Vietnam: Monthly Economic and Social Overview

May 2006

Adam Fforde and Associates Pty Ltd

A Selective Diary

The main event of the period is of course the Xth Party Congress.

This was preceded by a widely publicised scandal (Project Management Unit 18 - PMU 18) that claimed the scalp of a Deputy Minister of Transport, associated with goings-on in various areas. Various large aid donors then moved rather quickly to check to see just how exposed they were to likely blow-back - most aid projects, like most projects that are part of the state planning system, are thought by Vietnamese economists (publicly, this includes those at CIEM, the one-time radical think-tank), to lose around 30% on average to corruption. If true, this would of course mean that a high proportion of project audits are invalid, and that, as in many other countries (such as Indonesia), donors will live with corruption.

After the Congress, there was a certain degree of 'heat' (see below), but the National Assembly then rapidly settled down to discussion of various uncontentious issues, and it looked likely that the instructions to NA members from the Vietnam Fatherland Front would be followed and the new government passed. This unsurprising result means that few of the fundamental political and state issues that confront the country look set to be addressed.

I was in Vietnam through most of May. It was hot.

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Events

Important parts of the establishment attack senior Ministers

There were many interesting events during the immediate post-Congress period. One in particular was the strong attack upon senior Ministers mounted by the Vietnam Economic Times (Vietnamese edition), which rather quickly subsided. This is thought to have been in response to an instruction from the Party General Secretary who had told the mass media in general to 'hold back'. The Vietnam Economic Times is largely the journal of the Vietnamese Economics Association, and its editorial board contains most the country's leading establishment economists.

Can/will the National Assembly use its powers?

The issue of 17th May covered the opening of the National Assembly, headlined 'Concentring upon economic strategy'. Page 3 contained a long interview with Vo Hong Phuc, Minister of the Ministry of Planning and Investment which, with the Ministry of Finance which remains somewhat less powerful, strongly influences allocation of state resources in the economy. It is the main central counterpart of aid donors, which dates historically to the decision of the World Bank to abandon CIEM in favour of the State Planning Commission in the very early 1990s, keen to develop a lending program. The headline was 'Inadequacies in Inspection and Control'. The first question referred to whether the Minister was going to explain to the National Assembly just why there were such high losses and issues in the management of ODA.

The Minister's reply was worthy of the best traditions of the English TV series 'Yes Minister'. First, he said, responsibility was in fact the collective responsibility of the government, not MPI directly, and of other Ministries other than MPI; second, the systems in place 'although they had been continuously improved' were much harder to sort out than other investments because they are ODA and 'at the same time preparation and design are still not given adequate attention and the quality of projects is still not yet high'. This suggests that corruption is higher in ODA projects, which I doubt, since many use foreign auditors.

The interviewer pointed out that past projects had given much attention to such issues - the reply was that lower levels were to blame - by March 2006 only 71% of projects had reported properly. The interviewer pressed the point further: 'Is it not the case that in MPI itself there are many adequacies in inspection and control?'. The reply was that this was not 'entirely true' and that in the past three years they had set up an inspection system 'but this still only had 40 people ... and our point of view is that we do not inspect or control sectors that have their own control systems in place'. In PMU 18 (see above) there had been three visits from the Government's Inspectorate, so MPI did not bother with its own inspection. The interviewer then moved for the 'coup de grace' with the question 'How will officials of MPI responsible for projects such as PMU 18 be dealt with as the inspection finishes?'.

The reply, from an official with very very close personal connections with MPI and its predecessor SPC, and well known to aid donors, was that: 'our system .. does not allocate concrete work in these areas to any particular individual. You should bring up this problem with the Ministry of Transport ...'. In conclusion the Minister asserted that the current method of project management was 'irrational' and they expected that many foreign groups would soon be visiting them from various donors to 'help'. Whether this makes sense is, of course, a matter of perspective.

The same edition also contained a long article (p.16) on how corruption is fought in China; a central point made was that the nub of the problem was the political relationship between central and local government (the article included interesting observations of the effects of this upon corruption in the US). In Vietnam, the suggestion was that it was the relative independence of local party apparats that had to be dealt with, and by implication had not.

But some people are different ...

