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Issue No. 6
May 1998

A Periodic Report to Our Clients

Current Dispatches

IMF Rates the Region.   Pay Attention: "Fire sales" in the region may be more apparent than real.

It is no surprise that the IMF and regional nations do not always agree.   More conservative and with a wider audience, the IMF has not always been correct. However, to err on the side of caution during a crisis may be more important for the IMF than for the local nations that seek to boost both foreign investments and spirits.

However, the IMF is far less conservative than are some foreign companies.   That can spell disaster for such companies who mis-read the "tea leaves."  

Vietnam: Second In Forecasted Growth. The IMF's World Economic Outlook Report was released in mid April. It shows the forecasted GDP (gross domestic production) growth rates for 1998 in the region rise from a low negative (-) 5.0% for Indonesia to a high positive (+) 7.0% for China.   Second in forecasted GDP growth is Vietnam, at a positive (+) 5.0 per cent.

In the report for 1997 the IMF forecasted Vietnam's GDP growth at 7.5%, lower than the State forecasted 9.5 percent.  The actual 9.0% GDP for Vietnam in 1997 proved the wisdom of local thinking. Vietnam therefore feels justified in standing by its current forecast of 9.0% for this year.

Equally interesting is that as conservative as has been the IMF, many companies are forecasting even grimmer positions.  IMF Director, Michael Mussa, reportedly stated the "Asian economic crisis will reach it peak this year."   Asked about whether the Asian miracle was over, he reported replied that the region would be hard put to continue the annual growth rate of up to 10% seen in the past 30 years.

Fire Sales: beware of buying ash.   However, many international companies forecast the crisis lasting a full two years, with "fire sales" continuing to be available for the short term, region-wide.  Most often cited are Malaysia and Thailand as the spots with the best buys.  That may be fallacious reasoning, and could prove harmful to those companies own positions.

With the exception of Indonesia, the value of most area currencies have rebounded to single digits above where they were before the crisis started. This is particularly true of both Thailand and Malaysia.   Such thinking becomes startling when the IMF report for forecasted inflation is considered.  Inflation in Malaysia is forecasted to rise from 2.7% in 1997 to 7.5 % in 1998.  In Thailand the same is true, with inflation rising from 5.6% to a whopping 11.6% in 1998.

Not to be forgotten is that in Malaysia, the level of trainable staff, and their propensity to job-hop for as little as a 3% elevation in income is contrasted with other nations in the region.  In Thailand, the average minimum wage remains at about US$100 per month in spite of the changes in the baht.  That is higher than in Malaysia, and two to three times the minimum wage in Vietnam.

The situation in Indonesia is unstable at best. GDP is forecasted as dropping from a positive (+) 5.0% to a negative (-) 5.0% in 1998, while inflation is forecasted to gallop from 6.6% to 44.3% in 1998.  The growing, not lessening, political crisis is all the more troubling for investors who may want to gambol but not play "Russian roulette."

We therefore caution our clients and friends to be aware.  The appearance of worthy buys in "fire sales" may be more apparent than real.

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MPI Calls for Change, but...  The Ministry of Planning and Investment often says what needs to be heard about reform and the need for more reform. But there are some local or regional authorities who seem hell-bent to drive more wedges that hinder development.

We view these problems as resolvable, but only with the proper approach.   Consider the following:

MPI officials admit, in spite of initial success, plans to attract foreign investment have fallen short of expectations.  Deputy ministers call for relevant agencies to help foreign investors find partners, negotiate contracts and implement projects. One consultant advises, "To bait the flying birds, the first thing is to hold the anchored ones."

Water Park.  So, how does the Central directive fare in the local communities?  A local paper reports, the same week the MPI tell us to hold on to the investors we have, that due to the success of Saigon Water Park, they will have to pay to restore an old bridge that cannot safely carry the road traffic. 

This state-of-art entertainment center attracts 1,000 customers 6 days each week, and 6,000 visitors on Sundays. The entry price is US$4.60.  The cost for ancillary products sold at the site (food, drink, film, souvenirs) can be equal to or greater then the price of admission. Food must be purchased on the site.  Inspectors at the gate reportedly turn customers away or confiscate off-site food brought in.  All inclusive purchases and fees easily makes the average customer spend upwards of   VND100,000 or $7.60 for a visit lasting from 3 to 5 hours. 

