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Issue No. 18
March 1999

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

See VVG's  monthly feature on Current Economic Indicators

Current Dispatches

Update on US - Vietnam Trade Talks. The seventh round ended in Hanoi on March 19, 1999.  Immediately after, the US Mission to Vietnam put on a Herculean effort to "get the word out."   Cautious optimism seems to be that word.

In Ho Chi Minh City, the senior USTR negotiator, Joe Damond, made four speeches before as many different groups of  foreign diplomats and business leaders, following a similar whirlwind series of performances, and five days of negotiating, in Hanoi.

Those presentations were made "off the record" to allow for an openness not available if the remarks were made for attribution.  However, the size of the effort made indicates that this message is intended to be broadly reported.

Vietnam has a limited window of opportunity to reach an agreement with America on bilateral trade. That window will most likely close in November 1999 when the year 2000 Presidential campaign begins in earnest.  Then, no candidate will want to give the opposition a chance to scare up past recollections of the decade of divisiveness in America centering on the issue of Vietnam.  Vietnam  is still too much in the minds of America as the war, and not current opportunities.

There has been significant progress made in trade talks since September 1998, which was the sixth round.  Real progress has been made, and gaps narrowed, in key issues to include: Trade in Goods, Intellectual Property, Trade in Services, and Investments.

In the words of members of the USTR negotiating team, there are "a handful of different issues on which the parties are still far apart.   When Vietnam says (as in the area of the public monopoly in telecommunications) it cannot do anything to open that market to foreign competition (even to merely set a timetable for future action, which is a minimum WTO requirement), the US response is that we have no flexibility and cannot agree."

Vietnam continues in its position that it seeks to accede to WTO membership, wanting only some protection in time as it is a poor and a developing nation. However, even WTO standards require Vietnam to agree to a time-table of dates for implementing the standards that include opening the telecommunications industry to foreign competition.

As Vietnam will have no better benefit from WTO membership than trade with the US, it seems unreasonable for Vietnam to not reach agreement on dates with the US now.

Unless of course, the Vietnamese internal debate on the appropriateness of joining WTO is still going on. That it is seems apparent.

The internal divisiveness of that debate becomes apparent when public claims are examined in the light of the positions of both America and Vietnam.

Trade Agreements and Investment Agreements are often entered into separately. But in the past 10 years, the US has done that only twice.   Japan just this month reached a Trade Agreement with Vietnam affording it MFN status, and acknowledges that a separate Investment Agreement is to be hammered out at a later point in time. This is typical of the Free Market World: they reach agreement with the tough customers (and Vietnam is tough) early on the easy points (like MFN/NTR), and allow the US to take the lead on the difficult points (like open markets).  The EU nations have taken this route many times.

Investment Agreements our outside the scope of the WTO standards.  The US side entered these talks believing that there would be no possible leverage to open Vietnam's markets at a later time if the Trade Agreement alone were negotiated.

That is the problem.  Trade according to WTO standards has been accepted by other developing nations such as Mongolia, Turkistan and Cambodia who are not worse off than is Vietnam.  It is clear that the price for getting into the WTO is to meet that standard, and that Vietnam has the same ability as have the other nations how are now members.

The issues that separate the US and Vietnam include areas in all four segments of the Trade Agreement, only one of which is Investments.   It seems clear to all that the US desire to move the WTO standards for Vietnam along the same path as the Investment agreement is what is holding up the final accord.

America's interests do not depend upon an agreement with Vietnam.   And that is Vietnam's problem.  In order to achieve the approval of Congress on the Trade Agreement, America's negotiating team knows that Congress will hold the agreement to the same high standard as other recent nations.  There will be no favor given to Vietnam, for it is not within American economic or political interests to do so.

The more difficult (for closed-market Vietnam) Investment issues are inexorably made an integral part of the entire package. In order for Vietnam to reap the benefit of MFN / NTR (and it will get those benefits almost immediately), Vietnam must accede to the more difficult standards of the Investment issues (such as "registering" not licensing businesses).

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Economic Indicators: The year-end results show inflation on the rise and exports continuing to decline as Vietnam continues to feel the aftershocks and fall-out from the regional economic crisis.  An inflation target of 10% for 1999 appears ambitious, particularly in light of the implementation of the new Value Added Tax (VAT) and the higher tariffs on imports from the US and Japan. 

A decline in imports for the first two months of 1999 is attributed to several factors, including the VAT and the imposition of higher tariffs to leading export nations, all leading to low domestic demand.

