Pacific News #12


ANDREA KILGOUR, University of Liverpool, UK

Vietnam is once again embroiled in economic turmoil. The Asian crisis has been blamed for a number of these present problems, alongside socialist inexperience and indecision since transition to a market oriented economy. This article investigates whether the problems encountered have been predominantly created by domestic practices or as a result of the economic decline in South East Asia.

Vietnam has a current population of over 83 million people with one fifth of these being classified as urban by official Vietnamese statistics  (GSO,1995), which attract and provide the majority of growth and urbanisation within the country and allow some comparisons to be drawn with countries including Thailand within the South East Asian region. Such growth correlates with Vietnam’s later introduction into South East Asian and global markets through the introduction of economic liberalisation, doi-moi. The phenomenal rates of growth being achieved in the ‘four tigers’ and ‘newly industrialising economies’ (NIE), provided the perfect opportunity for Vietnam to ‘ride on the tigers back’. Most socialist systems of the ‘Second world’, were in the process of disintegration, removing from Vietnam trading partners, aid and ideological influence. Moreover, continued Chinese reforms which increased foreign economic co-operation, but retained control over social and political change had proved fruitful; suggesting that there were opportunities to maintain socialist ideology whilst taking advantage of market forces. Furthermore, the introduction of Vietnam to ASEAN in 1992 and the removal of the US trade embargo in 1993 also greatly benefited domestic growth. However, the style of growth adopted, and the new reliance on exchange with partners predominantly in the Pacific region, has meant that Vietnam has been affected by the economic downturn in the region. The country has been hit in a somewhat sporadic fashion, with the urban centres and those areas linked directly to foreign trade and investment feeling the greatest pressure.

 Original investors are currently searching for reasons to remain in the country as neither the regional economy nor the State are presently providing sufficient reassurance to encourage investment. Just as quickly as Vietnam rose to prominence in the early 1990s, when word spread of its potential, the country is now suffering from the negative impact of hearsay (Levine,1997). Investment is dwindling in Vietnam due to a variety of factors, including local corruption and continued over involvement of the bureaucracy. Foreign investment has typically hovered around 30% of GDP, however, the Asian crisis has dampened expansion plans of many South East Asian countries, the heaviest investors in the Vietnamese economy who generally have pledged around 70% of total foreign investment (Hiep,1998). As a result, the value of approved projects fell in 1997 to $2.4bn (Schiffrin,1998) and only $1.1bn of projects were approved in the first seven months of 1998 (Hiep,1998).  Few further injections are predicted for the remaining months of the year, as a result of the general economic downturn in the region. These figures show a reduction in FDI of over 20% on 1997 statistics, with few signs of improvement. Investment hit an all time low, moreover, in June 1998 when, for the first week in years, the Ministry of Planning and Investment allegedly failed to receive a single investment proposal.

 It is believed that the situation will worsen, with the ADB (1998) predicting that new foreign investment in Vietnam could fall to as little as $500 million by 1999.  Many of the country’s major investors, particularly in manufacturing and service enterprises, are presently cutting their domestic workforce and input for the future as they are hit by regional pressures and reductions in demand. For example, within textiles and footwear manufacturing,  Nike announced the loss of 2,700 jobs from a total workforce in Vietnam of 35,000, in July 1998 as a result of declining orders (Reuters, 1998). Nike claim the fall is directly linked to the impact of the regional crisis (Saini, 1998) and has affected investment and employment not only in Vietnam, but in a number of Nike’s Asian Pacific organisations. Similarly, the Daewoo Corporation, one of the first multinationals to enter Vietnam, has been forced to downsize a number of operations in Vietnam, totalling $920 million, over twenty licensed projects. Daewoo also suggest that such moves, particularly those related to reductions in enterprises specialising in electronic appliance production, are the result of the dwindling regional market. Consumer demand in Korea, Thailand, Indonesia and, in particular, in their domestic market of Japan has plummeted since the crisis. Furthermore, Vidamco, a joint Daewoo and state-run auto-manufacturing enterprise, has recently announced a reduction in workforce as the company, with an annual production capacity of 20,000 vehicles, has sold only 200 in the previous eight months (VIR, 1998). The firm’s chief accountant, Jung Hong Yeong, noted the surprisingly strong effects being felt on Vietnamese economy as a result of the Asian crisis (Presse-Agentur, 1998).

