May 2001 - VVG reports to clients on Vietnamese foreign direct investment.

Issue No. 43
May 2001
Our eighth year in Vietnam & fourth year on the Internet

IN THIS ISSUE
COMMENTARY: Rev Up Both the Economy and the Reform Process
Even with modest change great ideas can be born. Having passed up its few windows of opportunity, the time now is to ensure that doors are not closed, or locked, to keep Vietnam distant from expected regional growth. See our commentary (linked above) and our dispatches (linked below).
Motorbike Helmet Safety Law Itself Dies New Domestic Tax Table - small relief* Moody's Revises Rating Upwards* Delay in Trade Deal Strains Relations* Conoco Expands Production	$2 Billion in Real Property Projects Delayed* Foreign Currency Reserves Up and Showing* Ranking Order of New Leaders No Sweeping Changes To Follow

The International Monetary Fund estimates that inflation-adjusted growth perked up to 5.5% last year from 4.2% in 1999. But the IMF estimates expansion won't exceed 5% this year, well short of the government's target of 7% annual growth over the next decade.

The Asian Development Bank estimates that Vietnam's economy will expand 6.4% this year and 6.9% in 2002, up from 6.1% in 2000, according to the Asian Development Outlook published last week. It said the growth would be based on increased manufacturing output which is expected to expand around 9% each year in 2001 and 2002. However, the same report said it expects Hanoi to have a fiscal deficit of 5% of GDP in 2002, from a projected deficit 3.9% this year as spending demands rise.

The prospect of higher exports to the U.S. could stimulate growth if a bilateral deal signed last July is ratified soon. However, structural constraints and quality problems in the export sector need to be addressed to realize the potential of this agreement.

The ADB report said Vietnam's image as a foreign investment destination remains weak because of a "perception that high levels of protection make the cost of doing business...high." In the changing regional environment, the (Vietnamese) economy risks being left behind," it noted. Now read the full article.

MOTORBIKE HELMET SAFETY LAW - Itself Dies A Rapid and Expected Death. VVG has been following highway safety with particular regard to the use (or non-use) of motorbike safety helmets for many years. See Anh's Law for the full story.

Vietnam's government has reportedly bowed to public pressure and agreed to indefinitely postpone a plan to fine motorcyclists who don't wear helmets. This is the fourth time the government has tried but failed to enforce a motorcycle helmet law.

Vietnam's chaotic streets are crowded with millions of motorbikes which have become the country's chief means of transport, and accidents have risen sharply. In response, the government decided to begin fining violators of the helmet law 20,000 dong ($1=VND14,580) beginning June 1, 2001.

But many people complained that wearing helmets was uncomfortable in Vietnam's heat and humidity, and said it would be impractical for hundreds of people to carry helmets into movie theaters, restaurants or wedding receptions. No one seems to realize that Thailand has the same hot weather and there all bikers on the urban highways wear helmets.

There is a social difference. In Vietnam people of the highest business, political, and social order ride motorbikes. In Thailand they highest order of people NEVER ride on a motorbike which is the transportation of choice only for unskilled labor.

The helmet debate in Vietnam was covered extensively in the state-controlled media, which quoted some citizens as saying that Vietnam would look like it had been invaded by thousands of spacemen if everyone were forced to wear a helmet.

It is reported that under a new proposal, fines will be imposed only on motorcyclists traveling without helmets on highways, while those in cities will only be encouraged to wear protective headgear.

Vietnam has 7 million motorbikes for a population of 78 million people. About half of the motorbikes are in Hanoi and in southern Ho Chi Minh City.

There were 23,327 traffic accidents in Vietnam last year which killed 7,927 people and injured 25,693 others, according to the National Committee for Traffic Safety. From our experience, this number is vastly understated.

However, even as understated, the number of reported accidents rose 8.3% over the previous year, while the number of fatalities increased 11.7%. Well over half, or 64.5% of the accidents involved motorcycles, the committee said.

It is reported that Vietnam's Communist government has had to modify or withdraw decisions on a number of occasions because of popular opposition. This seems to point out that decision making is far from monolithic but remains by consensus, even on everyday issues of public safety and well being.

