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Issue No. 27
December 1999
our third year on the Internet

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

See VVG's  monthly feature on Current Economic Indicators

Current Dispatches

VIETNAM, Like Its Internet Connection, is "growing," but it is oh, such a slow process....   When we arrived in Vietnam at the start of 1994 carrying a lap top computer, that event alone caused a material increase in the total number of computers in the entire nation (then about 2,000).  Today, almost six years later, computers are for sale everywhere in the major cities. And in the secondary cities, a few cyber cafes (after initially being throttled down in Hanoi and HCMC), are now in operation.

Growth of the Internet in Vietnam is but one guide to review in order to get a true picture of real growth in the nation.  We feel there may be no better portal by which to view a nation's entry and position in the world of commerce, if not true openness, then its making the Internet available to its citizenry.

Our bias should be clear. We openly discriminate IN FAVOR of the foreign investor who seeks to locate good opportunities in our choice location, which is Southeast Asia.  We would not be here ourselves, otherwise. As we enter our seventh (7th) year here, we want you to know that we practice what we preach.

However, that is not to say we are entirely content with the pace of Vietnam's growth.  

In Issue 2 dated December 1997 we reported:   "Officially, the hook-up occurred on 19 November 1997 for the Internet Access Provider (VDC) and the four licensed Internet Service Providers (ISP). However, the connection out of HCMC is via a 64-kb line; out of Hanoi by a 254-kb line."

By Issue 3 dated January 1998, we were fully connected and reported:  "One useless program we thought to download came in over our 33.6 modem (the fastest available here due to the ISP using a 64Kb line) at only 100 bps. That is 0.1 kbs. After 20 minutes the speed picked up to 0.3 kbs.  In all, it took a full hour to download 900 Mb of data at a cost of  $1.80. We tossed the program after one look.   At this rate, we anticipate a bill in the first full month exceeding $300 just to learn how to surf the net."

Today, Hanoi reports that 38,677 subscribers are on-line in a nation of 77.8 million people where just 2.78 telephone lines exist for every 100 of its citizens.  A fare share of those lines are installed in multiple numbers for state, domestic, and foreign businesses.  Thus the number of families that own a phone is much less than 2.78 per 100 people.  And personal computer ownership numbers are far lower by per cent of the population.

Contrast neighboring Malaysia, sparsely populated with people (22 million) and itself not well connected to the net. But, with nearly 600,000 subscribers (and reportedly 1.5 million users), it is leagues ahead of the "growth" in Vietnam.

Vietnam has not increased the number of Internet Service Providers from the inception of service.  What can be said is that the same five still survive.   However, Netnam (the only domestic, quasi private ISP), is barely hanging on with a mere 4.2% of the market. That is, Netnam has all of 1,624 subscribers, while the State-owned sector controls the rest. 

While "growth"  can be claimed in the number of websites hosted in Vietnam, the actual numbers have grown from zero in January 1998 to sixteen. That is, there are a total of 16 websites that are housed and hosted directly from Vietnam on the Internet.  (Ours, reportedly the largest website in the world devoted exclusively to promoting foreign direct investment in Vietnam, for example, is housed in California.)  

Well, as we said at the start, that is progress. But the pace is far from impressive.  The same can be said for pace of true economic growth.  

There are few realists who think that Vietnam will achieve NTR (MFN) with the United States anytime soon.  The most optimistic outlook is for sometime in 2001. That the largest consumer market in the world remains closed to the enterprises of Vietnam is clearly not a way to spur a fatter GNP. 

We are left  merely to speculate why the good leaders of this bountiful and marvelous land believe that deliberate policy is good for the nation.

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YEAR END REVIEW - 1999

 The steep slide in growth that began in 1997 has still not leveled out. Many of the measures intended to rectify the situation have yet to take full effect. The first year of the new millennium will be fraught with difficulties.  It is likely Vietnam will face some of the toughest times the country has encountered since it set foot on the road to modernization.

Overall growth in 1999, estimated by the government at about 5%, is the lowest since the advent of doi moi. The figures from the World Bank are considerably lower.  Some independent investment bankers believe the economy of Vietnam is stagnant, if not in decline, bolstered mainly by talk and hope. Adding salt to the wound, the government estimates the recent floods in the country’s central provinces will eat away another 1% of GDP, whatever the actual figure.

