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Copyright © 1999-2014 Vietnam Venture Group, Inc. All rights reserved.   Updated March 2, 2004

A Need To Rev Up The Economy And The Reform Process.

V V G staff reporting from various media sources including Reuters, AP, AFP, and others

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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.

Until recently, reserve figures were held as a state secret.  According to the ADB report, “most observers agree that in 1999, they totaled only a few hundred thousand dollars.

Percentage growth estimates issued by the ADB 2000  (%) 2001  (%)     2002 (%)
GDP 6.1      6.4     6.9
Gross Domestic Invest/GDP   23.0     24.5    26.0
Gross Domestic Savings/GDP  25.0     24.0    24.1
Inflation (CPI)             0.6      -3.0     5.0
Money Supply (M2)           40.6     30.0    25.0
Fiscal Balance/GDP          -3.0     -3.9    -5.0
Export Growth (domestic)    24.3     12.0    13.0
Import Growth (retained)    31.0     16.0    17.0
Current Account Balance/GDP  2.0     -0.1    -1.9
Debt Service Ratio           9.2      9.0     8.3

To catch up with its wealthier, free-market Southeast Asian neighbors and absorb the [1.4 to 1.7] million people entering an already-bleak job market each year, Vietnam needs to grow at a much quicker pace.

"The economy isn't in crisis and not likely to be in crisis any time soon," says IMF senior resident representative Dennis de Tray, who adds that he is "absolutely sure this country will be a success by the end of the decade, if not before."

Still, Vietnam is likely to receive only modest support from foreign investors, at least in the immediate future. The World Bank estimates Vietnam attracted $600 million in new investments in 2000, down from $700 million a year earlier and well off the mid-1990s levels of $2 billion a year.

Tariff Increases if Trade Pact Is Delayed?

Prior to the end of the Ninth Party Congress,  Trade Minister Vu Khoan issued a warning that Vietnam would have to reconsider preferential tariffs for U.S. goods if a trade pact signed last year were not ratified soon.

"We were very flexible in providing the United States with MFN status pending negotiations and ratification of the trade agreement. If the agreement is not ratified, we'll have to reconsider this problem," Khoan said before the congress ended.

Will the tone change with greater understanding of the US political process and the need for Vietnam’s own reforms is a question whose answer is currently being awaited.  The trade agreement was signed last year under the Clinton administration but has still to be ratified by the U.S. Congress and Vietnam's National Assembly.

U.S. ratification had been expected this spring, but the Bush administration is considering packaging the legislation with other agreements with other countries, which could take up to two years to be passed through congress.

While Vietnam unilaterally lowered its import tariffs for U.S. manufactured goods to keep the U.S. in line with other nations, Vietnamese goods still face high U.S. tariffs which the trade agreement would greatly reduce.  

 

Moody's Investors Service changed its outlook to stable from negative for Vietnam's B1 foreign-currency country ceiling for bonds and notes and B3 foreign-currency country ceiling for bank deposits.

The rating agency said the outlook change was prompted by a renewed commitment by the government to advance structural reforms beyond a point that was previously considered politically unacceptable. This shift in policy is all the more noteworthy in that it was made in the run-up to the current 9th Congress of the Communist Party.

Reform measures that focus on the financial sector, state enterprises, and the external trade regime have reactivated support from the IMF and World Bank. Although Vietnam is now eligible to draw on the resources of the international financial institutions, the buildup in reserves and restructuring of outstanding debt arrears have already placed the country's external payments in a position of relative strength.

The future course of Vietnam's ratings will depend on the development of a credit culture, increased transparency in government policy and financial disclosure and the effective implementation of the ambitious program of structural reforms. Progress in such areas, together with the expected normalization of trade relations with the United States, would help reverse the deterioration in investor confidence in Vietnam that followed in the wake of the Asian financial crisis.

Internal Politics.  A political report  adopted at the Ninth Party Congress admitted the sorry state of the party, saying that corruption among the top brass and rank-and-file members has ``incurred wrath of the people and undermined their confidence in the party.'' Pointing to intensifying international competition, the report emphasized the urgent need of reform, saying ``we will lag even further behind economically unless we move ahead.''

The rhetoric for the need to change couldn't be better, but it makes little difference as long as it remains only hot air. The country's new leadership needs to implement the report's proposals to stamp out corruption, including the publication of assets of party executives and their families.

The nation can no longer hide from the need for market reforms, or support those who seek to derail them.  However, if the party tries to ram through market reforms, it will face the tough question of how to deal with the diversification of values among the people. Sooner or later, the country will have to embark on the hard road toward democratization. The rest of the world will be watching closely to see how Vietnam's new leadership will map the nation's future.

 

 


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