Last year, the Ministry of Trade imposed a customs inspection fee but abolished it four months later after companies protested it was too high and refused to pay.

Widespread opposition to low payments from the government for land seized for infrastructure projects has delayed many projects.

"We have completed our proposal and hope that the (government's lawmaking) National Assembly will consider it soon," said the Income Tax Section official.

The National Assembly due to convene later this month may consider this in its first of two annual meetings. As reported, lawmakers will meet for around one month to discuss various issues, including four new laws - on fire prevention, cultural heritage, customs issues and transportation - and the amendment of existing laws that deal with land regulations and criminal litigation.

The new tax proposal is based on one made last November, which pushed minimum taxable monthly income to VND2.5 million from VND2 million. The proposal raises that level even higher, to VND3.0 million.

No reason was given for the alteration to the November proposal, and no timetable was given for its implementation, if lawmakers pass the move.

The GDT, which operates under the Finance Ministry, has proposed that Hanoi's 60% tax rate be canceled, leaving 50% as the country's highest income tax bracket.

(These tax rates apply to Vietnamese citizens only, as foreigners working in Vietnam are subject to different taxes. All figures are in dong):

HANOI, May 3 (Reuters) - Vietnam said on Thursday the revision of the country's credit ratings by Moody's Investors Service last month to stable from negative was more objective and would bring benefits for Vietnamese companies.

Foreign Ministry's spokeswoman Phan Thuy Thanh said in a written statement "The more objective outlook by Moody's in Vietnam's credit rating would partially create favorable conditions for Vietnamese enterprises when they have sufficient conditions to issue bonds overseas."

Petrovietnam has been considering a plan drafted by a U.S. investment bank, Morgan Stanley Dean Witter, to issue bonds in the United States. In March a Petrovietnam official said the plan was part of a pre-feasibility study and had not been approved. In the recent statement, no timeframe for the issue was given.

Moody's last month action applies to Vietnam's B1 foreign-currency country ceiling for bonds and notes and B3 foreign-currency country ceiling for bank deposits.

"The outlook change was prompted by a renewal commitment by the government to advance structural reform beyond a point that was previously considered politically unacceptable," Moody's said in a news release.

It said reform measures focused on the financial sector, state enterprises and the external trade regime have reactivated support from the World Bank and the IMF.

The future of Vietnam's rating will depend on what Moody's called "the development of a credit culture," increased transparency in government policy and financial disclosure and the effective implementation of structural reforms.

Last April, Moody's said in its 2000 annual report that Vietnam's outlook was negative because the country lacked progress in the reform of its state, banking and trade sectors.

Communist Vietnam rejected that report, saying the rating agency was not objective and failed to understand the country's economic situation.

[ VVG Note: We recall all to well October 1999 when the former Politburo, some of whose members remain at the helm of Vietnam's leadership today, had little concern for trade issues when they revoked the authority of Prime Minister Khai to ink the BTA with President Clinton in Auckland, New Zealand. That unilateral and completely unnecessary act delayed the BTA for what may have been nine crucial months.]

[Many then cautioned the leaders to not miss the narrow window of opportunity that would close when the regional neighbors recovered. We also cautioned that no one could tell what the next US administration would do if the BTA were not completed in the Clinton years. While we have sympathy for the people of Vietnam should BTA be further delayed, we again urge the factors in Vietnam with a clear vision of the benefits to be gained to not allow the same conservative forces and voices to be heard as came forward in October 1999. If fingers are to be wagged, they should be wagged in all appropriate directions. It must be kept in mind that the BTA may bring some emotional relief but will bring little economic benefit to America. The largest benefits will flow to the people of Vietnam. Please pay attention, leaders of Vietnam, that wagging fingers can be lost. If you trim those of others, you may ultimately be severing more of your own needs than just your wagging fingers.]

By Rajiv Chandrasekaran, Washington Post Foreign Service
Sunday, April 29, 2001; Page A22
© 2001 The Washington Post Company

HANOI -- Several recent U.S. decisions, particularly on a historic trade agreement, have led to an unusual flurry of criticism from top Vietnamese officials, raising concerns the U.S.-Vietnamese relationship will backslide after years of progress in healing wartime wounds.