Agriculture recorded the highest growth rate, of 5.2-5.5%, with total output of 33.8m tones of food – adding up to some 26% of GDP. This success is attributed to wise investment in irrigation, mainly in the Mekong delta, and the application of biological advances. Unfortunately, the drop in food prices worldwide depressed domestic prices by up to 10.5% by the end of October (the latest period for which figures are available), and subsequently farm incomes. Fisheries were another success story, with overall growth estimated at 2.4% and export growth at 11%.

Industry accounted for 32.6% of GDP, with total growth of 10.3-10.5%. State-owned enterprises achieved 4.8% of this, non-state enterprises 8.5% and foreign interest businesses 20% - each showing a marked improvement over the previous year. Slightly better results were recorded in fields that have established foreign markets – crude oil (20.5%), footwear (12%) and small diesel engines (31%).

Some key products of state-owned corporations such as cement, steel, fertilizer and sugar encountered problems, however, because of inferior quality and limited competitiveness. Continued state support in the form of loan extensions and debt restructuring yielded only limited and short-term success.

The services sector, representing 42% of GDP, recorded growth of only 2.5%. Apart from a few notable exceptions – civil aviation (6.3%), tourism (9%), post and telecommunications (9.4%) – most areas, including transport, insurance and banking, reported poor result.  

Exports looked much brighter after the dismal first quarter, exceeding early expectations with an estimated $11bn – up by 17.5% from last year. The export sector is playing an increasingly important role in overall growth.

The trade balance was improved by a decline in imports of 2%, reducing the budget deficit to $600m, equal to 5.6% of export revenue – the lowest figure ever achieved and the cause of a major improvement in the country’s international balance of payments figures. Hard currency reserves also grew. Stricter controls were exerted over short-term commercial debt, improving immediate macro-economic prospects. On the other hand, reduced imports of new equipment threaten the renovation of production lines and thus the creation of new jobs for some years to come.

Total investment increased by 9% compared to 1998, largely due to increased state investment. Domestic investment grew an enormous 25%, representing 67% of the total, despite the slump in foreign investment and slow disbursement of overseas development aid. It is expected that a number of major foreign-invested projects that have been under negotiation for some years will reach fruition soon, so the final foreign investment result may end up as not much lower than last year. However, see related story in this issue about prior practices of speedy year-end licensing approvals that appear to merely color the figures and add no strength to the overall economic picture.

The consumer price index has been falling steadily throughout the year. By October, it was down 0.8% compared to last December. The price of food plummeted, although other commodities were 2.2-2.5% higher. This reflected the fact that general purchasing power was low, investment was stagnating, and supply outstripped demand in several sectors. Radical moves to encourage spending failed to produce the expected stimulus because of bureaucratic bottlenecks. Such measures as reducing interest rate (down from 1.25% to 0.85% per month) were certainly positive, but they were still not strong enough to exert an effect on investors. The bank’s rate of capital accumulation remains low in comparison with GDP (estimated at only 24%), and very large sums are still circulating outside the banking system.

Capital stagnation.  The peculiar phenomenon has arisen of capital stagnating in banks while business is desperate for funds. By the end of October, capital mobilization had increased by 21% over the same period last year, but loans had risen by only 9.5% despite the fall in interest rates.

Problems.  There are obviously still basic problems in the country’s economic structure. Vital funds have been wasted in many sectors, from sugar and cement to breweries; the resulting debts have thrown the entire banking system into disarray. The bank’s weakness has of course directly affected the entire economy.

Several major legal cases brought to trial this year also had an effect on the investment environment. The Tan Truong Sanh case was widely applauded as proof of the state’s determination to curb smuggling and corruption, but others – particularly the Ba Ria-Vung Tau real estate fraud – raised concerns about the increasing “criminalization” of civic affairs.

Curative measures.  The government had to perform a difficult juggling act, balancing the need for structural reforms with measures to prevent the regional crisis from affecting economic stability. In spite of these last-minute efforts, the reforms failed to achieve the expected results.

The prime Minister has held regular meetings with domestic and foreign enterprises, and some 1,500 legal documents aimed at improving the investment and business climate were issued. The Law on Enterprises marked an important step forward on the path of reform, and there has been increased investment by domestic enterprises and overseas Vietnamese.

Other initiatives have stimulated exports: the number of enterprises directly engaged in these activities has increased from 1,600 last year to 8,200 in 1999. The extension of export credits to exporters of new goods and firms that actively seek new markets abroad have breathed new life into the sector. The action plan to encourage small and medium-sized private enterprises is also bearing fruit.