Equitization of state owned companies is planned at a faster rate, with 400 firms targeted for public sale by year end.  To date, only 116 firms have been equitized, with almost all of them (98) having completed the procedure in 1998.  The goal is to equitized 60% of the remaining 6,000 state-owned companies.

Foreign holdings are currently limited to 30% of each company, but there are encouraging signs that may not hold fast.   The lack of development in laws and regulations continues to hamper the start of the much anticipated Vietnamese Stock Exchange.

While other regional nations are reporting light at the end of this tunnel of economic gloom, Vietnam is now suffering the full throws of the crisis that is beginning to hinder development.   Many domestic and foreign companies are experiencing a slowdown, both from crisis, as well as the result of a long Tet holiday in the short month of February.

Strong international investors recognize this period in Vietnam as a good time to step up their investment activity.   It is a curious matter that the number of business inquiries to VVG in the first two months of 1999 exceed all new inquires to VVG in the entire prior year.

Details on particular economic indicators available:  Current Economic Indicators.

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US - Vietnam Trade Talks: Fits and starts; uproar and progress; steps forward and backward; these are the phrases used to describe the current status of  important talks between the two sides that will determine when NTR (Normal Trade Relations, earlier called MFN) issues and is submitted to Congress for approval.

Vietnam "hopes to resolve" the impasse it created with the January 1, 1999 implementation of a new law that hiked import duties for all goods from countries that do not have NTR status with Vietnam.  Importantly for Vietnam, that includes Japan and the United States.

In late January, the Vietnamese submitted a "serious offer" in response to USTR's Joe Damond's request for forward movement.  A new round of talks is scheduled to begin in Hanoi in mid March.

The onerous tariff provision was reportedly waived on February 11, 1999 but as recently as early March, decrees implementing the waiver had not been issued, thus leaving the increased tariffs in place.   This must be seen as a wise move by some Vietnamese policy planners who seek to scuttle the Trade Talks, or it is a poor power play by others who would seek to gain advantage in those talks.  The move is no doubt favorably viewed by US opponents of Vietnam in Congress who seek to block NTR from ever issuing.

There are some on both sides who caution that NTR is not favorably viewed. However, it remains the hope of most international watchers here and in Washington that a trade agreement can be concluded and signed by both governments as early as this summer.

Also this summer the Jackson-Vanik Waiver will come up for renewal. This is a necessary component for NTR to issue.  If not disapproved, it will automatically renew.  Disapproval must be by an affirmative step in a joint resolution that must pass by September 1, 1999.

The Trade Agreement (and NTR that is an integral part of that agreement)  must be voted upon by Congress without amendment within 90 days from the date  the President's request is submitted.   Passage by both houses is required.  It remains possible that the Jackson-Vanik Waiver and the Trade Agreement may be considered by Congress at the same time this summer.

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Vung Tau superhighway: A corridor of opportunities - A modern-day expressway connecting HoChiMinh and Bien Hoa cities with Vung Tau got the official starting flag recently paving the way for construction of Vietnam’s first truly international standard highway and road link.  Approved plans for the $645.5 million superhighway show toll plazas, gasoline (petrol) stations, convenience complexes and rest areas. Each will be equipped with intercoms, public address, and emergency telephone systems.

Feasibility study results predicted that traffic would flow at up to 120 km (75 miles) per hour.  This highway will bring  the new Cua Lap Resort (the only 4-star hotel and resort community in the region) less than one hour away from the heart of down town Ho Chi Minh city.

The expressway is planned to open as a four-lane asphalt ribbon after the first construction phase to be completed in year 2000. Plans then call for the roadway to be expanded to six or eight lanes after 2011 to accommodate expanding needs.

The project has been listed as a pre-year 2000 Government priority and will be realized by South Korea’s Daewoo Corporation. Private industry sources project this project will be started in 1999 and be completed before the start of year 2001.

Land-use rights along the projected highway right -of-way were granted to Daewoo last year, according to a company source.

Daewoo development managers have predicted the initial investment capital will not be recouped from collecting road tolls alone. They said the company hoped to profit from the provision of hotels, residential apartments, restaurants, filing stations and other services dotted along the expressway.

The feasibility study for the project was conducted by the Daewoo Construction entity, in consultation with the Australian AIC Mounsell Company and the Ministry of Transport and communication (MoTC).

Le Ngoc Hoan, the Minister of Transport and Communication, said the road will start in the An Phu district of HoChiMinh City and run to Vung Tau City, the very center of the nation’s oil industry.

Estimated costs for the 91-km road project were increased from $370 million to $645.5 million after additional superstructure costs were included in the feasibility study. The final cost estimates were " much higher than expected," said Hoan. International industry sources state this is a far more realistic figure and bodes well for appropriate planning.