Vietnamese officials have bristled at what they perceive as foot-dragging by the Bush administration in winning approval for the trade pact, which was signed last summer and has been hailed as the greatest step toward building a normal relationship between the two countries. Vietnam's trade minister has warned that if Washington does not approve the agreement soon, Hanoi will consider revoking the preferential trading status that it has given the United States.

Government leaders also have expressed displeasure at the lack of White House support for $750 million in new loans from the World Bank and the International Monetary Fund, as well as the administration's decision to grant asylum to at least 38 Vietnamese farmers. The asylum-seekers, from the dissident Montagnard ethnic group, had fled into Cambodia after a government crackdown in the wake of riots protesting land rights policies and a lack of religious freedom in Vietnam's central highlands.

During breaks at the Communist Party's recent congress, senior government leaders took the unusual step of speaking with reporters to lash out at the United States for what they called "interference" and "intervention" in Vietnam's domestic affairs.

"On human rights and ethnic issues, the two sides are divergent at the moment," Foreign Minister Nguyen Dy Nien said. "We hope these issues will not affect state-to-state relations, especially after the two sides have made important steps to normalize relations."

During the Clinton administration, the two former enemies embarked on a far-reaching rapprochement. In 1994, the U.S. government lifted its trade embargo, and the following year the countries restored diplomatic relations.

Last year, it was difficult to tell that they had ever been adversaries. The trade agreement was signed in a ceremony in the Rose Garden and a U.S. military airplane carrying relief supplies to flood victims in the Mekong Delta touched down in Vietnam for the first time in a quarter-century. In November, President Bill Clinton was cheered by huge crowds on a visit during which he pledged to "open a new chapter" in the relationship between the United States and Vietnam.

U.S. officials said President Bush's foreign policy team does not intend to fundamentally reshape the approach toward Vietnam, but they said the new administration intends to place greater emphasis on religious freedom and human rights issues, which some said the Clinton administration subordinated in promoting economic ties.

Religious and human rights groups have actively lobbied the U.S. government to take a tough stance with Hanoi, arguing that the Communist government still enforces stiff restrictions on worship and free expression. The U.S. Commission on International Religious Freedom, an advisory body to Congress, recently urged the administration not to back the World Bank and IMF loans. The U.S. government subsequently abstained in the vote to approve the IMF funds, and officials say they expect it to do the same for the World Bank money.

Some Western diplomats and business executives in Hanoi, however, say they believe the new U.S. strategy could backfire, making it more difficult for moderates within the Vietnamese government, including the newly installed Communist Party chief, to win support for economic and political reforms.

Western business executives here say the delay in approving the trade agreement could undercut the legitimacy of reform-minded officials who have fought a bruising internal battle over the past few years to win support for the deal. "The reformers have put themselves on the line and now the Bush administration is dropping the ball big-time on them," said Fred Burke, a partner with the law firm Baker & McKenzie, who practices in Vietnam.

Vietnamese government officials and business executives from both countries had expected Congress to approve the trade deal, which has bipartisan support, this spring. But the new U.S. trade representative, Robert B. Zoellick, has insisted on bundling the agreement with two other measures, a free-trade deal with Jordan and "fast track" authority for the president to negotiate future deals.

Advocates of the Vietnam deal worry that that linkage could delay or prevent its passage. They also fear that some legislators will seek to include environmental and labor issues that could require reopening negotiations with Vietnam.

"Linkage is a very bad way to deal with our country," said Vietnamese Trade Minister Vu Khoan. It "is not the best way to expand our cooperation."

The agreement with Vietnam, which was negotiated over four years, would gradually permit unfettered commerce between the countries for the first time since the war. It would allow Vietnam to export clothing, shoes, toys and a host of other products to the United States on the same low-tariff terms granted to most other countries in exchange for allowing foreign firms to participate in key business sectors, including telecommunications and banking.

The U.S. ambassador to Vietnam, Douglas "Pete" Peterson, has urged the White House to unlink the agreement and push it through Congress. He said the trade deal represents not just economic cooperation but "a symbol of the maturity of our relationship."

CONOCO EXPANDS PRODUCTION - Conoco announced the successful completion of development well 15P in Block 15-2 offshore Vietnam. The well has increased production in the Rang Dong field from approximately 45,000 to 55,000 barrels of oil per day (bopd), representing a new production milestone for the field.

