Your Money Matters: Vietnam's economy - from tortoise to tiger

Vietnam's economy is booming, with events such as the country's acceptance to the World Trade Organization likely to strengthen it even further.

money 88 (photo credit: )
money 88
(photo credit: )
During the early 1980s, Vietnam's communist-style centralized economic planning led to an inert economy, creating greater strife that literally caused many of its citizens to come close to starvation. In 2000, the government created a stock market and commenced a program of ongoing structural reforms including the lifting of restrictions on private enterprise and liberalizing regulations to encourage for foreign investments. With its natural resources, geographic location, a well-educated population of 85 million (70% under the age of 35), high work ethic and half the average wage of China, only a structural change in Vietnam's market economy was needed to wake up a sleeping economic powerhouse. Steady improvement in Vietnam's regulatory environment has generated strong economic growth, assisted by surging foreign direct investments (FDI). Last year, the country's economy witnessed an accelerated rate of expansion with 2006 GDP growth of 8.2% equaling that seen in 2005 and FDI above $10 billion, up 50% year-over-year. Most impressive about the current trend in FDI is that the sizes of the projects have increased with five or six-billion-dollar-plus projects having been approved. Clearly, Vietnam is drawing the attention of some of the world's largest and most prestigious international corporations. GDP growth in 2006 was led by the industry and construction sector's 10.37% growth, followed by the service sector's 8.29% advance, while the agro-forestry and fisheries sector contributed with a 3.4% increase. Rising incomes and a sharp rise in the numbers of large scale retail outlets drove retail sales up 20.7% year-over-year. Exports totaled $39.6 billion. Export categories with sales exceeding $1b. are crude oil, garments and textiles, footwear, seafood, electronics products, wooden products, rice, coffee and rubber. Geographically, Vietnam's exports to the US rose 36% year-over-year, to the EU 31%, to Japan 20% and to the South East Asia region 19%. There were several major developments in the last quarter of 2006 - Vietnam was accepted as a member of the World Trade Organization (WTO) and the APEC leader's summit was held in Hanoi. Vietnam's membership in the WTO will serve to open and strengthen the economy even further. In the beginning of December, the US Congress passed a measure elevating Vietnam to Permanent Normal Trade Relations status. Recently released first-quarter 2007 economic data confirm that Vietnam continues on the path of strong economic growth. GDP was reported up 7.7% year-over-year - a seven-year high. Economic growth was driven by the industrial and construction sector which rose 9.3% year-over-year and the service sector, which grew by 7.8%. Retail sales were up 22.3% year-over-year. Most indicators, in fact, have maintained the growth rate of recent quarters. FDI for the first quarter was $2.5b., up 22% year-over-year. Capital markets Vietnam's capital markets showed very strong performance in 2006. The VN-Index increased by 146% over the course of the year while the HASTC-Index rose by 170%. The Ho Chi Minh City Securities Trading Centre ended the year with 106 listed shares, two fund certificates and 367 bonds, with a total listed face value of over $4.5b. The Hanoi Securities Trading Centre had 87 listed stocks and 91 bonds with a total registered listing face value of $1.81b. By the end of 2006, total equity market capitalization reached $13.8b. It is interesting to note that the market capitalization of all companies listed on the HSTC totaled more than $9b. in 2006, representing 15.36% of the country's GDP. New wealth Since the beginning of 2005, more than 38,000 private enterprises have started up - a 41% increase over 2004. For the past decade, the private sector has been the major source of jobs. It helped propel overall economic growth to 8.2% last year - second only to China. Just five years ago, only 9% of the population earned more than $500 annually. The number is at 35% as of last year, according to research by VinaCapital. Foreign investments have created opportunities for many Vietnamese, particularly the younger generation. College graduates who speak fluent English and studied in the US, Australia and other Western countries earn $1,500 or more a month working for a foreign firm -a fortune compared to laborers who toil in factories for less than $100. Despite the country's official per capita income of $750, Prada and Gucci have come to town, as well as mall culture and the demand for luxury goods. At Zenta and many other coffeehouses around town, patrons with laptops sip espressos while surfing on the Internet - free and wireless.With new found wealth, Vietnam's new economic elite is creating demands on a budding entertainment and leisure industry. They can be found for teeing off at various golf clubs that have sprouted around the country, seen building swimming pools for their villas and sending their preschoolers to international schools at a cost of almost $10,000/year. Western-style homes and high-rise apartments have been springing up, and the bridal industry is booming - no wonder given that two-thirds of the population is under the age of 30. Our next column will discuss how investors can take advantage of Vietnam's economic strength. The author is global investment strategist at Tandem Capital.