The number of repeat visitors is even more astounding then the amount they spend.  A recent private survey claims that in the first five months, 25% of the visitors in the first two weeks of April 1998 were making their third visit to Water Park The experience at WaterPark is causing many to re-think the ability of domestic Vietnamese to spend on leisure-time activities.

The park should generate annual turnover of US$ 1.68 million if the numbers hold solid, not bad but not great for a US$ 11.6 million project that must pay very high taxes and land use (rental) fees.  But to renovate a bridge will cost millions more.

Earlier in April a local bridge collapsed, inspiring local authorities to inspect all 263 bridges in the city. Only 15 % or 39 of 263 bridges, were found to be safe.  While officials from the local People's Committee say there has been no official correspondence between them and the park owners, the report is nevertheless very troubling. It reminds foreign investors that the administrative process in Vietnam is not transparent, and there is not yet sufficient legal review of arbitrary actions of low or mid-level officials who do not have the same outlook as do the nation's leaders.

It is not merely the presence of laws, but the need for all Vietnamese to get the picture right.

Local Rents.  Some domestic, private landlords feel they are being left out of the good times. In spite of the over abundance of housing and office space,  dispute the lowering of rents nation-wide in the face of decreasing numbers of foreign and domestic folks willing or able to pay exorbitant fees, some good folks are seeking to raise rent. 

We have been advising others to demand a reduction in rent in such a case, or move out. Well, out landlord asked us to increase the rent by 25 percent.  We are now looking for a new home.  Current indications are that we can save 25% from our current rent, locate on a quieter street in a newer villa and have better quarters plus furniture if we need it. We don't.

When we are close to signing a deal on the new place, we will tell our landlord that we see no reason to deny him his chance to get rich, and will leave our lease a few months early.  We suspect at that point he will agree to allow us to stay at the current rate.  But we will by then want to move and will challenge him to reduce the rent by 25% to meet the better offer.  This is the way of all business in Vietnam today.  Bottom line is  that we will do better than we are right now.

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Headlines Turn... south.  The feeling is that Vietnam's leaders know full well the direction of the economic decline, just not the level to which it will fall.   However, publicly facing-up to the reality without unduly frightening both domestic and foreign investors, may cause some to have doubt.  Such speculation is unwarranted.  A sampling of the State-run media leaves no doubt that actual knowledge of the problem is universal among the leadership.  Consider a sampling of headlines on pages 1-6 from Issue 341 of Vietnam Investment Review, dated 27 April 1998:

* Vietnam Air [Lines] slashes jobs and flights.
* Economy off course, warns Deputy PM
* Be Patient, former prime minister Kiet tells investors.
* Fundamental weaknesses are root of economic woes.
* President [Luong of Vietnam] hits out at gloomy IMF forecast.
* Executive salaries on the rise despite downward Asian trend.
* World Bank joins chorus in tipping lower growth
* Job scheme finds work for 12,000
* Doubt mounts over stalled Nissan Plant.
* Australian Foreign Minister holds talks with new leaders.

It has been our experience that what is known is not always spoken about freely in this system that is not yet transparent.  However, about the economic situation, former Prime Minster Kiet's advice is sound. He is quoted as stating, "My advice to foreign enterprises interested in investing in Vietnam and which are facing short-term difficulties [is that they] should overcome these with us because this is a long-term issue and needs time to be overcome."  He predicted that companies that stick by their guns would reap rich rewards in the long-term.

Addressing the IMF's forecast of a 5% gross domestic product (GDP) growth in 1998 vs. Vietnam's still current forecast of 9%, President Luong said, these "were not compulsory targets, but an indicator of the direction we're heading, so I don't think it's necessary to reshuffle the figures."  In fact, in 1997 the IMF figures for Vietnam were lower than the actuals, which were more close to the internal forecasts by Vietnam.

