Pacific Money

Vietnam’s Charm Fades

The country has some reforms to make before it can fulfill its long-term potential.

Anthony Fensom
Vietnam’s Charm Fades
Credit: Vietnam via Piter HaSon /

Vietnam’s “timeless charm” slogan may have attracted tourists, but after seven straight years of below-average growth hopes of a sustained boom have dimmed. Can the liberalizing socialist economy get its mojo back?

On Wednesday, a corruption scandal involving state shipping company Vinalines attracted further damaging headlines for the political establishment. The company’s former chairman, Duong Chi Dung told a Hanoi court he had bribed a leading communist party official in an attempt to avoid arrest after a tip-off from an insider.

Dung was sentenced to death last month for embezzling millions of dollars from the company, a scandal that almost forced its bankruptcy, while his brother, former police colonel Duong Tu Trong, was given an 18-year sentence for helping Dung flee the nation.

According to Time, the scandal’s widespread coverage could be aimed at placating citizens angry over corruption within state-owned enterprises and the establishment. “Many blame corruption for the country’s recent spell of tepid economic growth,” the report said.

Vietnam’s gross domestic product (GDP) expanded by 5.4 percent in 2013, up from the 5.2 percent recorded the previous year, but still below the long-term average of 7 percent and the government’s 5.5 percent target.

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A government official told VietNamNet that the economy “has never attained sustainable development,” blaming the decline on “imbalances in various aspects of the economy that have lingered since several years ago, coupled with the impact of the global crisis”.

In October, the nation’s central bank governor, Nguyen Van Binh, told the International Monetary Fund (IMF) that “business and production are still in difficulties” with macroeconomic stability “not firmly rooted,” calling for accelerated structural reforms along with an enhanced social safety net.

The nation’s growth is strongly reliant on foreign investment and exports, with the export-to-GDP ratio rising to 75 percent, up from 56 percent in 2009, according to IMF data. The nation attracted nearly $22 billion in official foreign direct investment last year, climbing 55 percent, with South Korea taking over top spot from Japan.

In this regard, reports of labor violence at a new $2 billion Samsung factory could prove problematic, with the government attempting to attract foreign investors with tax breaks and low labor costs.

Troubled Banks

Vietnamese Prime Minister Nguyen Tan Dung reportedly plans to complete a restructure of state-owned enterprises by 2015, including using an asset management company to buy bad loans. The government announced this week foreign investors would be allowed to take higher stakes in lenders to prop up an ailing banking system, which has the highest ratio of bad debt in Southeast Asia.

The government expects the economy to expand by 5.8 percent this year, up marginally on last year’s rise, aided by lower interest rates and a weaker exchange rate.

In a research note, ANZ economist Eugenia Fabon Victorino predicted 2014 growth of 5.6 percent, stating that “we expect foreign direct investments to remain constructive for growth, specifically to export-related manufacturing.” FDI and government spending on public construction would offset weak domestic demand, with the central bank likely to keep rates steady, Victorino said.

New Growth Frontier?

Yet despite softer recent growth, the longer-term outlook for Vietnam may be more promising, according to a recent survey by Boston Consulting Group (BCG).

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According to BCG, more than 90 percent of Vietnamese consumers “expect to live better than their parents and expect their children to live better than themselves” – a level of optimism among the highest recorded across the 25 nations surveyed.

By contrast, China, India and Indonesia rated around the 70 percent level, while only 9 percent of Japanese consumers said their children would have a better life.

With a combined population of 150 million, Vietnam and Myanmar have been identified by the consultancy as “Southeast Asia’s new growth frontiers.”

“Vietnam has the fastest-growing middle and affluent class in the region. Between 2012 and 2020, this population of consumers will rise from 12 million to 33 million,” BCG said.

In a January 2013 report, PwC Economics forecast that Vietnam would join the world’s top 20 economies by 2050, increasing its GDP (on a purchasing power parity basis) to $2.7 trillion to take 19th place as one of the fast-growing “wild cards” outside the G20.

However, achieving this promised destiny will require the nation to clean up its domestic sector, which according to the IMF currently suffers from low productivity, misallocated resources, impaired bank balance sheets and inefficient state-owned enterprises.

“The big question is what the economy will become once FDI enterprises withdraw and when domestic resources have become exhausted,” a government official said.

Meanwhile, Vietnam’s government will be hoping that its charm offensive for foreign investors does indeed prove timeless.