In the face of declining foreign investment, a decree was issued to phase out the dual pricing system, and it has been made easier for joint ventures to make a smooth shift to becoming 100% foreign owned. Other areas, including insurance and new retail developments have been opened up for foreign investment. These efforts have been hampered, however, by the unexpectedly severe impact of value added tax, although the situation should be rectified by amendments to the VAT law.

Some measures to retain control over hard currency were questionably necessary when they were introduced, but if left too long these measures will certainly produce adverse effects. Other regulations, such as the decision to put a ceiling on the interest rate for offshore loans, were not only difficult to apply in practice but also contribute to the instability of the business environment.

The Challenge of the State Owned Sector.  One of the most urgent tasks is to reform state-owned enterprises. The government has demonstrated its eagerness to tackle this by issuing decrees on equitization and the sale of enterprises with total capital of less than $72,000, and has permitted foreign interests to purchase up to 30% of equitized enterprises.

Even so, from the 6,000 SOE’s that still control more than 50% of the economy, only some 300 small and medium-sized SOEs will have been equitized by the end of the year, far less than the target of 500 enterprises that was set for the past two years. Audits of 100 SOEs are underway, but already this year grave deficiencies have been exposed in several corporations, which still enjoy a monopoly in some areas proving the need for a more comprehensive reform.

Communist Party General Secretary Le Kha Phieu, in his closing speech to the Central committee plenum in November, defined the main objectives for next year:  “To arrest declining growth; to make the economy more competitive; to nurture our human resources, solve social problems and enhance living standards”.

Vietnam has set a target rate of 5-6% for GDP growth next year, called an achievable figure only by Party stalwarts and doubted at by many in the foreign invested sector.  Given the country’s tremendous potential, it is no laughing matter for the hard working and intelligent Vietnamese labor force and middle management.

The main priorities are to reform the economic structure, SOEs and the finance and banking system, and to expedite the process of integration into the global economy. This will not likely occur unless and until Vietnam is able to control or retire the conservative forces that still block real economic growth.

Many of the country’s regional neighbors have introduced successful reforms and achieved high growth. It is to be hoped that Vietnam will learn from their example, accelerate its reform process and attain a high but sustainable growth rate, ushering in a new and promising century

ADMINISTRATIVE REFORM.

Administrative reform is slowly getting under way, bureaucracy is still rampant and there is a woeful shortage of competent and honest staff. The campaign against corruption, fraud and smuggling has yielded some initial success but it is still far from bringing about the fundamental changes that are so urgently needed.

In spite of the good will clearly shown by both sides, the talks between Vietnam and the IMF and World Bank have not yet produced any concrete results, although the discussions are continuing.  However, there can be no meaningful progress in those talks unless and until Vietnam signs the bilateral trade agreement (BTA) with the United States.

After the two sides reached an agreement in principle on the BTA in July, the more conservative elements in the Politburo scuttled the deal in September.  The most realistic appraisal is that Vietnam slammed the window shut on the agreement due to internal political strife. It is clear that the internal political struggle took precedence over the economic benefits to the nation and its people.

However, given the relatively low priority in the US for trade with Vietnam, some in Vietnam now openly question the economic and political wisdom of the Politburo’s action. The very best way to boost the economic climate in Vietnam will be to have NTR (normal trade relations) with America. 

The US Congress is in recess as it prepares for the last year of President Clinton’s term, and will not return until early January 2000.  At this point, even if the Politburo elected to do an about face, it is highly unlikely that the BTA can reach Congress before the next President takes office (January 20, 2001) and introduces the BTA to the new Congress.  The most likely period will be spring, 2001. The reasons are all due to America’s election year politics.

America, too, has its conservative forces that perversely join their counterparts in Vietnam by not wanting normal relations between the two nations.  Fractious as they are, the US Congressional conservatives cannot be compared to their counterparts in Vietnam’s Politburo.   Not a single important vote to restore full and normal relations with Vietnam has been blocked in Congress

However, even minor, fractious divisiveness, is to be avoided by both sides in this highly contested Presidential election year.  The Republican controlled Congress is also up for re-election.  It is considered likely that they may loose their majority control to the more progressive Democrats.  The Republicans would love to raise the old specter of the war and bash Vietnam and its supporters.  Accordingly, it is highly unlikely that the Democratic President or the Democratic minority in Congress will want to even consider the BTA that would only divert attention from the important issues facing the nation and bring support to the Republican’s cause that is more conservative. 

Vietnam effectively shot itself in its own economic foot by playing brinkmanship with itself over the BTA.  We who know the opportunities for real growth in this marvelous land are saddened for the harm that does to the good people of Vietnam. Many urge foreign investors to stay tuned.  Positive economic change is inevitable.  It is slow, but on its way.