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Foreign Investment Profile.  These times warrant a closer look at the $32 billion invested in Vietnam by foreign enterprises to date.  These numbers are as published by the MPI.   The sums  quoted are the total capital projected for the licensed life of a project at the time of license, or an  amendment of the license.  This sum includes the foreign capital contributed by the foreign parties, project loan equity needed during the life of a project (actual or projected debt of the enterprise), and the value assigned to land, which is often the only capital contributed to a joint venture by the Vietnamese party.  In some projects, land value can be over-stated to meet the minimum contribution requirement of 30% of Legal Capital (other than debt) for a joint venture partner, or Legal Capital kept artificially low (thus driving the JV's debt-equity uncomfortably high levels) to meet the needs and realities of Vietnamese joint venture partners.  See Investment Guide - Part IV for a more complete discussion.

Top Ten Investor nations - April 1998

Top Ten Investor nations -  two years earlier - April 1996

Top Ten Investor nations - three years earlier - April 1995

* Investments from the British Virgin Islands do not reflect local capital but rather capital from other nations that use the BVI as a tax haven for business formation purposes.

April 1998 Investment Capital By Sector: percentage of all foreign capital invested in Vietnam.

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US Investment Profile.   The April 1998 position of the US as sixth in total investments, with 71 project using $1.3 billion is in contrast with the April 1996 figures by the the Ministry of Planning and Investment (MPI).  Two years ago the MPI reported the United States was sixth ranked in total invested capital with 56 projects carrying a total investment capital of $1.2 billion. Three years ago, barely 14 months after the trade embargo was officially lifted by the US against Vietnam, the US was in 8th place with 33 projects and invested capital just over $500 million. (See the dispatch immediately above.)

The drop in US standing back to eighty place is all the more remarkable when viewed from the perspective of the investment growth from this region during the same period.

When considering the presumptive weakness of Japan, ROK and Malaysia, and questioning the ability of Hong Kong to remain strong due to the regional monitory crisis, one can responsibly wonder why the investments have not slackened.  The easy answer is that the full impact from the crisis has not yet been felt in Vietnam.  However, there has been an impact already:  a marked decline of new cash arriving from Malaysia and Korea (ROK) to support existing projects, and an influx of cash to support long dormant and new projects using Taiwan and Singaporean funding.

It seems that the strong financial positions of Taiwan and Singapore are allowing them to move forward at a time when others are retrenching, or pulling back all together. Their knowledge and confidence in the growth of Vietnam should not be overlooked by American and European investors when they consider their respective Asian portfolios.

Following a few spectacular major project burn-outs by some American investors (interesting concepts but poorly planned), the number and scope of US projects is picking up, even though the total dollars invested have not grown even by the low inflationary trends of Vietnam. The  existing 71 projects by American investors are classified in the following sectors:

Assembly & industrial production - 25%
Construction - 16.7%
Chemicals - 8.33%
Oil and Gas - 8.33%
Healthcare - 4.16%
Others (including consumer goods, infrastructure and service industry) 37.48%

The arrival of OPIC and the pending implementation of US Eximbank activities herald the start of the long-awaited correction to the imbalance faced by American investors as contrasted with regional and European competitors. 

OPIC - banker and insurer.  Operating as a bank, OPIC will supply credits up to US$200 million for a single project for companies that have until now suffered limited credit for their Vietnam projects, or suffered high service charges to achieve the needed credit.  OPIC will prioritize American invested projects above private Vietnamese companies. In addition, OPIC is an insurer, reimbursing capital lost here due to local inconvertible currency, by political instability or nationalization of projects.  The US Embassy in Hanoi reportedly estimates that OPIC will allocate approximately VND 15 billion (US$1.15 million) for risks from the inconvertibility of the dong.  There are no current concerns about risks from political unrest or nationalization.

US Eximbank is awaiting the appointment by Vietnam of a corresponding local bank.  When operational, US Eximbank will work in two major areas: Comprehensive Guarantees and Guarantees of foreign credit. Eximbank guarantees loans written by US commercial banks for the use of US goods and technology exported to Vietnam.  For example, an American plastics manufacturer, seeking to build a plant in Vietnam will soon be able to have US Eximbank guarantee a loan drawn by a US commercial bank, thus being able to achieve vastly lower rates. The loan guarantee will only have application for US manufactured machinery, parts and US owned technology actually shipped to Vietnam.  There will also be a short-term program in support of foreign credit in direct support of American companies participating in foreign trade.