The next day's front page headline was '"Peaceful people" (an dan) for development'. The main interview was with Le Huy Ngo, head of the Central Committee for Flood and Storm Management (my translation). The interview was calm, to the point and positive. Lurking under this is Le Huy Ngo's history: a liberal Party Secretary in Vinh Phu during the 1980s, when he observed Swedish aid work, then highly radical by Vietnamese standards, close up; then in 1988 he was sent to his native province of Thanh Hoa to replace the province Party Secretary who was sacked (in a rare example of such affairs) for falsifying food production records when there was widespread hunger; after that he was Deputy-Head of the all-important Party Organisation Department until moving to be Minister of Agriculture, with hopes that he would be able to reform it, but where he failed and was 'disciplined' in 2004 for loose management of a state company leading to 'severe consequences' and replaced by then 'rising star' Cao Duc Phat.

The same edition also contained a long article about Ho Chi Minh that nearly managed to avoid mentioning socialism.

Though many are not ...

Having effectively demolished Vo Hong Phuc, the edition of 19th May turned to the Minister of Finance, Nguyen Sinh Hung, in a report of the debate in the National Assembly about the formal approval of the 2004 (not - note - the 2005) state budget. Perhaps well briefed, NA members had a good time pointing to various issues: the wide gaps between forecasts and outcomes, the weak management of state investments and the poor state of auditing. Many local authorities, it was said, had been allowed to produce investment budgets that were low so that they could then ask for more funds (offering better opportunities) during implementation. The issue of auditing was brought up by one NA member who pointed out that they were being asked to approve the budget outcomes based upon the State Auditor's report, but that in fact about 50% of provinces and Ministries had not carried out audits, so how could they approve the report? There was a 16,000 bn dong (about US$ 1 bn) carry-over of receipts from 2003 and a carry-over of more than twice this to 2005 in the accounts. And so on. The Minister's reported reply was that: 'the main reason why expenses had been higher than forecast was that there were many large state projects ...'

The state and state business interests

Whilst the evidence from these materials is that much of the Vietnamese state administration continues to act as it pleases, despite the Vietnamese equivalent of a 'letter to The Times', a final article from a very much lower level showed the interests driving the game. In the same edition, VET reported an incident in Kon tum in the Central Highlands where around 2,000 hectares of standing timber had been illegally logged. What seems to have happened is that local farmers, whose land had received state funds for investment in timber through a local state business (a Forestry Enterprise), had seen the writing on the wall and decided that they would prefer to sell the timber to private loggers than (more cheaply) to the FE, so the chainsaws had come in at night and the timber had gone. Often, the contracts had been made through the commune, so that farmers were unclear as to their formal rights. The history of relations between FEs and the local population is often somewhat murky. Often, farmers are given resources to support tree growing on their land, or what had been their land, but are then locked into unfavourable contracts. The nature of legality is then obviously determined by the interests of the local apparat and state business.

From 'Cong-nong' to 'Kinh-ninh'?

It has been said that the old slogan of the 'Worker-peasant Alliance' (Lien minh Cong-nong) has been replaced by a 'Business-Security Alliance' (Lien ket Kinh-ninh). How true this is remains hard to say. But as ever the Vietnamese language is very inventive.

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Economic change in the fourth month of 2006: notes

Prices:

Price pressures are rising, driven by a combination of monetary inflation and ripple effects from global market worries. The real estate market is now showing signs of price falls, in part because of the increasing value of investment opportunities in production, often export-oriented. The commercial banks in general are awash with funds as they seek market share amongst depositors. The State Bank has been increasing its reserve holdings rather sharply, in part to keep the Dong down in value, in part simply to build up reserves whilst the balance of payments remains strong. This is partly de to oil, but also because of a combination of across-the-board export growth (see below).

Purchases of foreign currency involve sales of domestic currency, thus adding to the monetary base and so pushing inflation and supplying liquidity to the system. This eases pressures on the banking system but is inflationary.

In April the official CPI rose 0.6% and price increases since the start of the year have been across-the-board (though rice prices paid to farmers weakened in May). There are emerging regional differences, with inflation faster in the south and central highlands than in the north. The big cities are showing faster inflation than smaller centres.

