha Tay, Hai Duong, and Phu Tho - many of them traditional commercial centres.

Balance of payments:

Showing the confidence of the authorities, exports of hard currency in cash by Vietnamese no longer require permission. Official estimates are that overseas Vietnamese remitted $ 3.8 bn in 2005 - well above earlier levels.

Exports:

Despite a fall from January in February, the average value of exports for the first two months was reported as showing a 28.6% year-on-year gain, with strong gains in crude oil (+32.2% y-y), artisanal handicrafts (much of it furniture and other wood-processing) (+30-45%), garments (+45%), leather footwear(+30.8%) and rubber (+81.7%).

Imports:

Import growth is very slow - an average year-on-year gain of 4.2% for the first two months.

The export target for IT goods this year is $2 bn, compared with $1.5 bn in 2005.

FDI and ODA:

February saw continued good results in terms of numbers of projects and their value: for the first two months value of signed-up or increased capital was $ 1.2 bn, up 15% on the year.

The balance of payments is starting to move into a strong position and this should soon be marked by increasingly large reserve holdings and risks of inflationary pressures as the authorities try to avoid the resulting rise in Dong liquidity.

Fiscal issues:

Year-on-year tax revenues for January were up 12% on the year - slightly faster than inflation and slowing significantly from the 2005 performance, when they were well up on the year (50%). This excludes income from oil.

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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.

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?

Pressures from the real situation for Vietnam to join WTO are not great.

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