The Overall US Support Picture. Under the auspices of USTDA, an American company operating in a sector not in competition with American industry's export or domestic consumption needs, can get an outright grant of up to $250,000 for a feasibility study on a Vietnam-based project. That study must be done by a US company, and the specifications for products must utilize US manufactured goods, service and technology.  Under OPIC, the US company's project can achieve credit financing of up to US$200 million, and have achieve insurance against claims of inconvertible currency and local sovereign threats. Under US Eximbank, American companies can achieve favorably low interest rates by having their US based loaned guaranteed by the full faith and credit of the US government to the value of US manufactured goods, services and technology are used.

Ultimately, the services provided will help create jobs in the United States, bring greater wealth to the United States, and also assist United States companies to operate in Vietnam with greater security than without these essential tools.

Yet to come will the the bilateral trade agreements between the US and Vietnam.   When that is accomplished (recent projections by the office of the US Trade Representative put that off by at least one year, baring a dramatic reversal of course by the Vietnamese policy makers), Most Favored Nation's status (MFN) will automatically confer between the two nations.  That will reduce tariffs to levels that will encourage greater trade between America and Vietnam.  It is anticipated that Vietnam, under the bilateral agreement to be formed, will keep its own barriers up for a while, in accordance with the policies established under Vietnam's entry to ASEAN.

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Mitsui's $600 million investment drive. Vietnam Investment Review, the weekly public address system of the Ministry of Planning & Investment (MPI), has the inside track when it comes to knowledge of foreign direct investment.  It is this ministry that is responsible for approving all foreign direct investment, to include the disbursement of Overseas Direct Aid (ODA).  Japan is by far the largest donor of ODA funds, having pledged in excess of $4 billion.  Only last month Japan announced a further increase of $660 million in pledged aid.

It is no surprise to learn Japanese companies are on the march to invest in Vietnam.   Nevertheless, it is a wonderful shock and shot-in-the-arm to Vietnam, to realize such massive investments are being made in the face of the regional monetary crisis.   Japan has its own internal financial problems, but it is forward looking, not mortgaging its future by pulling back. With substantial financial strength as the world's second largest economic giant, Japan is encouraging its own industries to apply to Vietnam as contractors on the large infrastructure projects being funded by the ODA funds.

Interesting stuff, and very heady in otherwise lean financial times.  ODA funds are not directed to be spent by Japanese companies alone, but Japan does insist on tight audit controls that the Vietnamese have had difficulty complying with.  This has had two effects: it slows down the process of approval by the MPI for ODA disbursements, and it keeps at bay smaller and less able companies from taking part in the bidding process.

Looking at the projects proposed by Mitsui for investment should give encouragement to companies from other industrialized nations to get in line before all the ODA funded projects are spoken for:
$500 million southern power plant using gas Mitsui and Unocal (US) found off shore;

• $6 million welding electrode steel project, a joint venture with VinaMetal;
• $15 million aluminum project;
• $7 million battery manufacturing project;
• $14 million upgrade to an existing paper bag manufacturing plant;
• $14 million garment project to manufacture men's underwear for export to Japan.

The Japanese giant trading house is already involved in 15 licensed projects in Vietnam with a total capital investment of $350 million covering a broad range of sectors from foodstuffs to steel::

• steel - a 9% interest in the $69 million Vinakyoei Steel, a joint venture that after two years is "heading towards a profit;"
• resin - a 46% interest in the $90 million Mitsui Vina Plastic and Chemical Co., in which the plant is under construction and scheduled for commissioning by year-end 1998;
• food processing projects worth $20 million in rice, sesame, shrimp and coffee

Mr. Kazuo Nishi, Mitsui's chief representative in Vietnam, is quoted as having said, "We are facing typical problems like taxes and difficult administrative procedures, but for us they are not serious. That's why we have plans for other projects...  If we can accelerate our plans here, we would be the largest Japanese investor in Vietnam."

In 1997, Japanese investment fell from the prior year by 20 percent. Japan is currently ranked fourth among top investors with 218 projects with total capital investment of $3.566 billion.

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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.

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