Vietnam economic forecast for the year 2011

On January 21, 2011, many members of the foreign business community in Vietnam gathered at an annual business luncheon event organized by the Canadian Chamber of Commerce in Ho Chi Minh City to discuss prospects for the year ahead. The participants agreed that overall, they are optimistic, but also wary of several uncertainties, reported Vietnam News Agency.

The managing director of TNS Vietnam, Ralf Matthaes, who as also spoken to several groups arranged by www.business-in-asia.com during our trips to Vietnam, and was one of the key speakers at the event recently in HCMC, said Vietnam’s market will continue to grow in 2011, but at a slower pace than pre-global recession times, reported the paper.  Matthaes said his market research firm expects both exports and foreign investment to show stronger growth in the face of improved economic conditions. He warned that inflation and the global recession could be big problems for Vietnam.

Inflation

Inflation has been a persistent problem for Vietnam. The government has said high inflation, which hit 11.75 last year, was a weakness of the economy and they would try to lower it. The The Wall Street Journal on January 24, 2011 noted that “Vietnam’s inflation posted another double-digit rise ahead of the Lunar New Year (end of January 2011), adding pressure on authorities to raise interest rates to slow the nation’s growth and curb pressure on its currency”. The paper said that the consumer-price index rose 12.17% in January from the same month a year earlier.

Export to Decline?

Vietnam’s export turnover was estimated to total US$70.8 billion for the entire Yr. 2010, a year-on-year increase of 24%, marking a 16.5% increase on the predicted $60.5 billion, the Ministry of Industry and Trade announced just before New Year.

Even though Vietnam has continued to export more products, there is now serious concern over the country’s ability to retain its position and continue to turn in similar levels of growth this year in the global market.
Vietnam has been doing well so far because it was able to keep prices low, but that competitive edge is threatened by its heavy dependence on imported materials and increasing labor costs, said Jocelyn Tran, country manager at MAST Industries (the company is a subsidiary of The Limited Brands, which owns several top names including Victoria’s Secret, Express and The Limited), reported Vietnam News.  For example, Vietnam is now a major apparel supplier to the US, just behind China in terms of market share, she said. However, unlike other garment producers, Vietnam is “too far downstream in the supply chain” because 80 percent of its products use imported materials, mainly from China.  Tran said such dependence has made the sector easily affected by increases in world prices.

This is a point made repeatedly over the last several years by www.business-in-asia.com.  Many industries in Vietnam, especially producers of products for export, continue to rely on imported materials or spare parts. There are strong needs for stronger support industries in Vietnam.  Increase in support industries would improve domestic competitive capacity, add value to local products, and be essential for strengthening Vietnam’s competitiveness. The Vietnam News reported late last year that Vietnam’s automotive industry has a localization strategy that requires the development of local support industries. So far, the localization rate in the industry remains low. Domestic content of vehicles made by Honda Vietnam, for example, is only 10% and those of Toyota Vietnam, only 7%. Remaining automakers average 2-4% with domestic content.The garment and footwear industries are facing the same problem – with over 80% of raw materials imported, reported the paper.  The electronic industries urged for the development of support industries to focus on three major areas: mechanical, electrical and electronic spare parts. Director of the Ministry of Industry and Trade’s Industrial Policy Research Institute, Phan Dang Tuat commented on the issue that Vietnam should learn from the experience of and seek support from neighboring countries like Japan and South Korea in developing support industriesThe World Economic Forum index ranked 125 countries based on their performance in four main areas: market access, border administration, transport and communications infrastructure, and general business environment,.  Th is report released in 2010, showed that Vietnam still has the following factors that burden doing business in the country, which includes weak infrastructure

The most problematic factors for doing business in Vietnam:

Source: The Global Competitiveness Report 2010-2011, World Economic Forum

(Note: From a list of 15 factors, respondents were asked to select the five most problematic for doing business in their country and to rank them between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings.)

1. Access to financing: 17.7

2. Inflation:12.7

3. Policy instability: 10.9

4. Inadequately educated workforce: 10.2

5. Inadequate supply of infrastructure: 9.9

6. Foreign currency regulations: 8.2

7. Tax regulations: 7.0

8. Poor work ethic in national labor force: 5.4

9. Corruption: 4.8

10. Tax rates: 4.8

11. Inefficient government bureaucracy: 3.9

12. Government instability: 2.2

13. Restrictive labor regulations: 1.4

14. Crime and theft: 0.8

15. Poor public health: 0.1

Government Acknowledgement of the Troubles

On January 14, 2011, Mr. Vo Hong Phuc, Minister of Planning and Investment, said in his “Review of 10 years of implementing the socio-economic development strategy and lessons for the coming decades” that even though over the past 10 years, Vietnam GDP reached 7.26% per year; growth quality, productivity, efficiency and the competitiveness of the economy is still low and macro balances are unstable. Export products are mostly raw materials and industrial goods are mainly manually made. Productivity is much lower than regional economies, for example 2.6 times and 4.3 times lower than China and Thailand respectively. Energy losses are huge. In order to turn out $1 of GDP, Vietnam uses about 4.65 times more power than Hong Kong, 2.10 times compared to South Korea and 1.69 times to Malaysia, reported Vietnam News Agency.

Minister Vo Hong Phuc also commented that the infrastructure had developed slowly, with poor quality and a lack of synchrony that has hampered development. The transport network has yet to be completed and we have no express railway, modern sea port or airport. The power supply and network have not met the demands of production or the public.

Our View:

Minister Vo Hong Phuc gave a very honest and comprehensive view of the problems in Vietnam’s economy and we share his assessment. In 2011, we believe the big story for Vietnam and also for China will be inflation and how the government deals with it. In Vietnam, weak infrastructure, the continued weakness of supporting industries and the need for more efforts in building qualified human resources all should hopefully prod the government to do more in these areas in 2011. Vietnam remains a favorable location for investment and many investors are looking at Vietnam as their chief option to China where prices are also rapidly increasing and the local currency, the RMB or Yuan, is likely to increase in the years ahead, something that has not been the case for the Vietnamese Dong.

About the Author:

Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School. He served as Deputy General Counsel of President Gerald Ford’s Presidential Clemency Board. Mr. Runckel is the principal and founder of Runckel & Associates, a Portland, Oregon based consulting company that assists businesses expand business opportunities in Asia.

Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China. Mr. Runckel lived and worked in Thailand for over six years. He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War. In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations.

Tags: Vietnam economic, Vietnam economic growth, Vietnam economy, Vietnam economy 2011