The well is expected to ultimately produce 10,000 to 12,000 bopd, increasing total field production to more than 55,000 bopd.

Block 15-2 is in 165 feet (50 meters) of water in the Cuu Long Basin, approximately 120 miles (180 kilometers) southeast of Ho Chi Minh City. The block covers 400,000 acres (1,615 square kilometers) and is in close proximity to the Bach Ho and Ruby fields.

Conoco holds a working interest of 36 percent in Block 15-2. Other partners are Japan Vietnam Petroleum Co Ltd. (46.5 percent, operator) and PetroVietnam (17.5 percent). In neighboring Block 15-1, Conoco and its partners have completed their first appraisal well on the Sutu Den discovery made last year. An extended well test is being conducted.

Vietnam's crude oil exports reached a milestone in April when they reached 100 million tons (745 million barrels). Annual production is valued at US$15 billion.

Conoco is the largest acreage holder of any foreign energy company in Vietnam, with interests in five offshore blocks totaling more than 5.75 million acres (23,285 square kilometers). Since 1996, Conoco has invested more than $200 million in Vietnam's prolific oil and gas industry, and plans to invest an additional $500 million over the next several years as part of an aggressive development plan for the region.

Four projects with investments of $619 million which were under construction have been postponed, along with seven other projects with planned investments of $288 million for which sites have been cleared but construction hasn't yet begun, the official said.

Owners of 17 other real estate projects capitalized at $709 million have suspended operations and switched to other purposes, the official at the city's Planning and Investment Department said.

She said 11 other real estate projects with planned investments of $451 million have been licensed, but construction hasn't started.

The official cited two reasons for the postponement or cancellation of the foreign-invested real estate projects. Most investors in real estate projects in Ho Chi Minh City are from Asian countries which suffered from the region's 1997 economic crisis, affecting their investment in Vietnam, she said.

Second, the city is suffering from an oversupply of hotels, office buildings and apartments and investors are therefore unwilling to proceed with construction, she added.

Vietnam has approved 2,725 foreign projects, with a total investment capital of $36.5 billion since the first project was licensed in 1988.

Ho Chi Minh City ranks top in attracting foreign investment, with $9.8 billion in 934 projects.

The official said the city government is considering withdrawing licenses from projects which haven't begun construction despite long delays.

Vietnam has issued a regulation which from May 2001 will cut the amount of foreign exchange that foreign companies must convert to dong to 40% of total earnings from the previous 50%, Dow Jones Newswires report.

An official with the bank's Foreign Exchange Management Department, said the new decision was signed in late April and will take effect on May 11, 2001.

He noted that local companies with hard-currency earnings will also benefit from the new rule.

In the late 1990s, Hanoi introduced a rule that forced all hard currency-earning companies to convert 80% of those earnings in to the local unit to help bolster Vietnam's foreign exchange reserves, which were dangerously low at the time.

It later cut the amount that must be converted to 50%, but corporate executives said the figure was still too high. They noted that the conversion rule restricted their ability to do business and, for foreign companies, sometimes made it hard to repatriate profits.

The dong is non convertible, meaning it can not be taken offshore and exchanged for other currencies.

This week's move is a fresh sign that Hanoi is trying to improve its investment environment and attract more overseas firms to bring money in to the country.

It is also a sign that it is increasingly confident about the security of hard currency reserves, which the Asian Development Bank last week said was around $3.9 billion at the end of 2000.

Vietnam doesn't publish foreign reserve figures, but analysts have said they likely fell to just a few hundred thousand dollars in 1999, or just three to four weeks of import cover.

RANKING OF NEW LEADERS - Listing of names in official documents and State publications is often the only manner in which those outside the selection process can tell the level of importance in these matters. Here is the list of the new members of the smaller sized, younger, and better educated Politburo as published by the Vietnam Investment Review, an organ of the Ministry of Planning and Investment.

