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Issue No. 15
December 1998

A Periodic Report to Our Clients
(higher numbers indicate more recent dispatches)

See VVG's new monthly feature on Current Economic Indicators

Current Dispatches

Cua Lap Resort - The $276.3 million beach resort on over 370 acres less than a one hour drive from downtown Ho Chi Minh City when is projected as opening, now has achieved the preliminary approval by the MPI of its Master Plan. 

Featuring a full-scale aquarium, IMAX Theater, Botanical Garden, Cultural Fishing Village, salt-water Fishing Lake (stocked with exotic but farm bread behemoths weighing a minimum of 12 pounds) and a four-star beach front hotel, this project will seize the imagination of all business class Vietnamese and foreign visitors to Vietnam.   In time, the project will expand to include a Marina with clubhouse and boat slips, a AAA rated golf course and club, shopping centers, apartments, offices and luxury villas.

The past history of large land development projects have failed in large measure because the developers and investors were not able to obtain the advantages now available in Vietnam.  In today's economic climate, MPI now advises on the Cua Lap Project, and for the first time ever for a project of this importance, that the 100% foreign invested form of the Master Plan will be favorably  considered in accordance with the particular projects.

Read more about Cua Lap Resort.

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$2.7 Billion In New Aid Pledged.   More than last year ($2.4 billion), the new Official Development Assistance (ODA) grants in the recently concluded Paris talks total $2.2 billion in committed funds and an incentive bonus of an additional $500 million that is conditional on faster reform of the public and banking sectors in Vietnam.  The added funds are intended to (i) fund social and financial costs of economic reforms of the SOEs, banks and trade liberalization; (ii) project financing; and (iii) technical assistance to the government to design and implement reforms.

Japan remains the largest donor with 100 billion yen (at current rates, $847 million). Other leading donors include the IMF, World Bank, ADB, UNDP, Australia, France and Sweden.  Taking part in the group meetings for the first time as full members were the United States and Luxembourg.

Disbursements remain a problem.  More than $11 billion in ODA funds have been pledged and approved through bilateral and multilateral agreements since Vietnam began to receive such funding in  1993.  To date, about $5 billion has been disbursed for major infrastructure projects, such as transportation, power, and water supply.

Delays in disbursements can be attributed to several causes, but mostly Vietnamese tardiness in fulfilling the requirements of ODA disbursement which have become more complex. While many ODA donors complain that Vietnam takes too much time to complete feasibility studies, it also usually takes several years for both donors and recipients to clear formalities, such as assuring adequate audit measures required by donors and the inability of Vietnam to satisfy their needs.

Infrastructure projects being done with ODA funds include:

1. Three highway sections of the north-south system - Highway 1, the road from Hanoi to Hai Phong - Highway 5, and Hai Duong to Quang Ninh - Highway 18.

2.  Two major ports, one in Hai Phong and Saigon.

3. Power generation plants: northern Pha Lai thermal power plant; south-central Ham Thuan-Da Mi hydro plant; and two gas turbine projects at BaRia-VungTau's Phu My facility in the south.

4. Several irrigation projects on the Central coast and Tay Nguyen in the Central Highlands

5. Agricultural, forest, and fishery projects several provinces.

6.  Health-care programs such as anti-malaria and anti-HIV, as well as clean water supply systems in remote areas and the highlands.

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Currency Concerns.  The Vietnamese dong has always been the nation's only legal currency since the opening of economy to some of the principals of a free market.  However, laws were never enforced. Worse, the State still collects fees from foreigners in US dollars.  Many State owned companies in the travel, tourism, utility (electric, telephone), customs, and residence dwelling collection (including tax collection) sectors, bill and collect in US dollars only when a foreigner is involved.

Early in 1998 the policy of enforcement changed. The state seemed to recognize late that the dong, backed by only the slimmest reserves, could drop in value on a precipitous way. The first step was the State Bank's quiet tightening of up of approvals for companies to convert their foreign exchange holdings.  Next, the bank restricted companies to one foreign currency account. (This rule was lifted within the month, however.)  