This is taken by some analysts to show that Vietnam's domestic markets are still poorly integrated: for example, whilst the national data showed prices of construction materials growing by 1.1%, in Hanoi they grew 2.4%; for food staples, the national figure was a 0.5% increase, but whilst in some localities prices fell, in the northern uplands they rose 3.6% and in the south-central coast provinces they rose by 1.6%.

Reading of the VET shows that there are abundant signs of problems in key markets, with Vietnamese economists on the watch for speculative 'fevers', gouging and other indicators of interference. A continual source of concern remains the sugar market, where the excess investment in low-quality provincial plant in the late 1990s sits with a number of modern mills and a situation where the authorities refuse to allow a market made by middle-men and agents to emerge, and there are continual problems in securing stable supplies and reliable contracting arrangements. The procurement of rice from the Mekong delta still relies upon the injection of large amounts of credit by Hanoi into the local provincial state buying agencies, albeit monitored rather closely.

Industrial output:

After a slight stumble in March, April saw a resumption of the earlier momentum with a year-on-year growth of 16.5%. The structural shift way from state industry continues, with only 9% year-on-year in that sector (central growing slightly faster than local) whilst the foreign-invested sector grew 12.5% (so the remainder, the private sector, is by far the fastest growing). This structural change is interesting: whilst the overall rate of growth is rather slow (over 20% is 'fast') the relative slowdown in the state sector is of course to be welcomed, whilst the poor performance of the foreign-invested sector shows once again that Vietnam does not follow the Chinese model, where MNCs are the most dynamic performers. This was reflected in the export slowdown, as most FDI factories are now export-oriented.

Balance of payments:

Exports:

Total exports in April were US$ 2.65 bn, down some 2% on the month mainly due to an 8.9% fall in exports from foreign-invested factories (a chunk of this was because of lower value oil exports on a month-to-month basis), but showing a good year-on-year rise.

For the first four months of the year exports (value US$ 9.6 bn) showed a 23.3% year-on-year rise, well above forecasts. The shift to a 'quota free' world has not stopped gains in garments (up 6.1% y-y) or shoes (up 6.6% y-y), with strong gains in wood products - 65% y-y (see above), computers (up 55% y-y), fruit and vegetables (up 47% y-y). The value of oil exports for the first four months is up around 60%, despite a volume fall of 6% (policy appears now to reduce output so as to conserve supplies for the medium term when prices are naturally now expected to be far higher).

Imports:

Imports for the first half year (value US$ 11.4 bn) showed a year-on-year rise of 22.4%, so the trade balance narrowed.

FDI and ODA:

The April data was good, with 68 projects approved compared with a total of 177 so far in the year. The value of projects approved so far this year is around three times that for the same period of 2005, mainly due to increased unit value as the total number of projects is only up 25%.

If the increased in the value of existing projects is included, the first four months saw an addition commitment of US$ 2.1 bn, equivalent to the whole of 2005.

Garments, seafood and footwear

It is expected, partly because of EU anti-dumping, that these three sectors will fail to meet their yearly plan. Seafood exports are now sluggish, with a growth of only 7% for the first four months.

Trends

The balance of payments continues to move into a strong position marked by increasingly large reserve holdings and inflationary pressures as the authorities try to avoid the resulting rise in Dong liquidity in the banking system. Central to the issue is the problems banks face in lending to the emergent and often suspicious private sector.

Fiscal issues:

Whilst (see above) the internal discipline of the state financial and planning systems clearly leaves much to be desired, revenues are buoyant due to rapid growth and inflation, and spending quite large enough to satisfy core constituencies. High aid flows into rural areas create large rake-offs for important groups reaching quite far down the system, again, though, under relative control. Underpinning the overall macroeconomic balance are two main factors: the rapid growth, now increasingly coming from the private and foreign-invested sectors, supported by heavy state investments in infrastructure and heavy industry (often foreign-supported), and the position of the State Bank, well-led and advised. The head of the influential policy department, Le Xuan Nghia, is a member of the VET economic establishment discussed above. As memories of the 1980s hyperinflation fade, will its authority erode and the lax habits of MPI and Finance gain currency?

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Things to watch:

The economy remains supercharged by the combination of rapid growth of the structures of a market economy, high levels of rents accruing from FDI and ODA, and the lack of effective regulation that can ignore proper criticism and rely upon a subservient National Assembly.

So far the overall outcome is rapid growth and overall macroeconomic 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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