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PM vows to speed up new oil refinery   Prime Minister Phan Van Khai in late November pledged steps to speed up construction of Vietnam’s first oil refinery in the central coastal provinces of Quang Ngai following expressions of delay concerns raised by visiting Russian Minister of Energy and Fuel, Viktor Kalyuznyi.

Kalyuznyi expressed concern over construction delays at the Dung Quat Oil Refinery. Currently in Vietnam on a five-day working visit, the Minister said the 25-year, US$1.3 billion Dung Quat project would be delayed at least two years unless drastic measures were taken.

The project is stalled because of delays in the ongoing process to invite bids for the supply of technology to the refinery, a joint venture between the Viet Nam-Russia Oil and Gas Joint Venture Enterprise (Vietsovpetro) and Russia’s External Economic Federation (Zarubeznheft).

As a result, the minister said, just $35 million of the $80 million set aside for the project this year has been disbursed.

Khai said his Government is paying special attention to the development of the refinery project undertaken by a joint venture between Vietsovpetro (itself a Vietnam-Russia Joint Venture) and Russia’s External Economic Federation (Zarubeznheft).

This project has been troubled from it’s inception in the mid 1990s when France’s Total pulled out after projecting a need for more capital in order to meet the Vietnamese demand to construct the plant in Dung Quat in lieu of Vung Tau.

With a need for both Vietnam and Russia to each contribute $500 million in hard currency, and then together raise the remaining $700 - $800 million (if the project can still be completed for the $1.2 to $1.3 billion still projected), this project is not viewed by the majority as the most realizable.  Neither nation is currently flush with hard currency.

Additional questions of project costing also erode projections of profitability by others who tried and then pulled out of project before Russia came forward. The cost of transporting crude oil 1,200 km from the large southern basin reserves to Dung Quat, and the further transport cost of the refined products north and south to Hanoi and HCMC (800 km and 700 km distant, respectively) appears to put the cost of delivered product above the current market price of imported fuels and lubricants.

The Prime Minister seems undaunted, and said the Government would send a team to inspect the Dung Quat construction site in an attempt to solve problems and speed up work.

Kalyuznyi told the PM that his visit was aimed at gathering firsthand information about the construction of the Dung Quat Oil Refinery and at exploring, in talks with domestic agencies, future co-operation in the energy sector. One area was the possible purchase of coal from Vietnam and co-operation in producing natural gas and electricity.

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Power Plant Problems.   Negotiations on the stalled $120 million dollar Wartsila power plant for BaRia VungTau in the south are to be restarted.  Work on the plant stopped after Finland’s  NSP complained about what it perceived as a lack of access to foreign exchange, weak security for lenders to the venture and unsatisfactory risk  sharing conditions. 

Planned as a Build –Operate –Transfer  (BOT) deal, many have not succeeded making this project’s success all the more important.  The power station,  expected  to have a 120-megawatt  capacity was originally planned to have its start-up in October 1998.

 But, a source close to the case said that Wartsila’s previous agreement with  EVN was not persuasive  enough to tempt more banks into the project   Now “the Vietnamese partner has agreed to some points but another controversy  which is still outstanding is what price  the plan’s power can be sold at’’ he said.

Under current arrangements the power station is to be operated by Wartsila for 20 years before being handed to the state.  It is only during that time that Wartsila is allowed to recover its investment, for by contract, the ownership of the plant is to be transferred with out payment after that time expires. 

Some analysts believe that Vietnam should push ahead implementation of Wartsila, the country’s first power BOT project, if it wants to attract more investment into its power sector. 

According to the Ministry of Industry, there are now seven BOT power  projects with a combined investment capital of $1.5 billion waiting in the pipeline. Players include international heavyweights such as Enron, AES and Marubeni and Mitsubishi. 

The government estimates the national power supply will fall short of demand by 250 megawatts this year. In the next two years, say state power analysts, the annual shortage could climb up to 4,000 megawatts.

Earlier this year an Electricite de France-led consortium won a bid to construct a $400 million power plant in the southern BaRia-VungTau province under BOT terms. It is unclear whether negotiations on building the plant would be concluded by the year-end.

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Multiple worries fog up urban zone investments.  Foreign invested urban district development projects are well and truly stuck in the mire despite total registered capital of over $3.3 billion.

Bureaucratic dragging of feet, doubts over Vietnam’s reciprocal capital, legal questions and, above all, uncertainty as to whether buyers and lessees will be forthcoming, are all waylaying the projects. 