Then the bank directed certain companies to convert 80% of their foreign currency holdings into dong.  Most recently, when that rule was ignored, the State Bank ordered individual banks to do so unilaterally if the companies did not comply within 15 days of receipt of foreign funds in excess of $15,000.

Foreign invested banks were charged with speculating against the dong, and five banks were fined. Black market and official street exchange offices were closed.   Gold smuggling rings were hit (gold sells at official established rates at from $25 to $75  per once higher than world rates.)

Some report that recent measures smack of desperation and fuels a frenzy of speculation.  The bulk of foreign exchange is held by strong state-owned companies (Electric, Post & Telephone, Airlines, Oil & Gas) that refuse to make the conversion. That is either due to official or private sanctions (and smacks of deals or favoritism). 

Fully foreign invested manufacturers for export do not report problems. They can control the flow of dollar currency to comply with the rules (ship dollars out within 15 days of receipt, or redirect payments to parent companies as in servicing debt).   However, both domestic and foreign invested companies who sell products for dong and need dollars to purchase raw materials are in trouble.

As the State Bank does not impose a regulatory rate on the exchange of dong to other currencies, one major trick is to trade outside the official rate by taking a detour via a third currency.  Those who cannot play that game cannot get dollars they need to pay for imports.  Fears of an imminent devaluation of the dong blights an already cloudy investment climate for producers in the domestic market.

While exporters will continue to sell dollars for dong to meet demands for domestic working capital, speculation continues that the dong will slide. A precipitous drop is not predicted.  Unless, that is, China takes the lead. That will not help Vietnam.

Consider the table outlining changes in regional currencies against the dong June 1997 to November 1998.  Vietnam is still competitive against regional nations in terms of labor, productivity and stability.

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Trade Deficit Grows Sharply * Vietnam's trade deficit exploded to more than 1.9 billion U.S. dollars or 24.8 percent of its total export volume in the first 10 months of this year, exceeding the state ceiling of 20 percent, the latest issue of Vietnam Investment Review reported.

A shrinking international market and lower prices for imported goods have caused Vietnam's trade deficit to mushroom, the newspaper said, quoting official statistics.  Local analysts said increasing difficulties in exports and dropping prices of goods in the international market have worked to push the trade deficit too high.

The prices have dropped considerably since 1996, especially for goods that top Vietnam's import list.

Consequently, Vietnam's imports of goods have increased. During the first 10 months of this year, Vietnam imported over 5.5 million tons of oil and petrol, an extra million tons compared to the same period of last year. Similarly, this year's imports of iron and steel have risen by more than 400,000 tons and fertilizer by 800,000 tons.

The lower prices may not be the only reason for Vietnam's skyrocketing import levels. According to some Vietnamese analysts, many Vietnamese businesses are stockpiling materials in a bid to avoid paying value added tax (VAT) which comes into effect in 1999.

The problem can be solved through better management of unessential imports, the newspaper said.

(with thanks to Vietnam Business Journal on-line http://www.vbj.com who retain all copyrights)

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Oil Refinery - Update: When first proposed in 1990, Vietnam's first refinery to produce oil products in commercial quantities was to have been up and running in Vung Tau by 1995 at a cost of US$ 1.2 billion and be a joint venture partnership between France's Total and Vietnam's PetroVietnam.  France pulled out in early 1996 branding the change in location demanded by Vietnam as uneconomical.

Two years and many joint venture partners later, Zarubeznheft (itself a state owned enterprise in Russia) and PetroVietnam announced in March  1998 (Vietnam Vignettes 4) announced a plan to work together.  They both have now (late November 1998) signed an agreement to build the refinery with 6.5 million tonnes annual capacity in a 25 year joint venture at Dung Quat in the central province of Quang Ngai. 

The inter-governmental agreement of August 1998 was the start of what is now projected to be US$ 1.3 billion project in which the two state governments will each contribute $400 million and the joint venture enterprise will raise the additional $500 million from sources not yet disclosed.