Important progressives favoring better opportunities for foreign direct investment in Vietnam who continue at their posts in the Politburo are: New Chairman Nong Duc Manh, 60; President Tran Duc Luong (63); Prime Minister Phan Van Khai (67); Deputy Prime Minister, Nguyen Tan Dung (61); Party Commission For Economic Affairs head, Truong Tan Sang (62); Hanoi Party Secretary, Nguyen Phu Trong; and Ho Chi Minh City Party Secretary, Nguyen Minh Triet

It is interesting to see that the ranking order for the first time is not dominated by those who are often identified with conservative forces consisting of State Security (formerly Interior), Defense, Culture, and Communist Party planning.

This then is the line-up of the New Politburo, where # designates a new member to the smaller body and * designates a younger member earlier identified as a rising star in this body. Ages are provided where previously disclosed in other publications:

Dung was five years before a Deputy Minister of the Interior, for the past five years has held ever increasingly important positions as a leading progressive, and managed to more than survive his loss of control of the State Bank.

Sang was formerly HCMC People's Committee Chair, the became HCMC Party Secretary and from there was elevated to the Politburo. While his ranking and public posture has not been as dramatic as has Dung's, he remains a powerful and progressive voice in the Nation.

Vietnam's administrative Party Central Committee membership has been reduced to150 from 170.

When they retired in 1996, three of Vietnam's elder statesmen, Do Muoi (former Party Secretary), Le Duc Anh (former President) and Vo Van Kiet (former Prime Minister), were given official posts as party advisors. These posts have now been removed. It is not clear if the three still remain on the Central Committee, but it is clear that the most recent former Party Secretary Phieu is not. This seems to be a complete repudiation of his five year term during which Vietnam could have gained but in fact lost much ground in the all important struggle to achieve economic power in the region and the world.

NO SWEEPING CHANGES ANTICIPATED. With the Ninth Party Congress concluded and the need still for the further rubber stamp of the National Assembly to approve changes, word from all reliable sources is that foreign direct investors should not expect any major changes.

With the retirement of the former leadership, one can only hope that the new leaders will at least not try to lecture the leaders of the free world on the benefits of Marxism-Leninism that has fallen in such disrepute in the world, and remains in Vietnam more as an instrument of control than a working ideology.

However, the leadership in control, those at the Politburo and the revived Secretariat, are not prepared to make dramatic moves away from "market-oriented Socialism in the Vietnamese-style." The political changes just announced came with a price that can only be guessed at. The need to retain stability is the most probable reason for the absence of any sweeping changes.

While the US President now controls if and when the BTA will be ratified, some pessimists say it can take up to two more years as Bush may elect to try to swing his entire trade policy at one time. Manh's leadership is expected as a positive sign to the US on both business and non-business oriented issues, and may help the supporters of the BTA move Bush forward, faster.

Financial reports indicate that Vietnam may be well poised to move beyond stagnation and into the world's financial markets. See the May 2001 issue of Economics Indicators.

Recent negative USA reports in the domestic press are now being attributed to the former Secretary and not operative. Time will tell.

The leadership of Manh is not expected to block development in Vietnam as did that of his two previous predecessors. Dramatic changes are also not likely. A man who allows rumors to persist that he may be the illegitimate son of the much beloved national founding father is not likely a man who is expected to act boldly to change policy.

It is well known that Ho Chi Minh lived the life of an esthete who never married, was rarely if ever pictured (or known to associate) with women, and who openly lived unencumbered by physical possession and possibly even close friends.

In a recent news report distributed in Asia, Manh reportedly dispelled his parentage rumors when he said that both his parents died while he was young and that both are buried in his home village, where he paid them tribute over the Tet Holiday this past February. Ho Chi Minh is entombed in a mausoleum in Central Hanoi. He concluded his comments by saying that all Vietnamese are children of "Uncle Ho."

Current Tax Rates	Proposed New Rates
Monthly Income Tax	Monthly Income Tax
Up to VND3 Mln 0%	Up to VND2 Mln 0%
VND2-3 Mln 10%	VND3-6 Mln 10%
VND3-4 Mln 20%	VND6-9 Mln 20%
VND4-6 Mln 30%	VND9-12 Mln 30%
VND6-8 Mln 40%	VND12-15 Mln 40%
VND8-10 Mln 50%	Above VND15 Mil 50%
Over VND10 Mln 60%	--------