May 2000 - VVG reports to clients on Vietnamese foreign direct investment.

IN THIS ISSUE
COMMENTARY: Pity Other Poor Nations, but not Vietnam
The leadership of Vietnam stares in the face of reality and seems to choose a wait-and- see attitude while most other nations, many with less ability than Vietnam, march forward to seize true economic independence. Blessed with the best labor force in the region and some of the best natural resources, the economic success of Vietnam can be assured but only if the leadership moves in that direction. See our commentary (linked above) and our dispatches (linked below).
Daewoo Auto Plant - Fully Foreign Owned? ODA Disbursements Still Lag Revenue Disruption is Inevitable Internet In Vietnam - Where is it?	Vietnam Trade Ties: US and Cuba Rice Exports - Vietnam Catching Thailand Dalat-Dankia Resort Again On Hold Furama Resort in DaNang To Expand

Pity the poor nations of the world* (those with per capita incomes of about $300) that are not able to grow their economies to support their people, much less meet the aspirations of the nation. Due to a lack of natural resources, and a shortage of literate people, they suffer as the whims of Mother Nature and the generosity of donor nations allow.

Vietnam is clearly in the list of poor nations, but the leadership asks for patience, not pity, as it tries to grow its own economy. However, Vietnam, unlike other poor nations, has no shortage of natural resources. In fact, there is such an abundance that Vietnam is the world’s third leading exporter of rice, and a small but consistent producer of crude oil that provides almost 1/3 of the nation’s annual total income.

We have often written that the greatest strength of Vietnam is its people. Literate, hard working, loyal, with proper supervision and training there is no skill that they cannot master.

In many ways, the potential of Vietnam can only be contrasted with sleepy Laos, restive Cambodia, and wayward Burma. Almost no comparison can be made between the opportunities of the starving nations of Africa and the inertia of Vietnam, other than their per capita income.

The Asian Development Bank predicts that the regional economy should expand by about 6.2 per cent this year, outpacing growth in the rest of the world for a second year running. However, Vietnam is among the nations holding down overall regional growth, not increasing it.

Why do most forecasts predict that year 2000 will be the absolute worst economic year in Vietnam since 1990?

“The outlook for the Socialist Republic of Vietnam's B1 rating is negative as a result of Vietnam's lack of progress in advancing structural reforms aimed at reinvigorating the financial sector, state enterprises, and the Republic's external trade regime, says Moody's Investors Service in its annual report on Vietnam.

“ ‘Incomplete reform heightens risks to the strength of Vietnam's balance of payments, the medium-term performance of its economy, and the durability of the country's past accomplishments in structural reform,’ says Thomas J. Byrne, a VP/Senior Analyst with Moody's and author of the report. For example, ‘the hesitance to allow further foreign participation in the economy has deprived Vietnam of much of its recent dynamism,’ says Byrne. ‘The authorities seem to have concluded that a more rapid pace of liberalization is a recipe for instability.’ However, ‘choosing short-term stasis and economic inefficiency will likely produce the socioeconomic problems these policies are intended to prevent.’ "

In the face of regional growth, a potentially weakened resolve by Thailand, Malaysia, South Korea, and Indonesia to complete the reforms needed in financial and commercial restructuring can cause their new growth to slowdown once more, and thus jeopardize their own futures.

Vietnam of course is not even considered in this analysis. Yet the leadership of Vietnam shows the same weakened resolve to actually start, much less complete, the necessary reforms. Instead, Vietnam promotes and propagandizes reform as a goal.

" ‘The Vietnamese government is continuing to promote economic reform and set out economic solutions to develop the country's economy,’ the foreign ministry said in response to Moody's criticism of its lack of progress in advancing reforms.

" ‘In 1999, 370 state-owned enterprises were equitized and in the coming time Vietnam will complete the policy of equitization in accordance with the enterprise law," the ministry said. [What is not mentioned is that these are among the weakest of the 6,000 companies. All of Vietnam’s leaders know that equitization without true reform is not a formula for success.]

“Cuts in duties and preferential credits to exporters had boosted exports to 2.39 billion dollars in the first quarter, an increase of 33 percent on the previous year, the ministry said. [Not mentioned here is the often acknowledged slowdown in manufacturing and the near disappearance in the growth of new industrial output. There is no secret that real growth is thus jeopardized.]

“It strongly denied Moody's charge that the government was hesitating in allowing further foreign participation in the economy. [No comment needed.]

“In 1999 the government licensed 275 new joint ventures with foreign firms, with a total registered capital of 1.74 billion, it said. [However, real investment - steel in the ground - was at most only $600 million, down from over $2 billion only two years before.]

“And at its next session in May, parliament was due to consider a bill to further stimulate foreign investment, it added.”