 Tertiary investments by Daewoo have also met with problems as occupancy rates steadily drop in the company owned hotels, it is expected that expatriate and domestic workers will face redundancy and employees salaries may be cut to reduce losses (VIR, 1998). Such changes appear to highlight a growing trend in the hotel and business complex sector of Vietnam. Tourism figures have plummeted for a second year in 1998, postponing many new foreign construction deals, particularly investment for hotels and trade centres. Figures show tourism to be down 50% over the last two years (Levine, 1997), quite probably as a large percentage of visitors came from the Asian region. Furthermore, major regional investors Colliers-Jardine (property brokers) have since the end of 1997, announced withdrawals from the country, shaking the confidence of other major corporations; approximately 30 Japanese construction companies with (hopeful) involvement in Overseas Development Agency (ODA) and international bank projects have also begun office closures. This in turn, has forced the State to deal more swiftly with economic growth projections and to introduce tighter management of the state budget in an attempt to maintain present and encourage future foreign input, so essential to the survival of the Vietnamese economy. More realistic targets and projections have been a first step. GDP growth has currently been forecast at 6% from an original 9% target (Hiep, 1998), even though, Verbiest (1998), has suggested that more realistic values for 1998 will be around 4-5%, with inflation now expected to be ‘around 10%’ as opposed to the 6-7% forecast (Keenan, 1998).

The value of exports grew by 4.1% in the first nine months of 1998, standing between $6.1 and $6.9 billion (VN News, Sept. 24, 1998), leading to the marked revision of projected annual export growth rates, cut by more than half from over 25% to 10% (GSO, 1998). Official sources claimed that the fall is a result of the regional slump (Hiep, 1998). This downturn continued to be reflected in the latest figures which showed a reduction in exports between August and September this year, the first decline in more than ten years. This was primarily due to a fall in Vietnam’s largest exporters, the footwear, garments and textiles industries; with a 6.2 % reduction in the month (Yates, 1998). Furthermore, those sectors which have made increases in production during this year, namely, crude oil and rice, will do little to aid the trade deficit (currently predicted to be US$1.4bn) (VN News, Sept. 25, 1998), as global reductions in oil prices and currency devaluation’s both in Vietnam and in South East Asia, have reduced competitiveness.  In an  attempt to boost flagging exports in August 1998, the Vietnamese government introduced an incentive programme whereby financial bonuses would be paid to successful exporters ( Presse-Agentur, 1998).

 Furthermore, a slow down in imports has resulted from the short supply of foreign reserves, lack of foreign investment and the readjustments of the Vietnamese dong. Economic growth is expected to suffer to some extent as a result, as imported machinery and capital goods are vital for Vietnamese industry (Hiep, 1998) and thus economic growth both domestically and internationally will be impeded. The Vice Minister, Nguyen Xuan Chuan, has reported that the government has already taken steps to boost the manufacturing sector by increasing incentives for small and medium sized enterprises and is attempting reduce its reliance on imports (Hastings, 1998).  Yet according to annual figures, imports have fallen only slightly, down 0.3% from 1997 to $8.578 billion, but down 6.6% from August to September this year. This figure may be reduced again within the coming months, as a result of the currency devaluation and the increasing likelihood that import controls will be enforced to increase foreign exchange reserves ( Vietnam News, Sept. 25, 1998).

 The Vietnamese dong has been devalued by 17% over the past twelve months, with significant realignments being made in August of this year. It is suggested that the dong may be devalued again more substantially by the end of the year as a result of slowdown of FDI. The move is designed to improve export competitiveness, but analysts speculate that even this devaluation is insufficient, so it is expected that the government will continue to devalue within the next few months but at a gradual pace hopefully to ease the burden on the Vietnamese people. However, some Vietnamese within the banking sector, feel that this may not be beneficial for the economy, as although Vietnamese goods would become cheaper, there still remained insufficient global demand for products due to the wider economic crisis (Yates, 1998).