Also open to disclosure is how the nearly bankrupt government of Russia will find a spare $400 to invest in Vietnam, or how Vietnam will generate its own $400 million.  The issue of locating an institution willing to finance such a partnership is considered a marvel, or idle speculation, depending upon the source of comment.

Deputy Prime Minister Ngo Xuan Luc is quoted in local media as having "stressed that the establishment of the joint venture showed the 'wish and determination' of Vietnam and Russia to build an 'important strategic partnership.' "  

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Foreign Investment Continues to Drop:.  After nearly staggering growth during the first three quarters of this decade, the size of foreign investment in Vietnam has plunged by 59% in the first 10 months of 1998 as contrasted to 1997.

To date, the MPI has approved 124 projects with Total Investment Capital of $1.78 billion and approved approximately 77 projects to increase their Total Legal Capital by $522 million.  Many  projects have been terminated in the same period, or current activity substantially reduced.

As happened at year-end 1997, there are a few large projects in the works for approval by year end that may boost the appearance of total investment.  However, it is important to note that last year's year end mega-projects are both stalled and appear to be not moving forward in the near term.

Of the active 1,770 projects calling for total investment of over $32 billion, Jean-Pierre Verbiest of the ADB predicts that "little more than $1 billion will be disbursed this year and $500 million next year, unless several BOT projects are approved."

It is expected that the regional economic crisis will have a greater impact on Vietnam in 1999.

While labor may be cheaper in Indonesia, Vietnam is still an island of stability in a region of turmoil.  Its current minimum wage of $35 to $50 per month, its highly literate work force that is readily trainable, and its long history of dedicated, loyal workers should benefit both the nation and investors willing to take a good look at regional opportunities.

Of course, much more effort is also needed in Vietnam to push forward additional reforms to make Vietnam more attractive to foreign investors, says Verbiest.  Among overhauls are those to Vietnam's financial system, improvements to its money-losing State-owned enterprises, and the general overall environment to foreign investment.

A source yet to be tapped is the estimated $10 billion to $20 billion held by private individuals throughout the nation. One major step in the right direction is the increased ability to establish 100 per cent foreign investments.

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Coffee - Now #3:  Exporting to 52 nations of the world, Vietnam sold approximately 390,000 tonnes of coffee on the world market valued at $594 million, or 37% increase compared to the same period last year. Now the world's number three producer of coffee, Vietnam's largest market is the United States, taking in 21% (82 T) of Vietnam's total exports.  Germany was a close second, taking in 18% (68 T).

The coffee industry is not living up to its full potential due to continuing problems in production, circulation and export.   However, due to the increased popularity of Vietnam's non-Arabica varieties, planters have begun new plantations in the central highland regions.  When planted in infertile regions, there is more opportunity for ancillary erosion damage, as well as economic disaster in draught areas.

Targets are for exports to reach 500,000 tonnes with a value of from $600 to $700 million in the 1999 crop year. See related article, Vietnamese Export Opportunities to the United States.

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Dong - Stable but may float downward: When the US Federal Reserve reduced interest rates to 4.75 per cent in late November, it pushed the interest rates on member banks to 4.0 per cent. That in turn increased the value of other currencies including the Vietnamese dong.

Giving the State Bank greater flexibility in managing its exchange rate, some foreign bankers say there are now explicit indicators of a downward trend in the dong's value but in a stable manner.

Vietnam may be turning to "an exchange rate solution" as a way to boost the country's exports, reduce its growing trade deficit, and make up for the drop in official development assistance.

If the exchange rate is not realistic, it will effect the volume and direction of trade.  An overvalued dong will encourage imports, including smuggled goods, while discourage exports.  It often takes 12 to 18 months for currency adjustments to reduce imports and increase exports. 

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Vietnam Vignettes is a periodic report distributed since early 1994. It is NOT a newsletter although for the ease of linkage we have called it that.  It is a summary of domestically published  media reports from more than 17 industrial sectors that we at VVG follow and report upon for our clients. * Due to the importance of certain topics of key importance to trade with Vietnam, we will occasionally include some wire and other media reports.