Bills, intentions and policies will not grow an economy. No matter how often the State’s Information machine publishes good intentions, investors have no need to be in Vietnam. For the past two years, investors have been showing their backs to Vietnam in favor of other nations.

Vietnam needs to change its policies and practices at the local, and not merely the central, level. Then, there is a need for the leadership to capture NTR with the US by signing the bilateral trade agreement. There is no better way to encourage foreign investors to build new factories for export sales to the largest market in the world, and flood Vietnam with hard currency.

We believe Vietnam will change. The pragmatic people of Vietnam have always been flexible to change that benefits the nation. There may be potentially greater markets than the US, but we doubt that Vietnam is waiting to capitalize on the Chinese markets 20+ years down the road, as are the US and the EU nations.

The only chance remaining for Vietnam to utilize its full potential in the near term is for the leadership to make the necessary further changes at the Ninth Party Congress in the spring of 2001. This process began in 1986 and the world saw what Vietnam might have done.

Now is the time for Vietnam to insure that the BTA with the US is signed so that it can be enacted by Congress before for the Ninth Party Congress begins. Should that happen, we predict that the year 2001-2002 will show the real potential of Vietnam’s economic might.

From The Wall Street Journal by Greg Rushford, the editor and publisher of the Rushford Report, a Washington-based newsletter on trade politics:

“The bottom line: Vietnam will never defeat poverty as long as its economic system stifles the creative energies of its citizens. Investors will return only when the government demonstrates the necessary seriousness of purpose to convince prudent executives to put their money at risk. If its economic fundamentals were put on a sound footing, this country would quickly get rich. This is because Vietnam's greatest natural resource is its people, who are blessed in energy, intelligence, and possess a proud culture.”

First Fully Foreign Owned Auto Plant. Daewoo received the Prime Minister’s approval to buy out its 35% minority partner, State-owned Mechanical 7983 Company under the Defense Ministry in the $32 million venture called VIDAMCO.

Under the buyout arrangement that received the Prime Minister's approval, the Daewoo was to bear the accumulated losses of around $7 million and pay the local partner $2 million for its 30% stake in the project.

However, Daewoo in Seoul is now undergoing merger discussions with the US General Motors that elected to take no stake in Vietnam's crowded market. In a letter to the General Administration of Economy and Technology who manages the local partner, Daewoo Motors - Vietnam reportedly said that its parent company in South Korea had refused to allow the buyout to go ahead.

With 14 automobile plants licensed and 11 now in production, demand is low enough that any one plant in full production would meet or exceed the nation’s full need for domestically produced new cars and trucks. All eleven plants together reportedly sold only 6,882 units in 1999, up from 1998 sales of 4,971. Ford ,with a plant capacity of 14, 000 vehicles per year sold 400 vehicles in1999.

It is not expected that GM will lightly want to rush into this market for domestic sales alone.

ODA Disbursements Still Lag. As new funds granted become slower, the need to utilize past grants before they expire becomes critical. While Vietnam claims that it can meet 70% of the annual disbursement target rate, that rate is considerably less then the total funds available.

As foreign investments dry up, it becomes more distressing for the State to witness the evaporation of ODA funding as well. As new commitments for the use of funds increase, the lending pipeline is shrinking. While the level of disbursements is increasing, it is still far short of Vietnam’s potential according to the World Bank’s Paul Stott.

Reasons given have not changed in almost a decade: the lack of capacity for Vietnam to absorb the funds and number of different donor procedures to understand. Translated to real economics, domestic red tape needed to qualify for donor funds is exceeded only by Vietnam’s continuing inability or refusal to meet donor auditing requirements to insure the funds are not sent to the private accounts of domestic bureaucrats.

The foreign investor community sees ODA funding as strong competition for private investment. There are no tears shed by the FDI community to see this source of cheap funding dry up. That is all the more reason the leadership should implement policy changes at all levels, and not merely talk about policy changes.

Revenue Disruption Is Inevitable. The failure of the system to adjust to current needs will cause a natural continuation of decline in Vietnam that is the clarion call for either further, drastic reform, or taking comfort in sliding quickly back to the economic ills as they existed in the late 1980s.

The pace of new development is so very slow that the nation’s media have stopped publishing monthly growth figures.

The main problem limiting the effectiveness of newly enacted policies such as Decision 53 is the lower and local level authorities have not abided by the rulings. The scrapping of duel pricing has been ineffective, but that is only window-dressing. Drawing and implementing new banking regulations, eliminating “nannyism” in all forms of government oversight of business, and the elimination of corruption will help.