Build-operate-transfer (BOT) conditions are to be applied to the development, making the first BOT road in Vietnam. (See related story, below)

The project has an operational term of 25 years. Recoupement of investment will occur after 2010.

Phased Development.  Planners have divided the expressway into five sections: HoChiMinh city and Bien Hoa to Long Thanh; Long Thanh to Phu My; Phu My to BaRia; and BaRia to Vung Tau. The road involves 97 small and large bridges. Many of these bridges have been upgraded to accommodate the remodeled Highway 51 that is planned for completion by mid-1999.

Renovation of the roadway from HCMC to Bien Hoa is nearing completion to a six and four land expanse. Highway 51 from Bien Hoa, through Long Thanh and Phu My to Ba Ria, will connect to the new Highway 51 C that is scheduled for commissioning at the same time.

The major new link to be built by Daewoo from An Phu to Long Thanh will connect with the $94 million Dong Nai bridge, to be constructed separately through Official Development Assistance funding.

MoTC confirmed that the establishment of new residential and urban zones will be realized in conjunction with the highway project, including development of Cau Quan, Go Dau, Phu My and Long Thanh.

New International Airport.  Of major interest is the planned relief to the already congested but central Tan Son Nhat Airport in HCMC. The new road is geared to ease access to the planned international airport, to be constructed in Long Thanh, soon to be a 45 km 28 m) trip along the new highway.  This new airport, scheduled for about 2010, will be less than a 30 minute drive from the new Cua Lap Resort on the East Sea (also known as the South China Sea)

Daewoo Construction is involved in many other infrastructure projects, including the Saigon Industrial Zone; development of Le Thanh Ton Street in HoChiMinh; various hotel and apartment complexes in Vietnam; National Highway No 18; the Hanoi bus system and the Quang Binh cement production facility.

A second licensed BOT project, worth $638 million for the establishment of a new container port in Vung Tau was revoked late last year after Taiwan’s Evergreen, the project developers, ran into financial trouble. It is anticipated that others will take up this vital project and plan it on a more realistic basis than before.

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Property investors: cautiously eye the current market - After a period when the property market was like a money-printing machine, property speculators are now taking a harder look at this market during the downturn.

According to property specialists, the industry urgently needs to shift its focus to providing affordable construction for low-income earners.  In Hanoi last year, small projects for projects such as residential constructions, accounted for about 80,000 square meters of new construction.

Most people that require housing are low-income earners. However, almost 300 low-income housing projects are yet to progress past the planning stage due to a lack of capital.   Among 15 approved projects for urban development in Hanoi, only the North Thang Long and South Thang Long projects have utilized foreign capital. But the projects still remain idle.

Despite laws that permit investors to undertake a trial period of land leasing for housing, wary investors are yet to go down that path.   The previously intense office and apartment sector has waned considerably. There has been no new investment in apartment and office construction for two years. At the moment, 19 of 50 licensed construction projects have been temporarily stopped or rescheduled. Six have had their licenses withdrawn.

The office rental industry has failed to realize it’s potential because attracting commercial tenants is becoming more and more difficult, especially as the number of foreign organizations begin to taper off.

Buyers and renters remain in a good position, as room and office prices have fallen by 30 to 50 per cent. Many property-related services are now free as part of owner’s marketing strategies.  In the private housing sector, of 764 houses permitted by Hanoi’s Housing Department for lease to foreigners, n 255 contracts were cancelled before the regulated time mainly because of the decline in numbers of renters.

Conservative analysts project the market will remain soft until the start of year 2000, when the regional economies will be on the recovery road.

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Tax overhaul seen as investment stimulant- Vietnam must be wise and thrifty in how domestic investment is used to achieve its investment target for the five-year socio-economic development plan until 2000.  Finance Minister Nguyen Sinh Hung said that the target of US$20 billion could be reached but it won’t be done on State revenue alone.

He said the tax collection system needed a major overhaul, and that new tax policies needed to be strictly applied.

Old tax policies, which are no longer suitable, should be amended. These include taxes on property ownership or land use rights, and people’s financial or social welfare projects.

Tax levied on the registration of property ownership and the transfer of land use rights, and contributions sought from poor localities, should be lowered. Lower tax rates applicable to financially struggling enterprises should be considered.

The above measures would encourage people to abide by tax laws, thus improving tax collection, Minister Hung said.

The Finance Minister said national financial strategy should be aimed at facilitating business operations throughout the nation help them to make a profit this year and next.