 Moreover, like other Asian governments grappling with the dire consequences of poorly regulated banking systems, Vietnam is being forced to design solutions within its banking sector, to restructure both joint-stock establishments and state-owned banks, in an attempt to ease growing burdens and increase depositors’ confidence (Schiffrin, 1998). The majority of Vietnamese banks are suffering “a bad debt hangover”, due to heavy lending in the early 1990’s (Stone,1998). The magnitude of the problem is difficult to speculate due to the lack of data available regarding the banking system and information regarding the government’s reserves. However, it is apparent that Vietnamese banks have been crippled by bad loans to bank shareholders and associates as well as to state-directed agreements with money losing enterprises; collapsing property prices furthermore, have left them with worthless collateral (Schiffrin, 1998).

 Such problems have forced Vietnam to deal more practically with budget and economic planning for the future.  Presently this would appear to be working as since mid-July the government has revised growth forecasts, allowed the dong to slide against the dollar (arguably insufficiently) and postponed infrastructural projects with extensive costs (Keenan, 1998). Budget cuts in capital construction due to the on-going regional crisis has led to a slowdown or postponement of industrial, housing and road or bridge construction  projects. This unfortunately has wider repercussions particularly within the urban sector, as opportunities for employment and settlement become restricted.

Vietnam has so to some extent been shielded from the Asian crisis because  its associations with the global economy are not as strong as neighbouring countries, but with export growth falling and foreign investment withdrawing, the crisis may yet still affect the country in a more dramatic fashion than has been previously anticipated. Undoubtedly the regional economic downturn has both directly and indirectly affected growth and development within the country, but Vietnam cannot blame the Asian Crisis entirely for the problems it faces. Much  financial support has come from the regional market, and Asian investors are now choosing to close or stay away en masse as they try to gradually recover from the crisis themselves ( Hornstein, 1998) . However, events from as early as 1996 indicate that reductions in investment and curtailment of growth were likely to occur anyway,  as the Vietnamese government failed to relax certain regulations related to foreign corporations. In fact, the value of newly pledged foreign capital has declined in real terms each year since 1994 and utilisation of foreign capital has also decreased. Therefore, although the Asian crisis is clearly preventing the arrival of new foreign initiatives, the Vietnamese have done little to ensure that previous levels of FDI were maintained. Verbiest  (1998) suggests it was likely that FDI would have slowed regardless of the regional economic crisis, but possibly not to the extent currently seen in Vietnam, particularly regarding export growth. Nevertheless, FDI is expected to fall by up to one third in 1998 (Reuters, 1998). There are quite notably, alternative reasons for Vietnam’s economic downturn at present. Primarily, Vietnam is still regarded as a country with violated contracts, bad debts, corruption and governed by a system that is still averse to profit making. If these didn’t offer enough problems, there has also been a re-emergence of a sizeable black market for goods and currency.

The government has continued to retain strict controls over all forms of foreign investment. Hornstein (1998) suggests that not only was Vietnam not improving its climate for foreign direct investment, as in the case of China, but it was actually perceived as making it harder for investors to operate. The Proctor and Gamble battle in the spring of 1998 highlighted many of the problems arising  . Moreover, the government continues to require some of the largest and most advanced foreign firms to operate out of representative offices based in Vietnam, from which profit making is illegal unless the firm enters joint-venture with a local partner. As a result, over 95 % of all  joint ventures in 1997 were made with state-owned companies but relatively few have stories of success to date. Other problems including relocation rights, foreign-currency restrictions and land-use permits still continue to dog foreign business ventures. If this continues it is likely that foreign business will begin to venture elsewhere, as presently Thailand and Indonesia are widening opportunities for foreign investors.

Thus the problems apparent in the Vietnamese economy may not be a direct result of the Asian crisis, as often suggested, but may have emerged as a result of Vietnamese development practice. The Asian crisis has to some extent intensified domestic factors, but, more optimistically, may have unwittingly provoked the bureaucracy sufficiently into improving domestic legislation and trading procedures, to, in turn, help Vietnam gain a more competitive edge in relation to her South East Asian neighbours.