Opening Vietnam’s doors to Foreign Direct Investment (FDI), even with a Bilateral Trade Agreement (BTA) with the USA will help. However, the failure to match that opportunity with true market and government reforms will cause that effort to be equally ineffective to the bottom line as have been the procedures in the past.

Internet Subscribers in Vietnam - There are reportedly 2,729,651 telephones in Vietnam, or about 3.5 phone lines for every 100 of the 78 million people. (Saigon Times Weekly).

These numbers are encouraging only when one looks back 6 years to a time when there were few private homes with telephones, and business had to pay hundreds of dollars in bribes in addition to almost $1,000 to merely wait months for a new phone line.

In 1994 there were approximately 2,000 personal computers in the entire country, and no Internet connection available, other than by making an overseas call.

The Internet came to Vietnam in 1997. Since then, Internet subscribers have “grown” to almost 60,000 in number, according to the General Department of Post. The four major Internet service providers (ISP) are VNN, FPT, Saigon Net and Netnam. Of the ISPs, VNN takes 65% of the market share, and FPT - 30%. HCM City has the most subscribers with 40,000. On average, there are 5.7 Internet users to every 1,000 people in the city.

In terms of penetration of the Internet to the general population, Vietnam can only be contrasted to other area nations. China with 1.2 billion people reports 15.8 million Internet subscribers (1.3% of the population) while Vietnam has only 0.076% of its population signed on. The ratio is far more distressing when similar comparisons are made with neighbors Indonesia, Malaysia, the Philippines, and Thailand.

There are no figures available for wayward Burma, sleepy Laos, or volatile Cambodia, the nations now most often compared to Vietnam for their inertia.

However, the costs for Internet connections in the region as a whole are still intentionally high due to the lack of real competition. All of Asia suffers from telephone monopolies that cause an artificial increase in the cost of the Internet.

That makes the disparity even greater between Vietnam and the wealthy nations. State owned VNN, a subsidiary of the General Department of Post, is the only company with direct access to the Internet. VNN leases access lines to the other ISPs at rates that deny any price-cutting.

The Internet cost in Vietnam can exceed $100 per month for daily use of only a few hours, where in the wealthy nations, Internet use is unlimited for a fee from $10 to $30 per month.

Looking for a cyber café is no longer a problem in Hanoi or HCMC, although they are far more prevalent in the southern city. However, the costs are nearly double to rent time in a café over the at home cost that is already too high to allow greater penetration of the Internet to the general population. And if price is not a barrier, the low band width and the many firewalls erected by the State are further blocks to Vietnam's entering the 21st Century Information Age.

Vietnam Trade Ties: United States - It is a comfort to some that trade between America and Vietnam has been increasing since February 1994 with the lifting of the trade embargo.

It is reported by the Ministry of Trade that Vietnam exported just over $500 million worth of goods to the US last year, while imports from the States were about $330 million.

However, that is barely a two fold increase from the fist year of trade in 1995, and down considerably from forecasts in both the US and Vietnam at the time the embargo was lifted.

Worse, it is conservatively estimated by Vietnam that sales into the US will amount to an additional $800 million once the Bilateral Trade Agreement (BTA) with America is signed and enacted by both lands. Currently, Vietnam is still backing away from the agreement it inked in 1999 and now seeks to “talk some more.”

Absent the BTA, Vietnam will only flounder, or even sink, as its regional competitors correct their own poor economic practices and soon begin to roar. Their tiger economies are soon expected to return to lead the world’s economies in growth. One can only wonder where Vietnam will be, and where does its leadership really want it to go?

Vietnam's exports were mainly agricultural products and crude materials. Seafood ranked top with a turnover of $125.59 million: following was crude oil, $99.6 million; coffee, $59.21 million; garments and textiles, $34.7 million; rice, $4.95 million, and fruit and vegetables, $3.2 million.

The US sold mainly chemicals, equipment and electrical products to Vietnam. Its machinery sales totaled $88.55 million, fertilizers, $39.17 million, electrical products, $13.44 million, cars, $2.26 million, and cotton, $1.35 million.

However, none dispute that with NTR (normal trade relations) established with America, and internal reforms to allow foreign investors to earn profits and avoid corruption still so prevalent in Vietnam today, the increased sales to the US will be many multiples of $800 million, while the US will export few materials that Vietnam will soon be able to afford.

With the BTA and NTR, we expect to see all lines of the manufacturing sector to dominate sales to the US

The US is Vietnam's sixth largest export market, but Vietnam ranks only 71st in US's trade partner list. Vietnamese commodities account for just 0.05% of US imports.

Vietnam Trade Ties: Cuba - Cuba will take part in providing physical training and sports services to, and buying rice from, Vietnam. Additionally, there are clauses for economic and scientific-technological cooperation, and the involvement of Cuba in the construction of the Ho Chi Minh (new north-south 2,000 km) Highway. While no further details have been made available, the published facts seem to exceed the FDI community’s need to know. However, it is reported that two-way trade between the two nations remain “below potential due to the large distance between the two countries.”