The finance-related legal system must ensure a stable and secure financial market and contribute to increasing monetary accumulation in all three pivotal sectors- the State budget, business, and the general population.

He said the State has granted budget allocations by giving priority to development investment, exercising tight control of budgetary spending, and publicly announcing budget allocations.

Hung said self- reliance was necessary for any nation to obtain long term and sustainable development. It is, therefore, urgent for Vietnam to work out and issue detailed policies that encourage funding from grassroots budgets and other local financial sources to infrastructure projects, in both rural and urban areas.

A plan for issuing Government bonds should be worked out as soon as possible on the basis of advice from monetary organizations and financial institutions. Monetary policies should grant entrepreneurs full autonomy in running their businesses and encouraged them to take responsibility for their financial situation. Regular inspection of business and production establishments should be conducted to have an overview of their real situation, including debts, so as to work out suitable measures to settle their problems.

The equitization of State owned enterprises should be pushed, along with efforts for organizing other SOEs so as to set up a suitable framework for their operations. Banking operations should also be reformed to raise the sense of responsibility of individual banks in lending operations so as to avid the possibility of unpaid debts and minimize the list of debts over due, Hung said.

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Processing zones reviewed - Investment in HCM Cites Tan Thuan and Linh Trung Processing Zones has slowed, despite their having attracted 60 enterprises with capital of US$32 million. Doanh Nghiep, Enterprise Weekly, says this shows that investors still want to gain firm foothold in the Viet Nam market. A reporter from the State Owned newspaper, as quoted in the English-language State-Owned Vietnam News, spoke about the Zone’s success with the deputy director of the management board for Industrial and processing zones, Nguyen Chon Trung.

How would you describe the working and effectiveness of industrial and processing zones in HCM City last year?

Eighty to 100 per cent of the infrastructure for the Tan Thuan and Ling Trung processing zones is finished. A total of 128 investment licenses have been granted to the zones with a total capital of US$580.41 million. The leased land involved totals 116ha.

Total export earnings were more than $700 million - $450million from exports. The total of domestic goods from the processing zones has reached $35 million.

Seven of 10 industrial zones attached investment capital totaling $264.39 million and VND358.09 billion. In particular, Le Minh Xuan industrial zone attracted 22 companies.

What are the main points that have concerned you?

Foreign investors have implemented studies to replace foreign experts by local experts. Now, there are some local experts working in enterprises. The Hiep Phuoc joint-venture company has been set up by Tan Thuan industrial development company and Belgium IPEM company. This aims to build Hiep Phuoc industrial zone and port.

We also plan to expand with Belgian JV. Importantly the Government has allowed Hiep Phuoc electricity plant to work around the clock. This is the most important feature to attract foreign investors. The Dong Dien Bridge now links Hiep Phuoc industrial zone and is expected to be completed in the first quarter this year. This will help further develop and create a better investment environment.

Last year, I paid much attention to the capacity of import-export activities of export processing zone. Industrial zones, IZs, have help push up the increase of local import export and it has meant that locally made commodities are imported into processing zones. This also make a strategic co-operation between export processing zones and local business.

To develop HCM City industrial with processing zones, investor can set up a stable material-processing zone. This is a process to carry out industrialization of agriculture. We also have to maximize profits from over co-operation.

Can you predict any advantages and obstacles on IZs and processing zones this year?

The Asian financial crisis will slow down investment during the year and labor may fluctuate. We need to have policies and plans that gave favorable conditions to investors as well as implementing detailed policies on investment in Europe and North America.

However, we now have a Decree on domestic investment encouragement and a Decree on foreign investment encouragement and supplemented and amended laws that have been ratified. Apart from this, the recent Asian summit conference in Ha On helped Vietnam become more powerful and give it a firm foothold in the International arena.

What problems need to be solved for the development of IZs – including in the State and local management areas?

In 1998, foreign investment was given a lot of attention and there was a great deal of co-operation with foreign investors. But we are still faced with many obstacles and limits on investment. The structure also is not clear and whether central or local level organizations are responsible for managing IZs and processing zones. This year, Government will discuss this problem and produce a law on IZs and processing zones that will create more favorable conditions to attracting foreign investment.

The Government has recently granted construction permits to management boards in IZs and processing zones. These aim to help investors during the construction process. And a "one-stop" policy is now also available. But there are still some difficulties in its implementation. I am asked why we do not implement a one-stop policy for local investors who have been a successful factor in IZs and processing zones. In my opinion, the Government should allow the management board to grant operation licenses for domestic enterprises and give them the most favorable conditions to develop

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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.