Since the law on foreign investment was promulgated, Vietnam has attracted three large-scale foreign-invested projects to develop new urban districts – Ho Chi Minh City’s An Phu urban project and Hanoi's Northern and Southern Thang Long urban projects. 

The southern Thang Long urban project, while being the first project to begin the first project to begin implementation, is a typical example of the problems faced by urban development projects.  

Licensed from the end of 1996 in cooperation with a Singaporean company with registered capital of $2.1 billion, it has been particularly slow getting off the ground.  Less than $3 million has been spent on the 392 ha site to date. 

So far, on the first assigned land area of 29 ha, investors have drawn up a nine ha plot on which to build an international school with $30 million of capital, financed by the United Nations Development Programmed (UNDP). Another 16 ha have been given over for residential housing construction and the remaining four ha are for road construction.  

However, this plan is still awaiting approval from central authorized bodies. 

Adding to the delay is concern over whether Vietnamese investors can mobilize enough capital for these projects. 

According to the investment license, the Vietnamese partner in the Southern Thang Long urban region project should contribute 30 per cent of legal capital, approximately $168 million.  

One option is to mobilize capital in advance from lessees and buyers of houses, using equity and credit capital. But the key question that remains unanswered is how many people are likely to lease or buy  houses in  this urban region . This is  particularly  pertinent since Hanoians generally prefer living in private houses rather than large communal blocks. 

Investor  have therefore to carefully calculate their investments if they do not want to be left with  constructed  homes without lessees.  Investors have also expressed concern over the legal background of house buying and se selling in new urban areas. 

In an interview with Vietnam Investment Review, one urban development  project expert said only when “house sales mean the transferal  of house ownership right to organizations  and citizen under economic sectors and different nationalities as confirmed by Vietnamese law, will new urban projects be highly feasible.” 

Finally, the biggest question is the potential economic effectiveness and feasibility of the project.  Some experts believe that the development of urban regions depends upon the capacity to do business in these areas.  They emphasized that, if the new projects promise little in the way of economic prospects there is no point in going ahead with them.

Therefore, experts say the state needs to look closer at the potential of the areas and develop relevant policies otherwise investors would be in no hurry to push ahead. 

The Northern Thang Long urban region project, licensed in early 1997, has a registered capital of $236 million and is to be developed in cooperation with a Thai business.  No progress in implementation has been reported as yet. 

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INVESTORS PROMISED ROLLING INCENTIVES     Continuously improving the business environment is not an option, it is a must, Vice Minister of Planning and Investment Lai Quang Thuc strongly restated in a speech to diplomats who represent Vietnam in 30 countries.  They conveyed to Thuc a flood of complaints from foreign businesses, mostly over bureaucracy and fast changing regulations. 

Thuc admitted that there was generally a harassment of foreign businesses here by local authorities, mostly in form of wrongly alleged tax frauds, and an excess of labor, safety, security and hygiene inspections. 

“The problem must be fixed and will be fixed, we are on the way to draft new regulations to issue new incentives to foreigners, so we can compete with other regional players,” Thuc said. 

The emergence of leaner, more competitive rival nations from the Southeast Asian economic crisis has exacerbated the situation, the diplomats say, and Vietnam is now in danger of lagging further behind these countries. 

But promises of reform are no longer sufficient. The investor community has been hearing that story for almost a decade.  As windows of opportunity close, the leadership of Vietnam is being called upon to do much more than pump in stale air.

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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. Our primary sources are: Vietnam Economic Times, Saigon Weekly News, Viet Nam Daily News, Vietnam Investment Review, and Vietnam Business Journal.  * Due to the importance of certain topics of key importance to trade with Vietnam, we will occasionally include some wire and other media reports.

Prior Issues On Line:  No. 1 - November 1997  |  No. 2 - December 1997  |  No. 3 - January 1998 | No.4 - March 1998 | No.5 - April 1998 | No.6 - May 1998 | No.7 - June 1998 | No.8 - Mid-June 1998 | No.9 - July 1998 | No.10 - Mid-July 1998 | No.11 - August 1998  | No. 12 - September 1998 | No. 13 - October 1998 | No. 14 - November 1998 | No. 15 - December 1998 | No. 16 - January 1999  | No. 17 - February 1999 | No. 18 - March 1999 | No. 19 - April 1999 | No. 20 - May 1999 | No. 21 - June 1999 | No. 22 - July 1999 | No. 23 - August 1999 | No. 24 - September 1999 | No 25 - October 1999 | No. 26 - November 1999 |