*Rice - Vietnam’s Challenge to Thailand - Vietnam, already a larger producer of rice paddy than Thailand (1999 production 30 million tonnes vs. 21 million) is poised to outdistance Thailand in the tonnes of rice exported.

While Vietnam has a larger at-home population to feed (79 million vs. 68 million), Vietnam has been known as the rice basket of Asia for decades due to its ability to grow three crops per year.

Vietnam’s growing export potential is a double-edged sword. The international prestige at having transformed this industry in less than 10 years from a net importer to the world’s 2^nd or 3^rd largest exporter is balanced by a prospective drop in world price achieved due to the greater quantities available from Vietnam.

Price wars have only just begun. Where Thailand sought $200 per tonne for 15% rice sold to both Indonesia and the Philippines, Vietnam is reportedly quoting US$30-$40 less. While some say there is no difference in quality, Thai authorities cite their on-time delivery record as superior.

Vietnam shipped 4.56 million tonnes in 1999, up from barely 100,000 tonnes in the late 1980s. The leading destinations are Asia and Africa. The reasons for this dramatic growth are directly tied to Vietnam’s opening to a free-market economy, incentives paid to producers, and a long-standing irrigation system that allows three crops per year.

In the same period, Thailand shipped 6.675 million tonnes. Thai authorities claim the reason Vietnam is fast approaching Thailand in export numbers is both the need for Thai farmers to work in other areas (“we don’t have all day to spend on rice”) and the absence of any comparable irrigation system that restricts Thai production to one crop per year.

However, where Vietnam’s annual paddy output is greater than 3.75 tonnes/ha vs. Thailand’s 2.5 tonnes/ha, Thailand’s advantages include (i) new varieties that will produce up to 6.25 tonnes/ha and (ii) a more desired, aromatic rice.

While the US remains the world leading producer and exporter of rice, most domestic consumption is for animal husbandry. The US home consumer rice market is still wide open to better and more aromatic rice at competitive prices. Last year’s exports from Vietnam and Thailand to the US were 233,000 tonnes and 318,000 tonnes, respectively. (The foregoing comes from several sources, including The Bangkok Post)

Both Vietnamese media and sources report that that Thailand recently suggested the establishment of a joint Thai-Viet company to manage exports and prevent rice dumping. While this has not yet been reported in the Thai press, Vietnamese sources say the government has agreed to study the proposal.

Dalat-Dankia Resort On Hold. While it was hoped in 1999 that funds would soon be available for the $706 million resort complex in Dalat, the Singaporean Joint Venture between LKN Management Services Pte., Natsteel Ltd. and Leisure Industries (foreign investors), and Dalat Tourism, will not soon see new funding.

First licensed in the closing days of 1998 and seen to boost the total FDI for that year (along with an equally unrealized project in Hanoi at the same level), the project has not been able to excite the foreign investor community. While the level of tourism is reportedly increasing to 1.7 million I 1999 (a 14% increase over 1998), most hotels have slashed prices to as low as 25% of their listed rack rates.

Overall average occupancy hovers at less than 30 per cent. Some hotels have opened only 40% of their rooms while others have closed entire floors.

Furama In DaNang to Expand. Belying the current down turn in hotel operations, the Five Star Furama Resort announced plans to invest an additional $30 million and build out its second phase 200-room addition.

In spite of local reports of “a very quiet hotel with near empty facilities,” management claims the expansion is justified due to the Resort’s enjoying an average occupancy rate of 60-70 per cent, or more than double the inflated national average.

Most of the new tourists reportedly making their way to remote DaNang (500 km north of Saigon; 700 km south of Hanoi) will come from Star Cruise Line's plans to carry 2,000 to 2,800 passengers a week there.

Hong Kong based Lai Sun and DaNang Province have signed an agreement to develop a further 40 ha tract adjacent to the existing resort grounds. In two sub-phases, planned for completion in May 2001 are a bare-foot bar, a beach restaurant, badminton courts, and shops.

This sub-phase will be helped by the expected sea-passage traffic, most of which will have special low-cost visas allowing entry but not over night stays in Vietnam.

The next sub-phase is then planned to start building the additional 200 rooms. Subsequent phases planned are an 18-hole golf course with clubhouse and guest rooms.

	1996	1997	1998	1999	2000 (1^st Q.)
New licensed- registered capital	8.5	4.5	3.7	1.9	0.1
FDI realized capital	2.6	2.9	2.1	1.9	0.6
Revenue	2.7	0.1	3.9	4.2	1.5