KEY POINTS:
Western media may be full of gloom and doom about an economic slowdown but there is no sign of an economic slump on the streets of Vietnam. The country is going through a major economic renaissance with GDP growth in excess of 7 per cent for six consecutive years.
Although inflation is a major concern most economic forecasting groups are expecting economic growth to continue to exceed 7 per cent in 2008 and 2009.
This begs the question; does Vietnam's economic renaissance offer opportunities for New Zealand businesses and investors?
Vietnam was ruled by the French from 1884 until 1954 when the colonialists were defeated by Communist forces lead by Ho Chi Minh. Under the 1954 Geneva accord the country was divided into the Communist North and anti-Communist South.
The highly controversial Vietnam War, between Communist North Vietnam and the US-supported Republic of Vietnam, ended in 1973 with the withdrawal of all US combat troops. Saigon, now called Ho Chi Minh City, fell to North Vietnamese Government troops on April 30, 1975 and the country was officially united under Communist rule as the Socialist Republic of Vietnam on July 2, 1976.
The most important economic development occurred in 1986 when the Vietnam Government introduced free-market reforms known as Doi Moi (renovation). The authority of the state remains unchallenged but foreign investment and private ownership of farms and companies has been encouraged.
Regulatory reform has also been accelerated and the Ho Chi Minh Stock Exchange, which is the youngest in South-East Asia, was opened in July 2000 with just two listed companies.
Vietnam is still a poor country that looks more like India than China. This is confirmed by GDP per capita data which has China on US$2460 ($3121) per capita, India US$1020 and Vietnam just US$810.
Vietnam should play an increasingly important role in South-East Asia because it has a population of 86.1 million, behind only Indonesia (245.5 million) and the Philippines (91.1 million), and has achieved much higher GDP growth than either of these two countries in recent years. It also has a young and ambitious work force with a median age of 26.9 years, compared with 36.3 years for New Zealand.
Vietnam's economic renaissance has been strongly influenced by an aggressive Foreign Direct Investment (FDI) strategy, which attracted US$20.3 billion ($25.7 billion) of new offshore investment in 2007 compared with US$12.0 billion in 2006, according to the General Statistics Office of Vietnam.
The main sources of investment in 2007 were Korea, Virgin Islands (UK), United States, Singapore, Taiwan and Malaysia. Investment has been attracted into a wide range of sectors although there has been a massive inflow of foreign funds into the commercial and residential property markets over the past 12 months.
As a result the property market is overheated in parts of the country.
The driving force behind the economy is the increasing number of major multinationals that have established large scale manufacturing plants or use contract manufacturers.
These include:
* Nike, which manufactures 75 million pairs of shoes a year under contract agreements in 10 factories. Nike's labour practices in Vietnam have been under considerable scrutiny and this month 20,000 workers at one of its contracted manufacturing plants went on strike in protest at the average wage of US$59 per month (Vietnam's minimum wage is US$52 per month). Media reports indicate that union representatives and the Taiwanese owners of the Nike plant have agreed to a US$6 dollar a month pay increase.
* Intel will construct a US$1 billion chip assembly and testing facility near Ho Chi Minh City. This is an important development for Vietnam because it will be Intel's biggest factory and indicates that the country can attract higher value-added companies and become less reliant on the low-cost, labour-intensive garment and shoe production sectors.
* Coats, which is owned by Guinness Peat Group, has two factories in Vietnam under a joint venture operation with the state-owned Phong Phu Textile Company. The JV, which is 70 per cent owned by GPG, is the leading thread supplier in the country.
New Zealand had a trade surplus of $113.9 million with Vietnam in the June 2007 year. This comprised exports of $264.3 million and imports of $150.4 million and the country is New Zealand's 24th largest export market.
Our main exports to Vietnam were milk powder $102.6 million, timber $49.3 million and butter $26.7 million.
Our main imports were furniture & parts $28.4 million, engines and motors $22.9 million, edible nuts $9.1 million and footwear, rubber etc $8.4 million.
The only New Zealand companies with any visual presence in Vietnam are Fonterra and Diane Foreman's New Zealand Natural Ice Cream.
Vietnam is too difficult for most New Zealand companies because the market is incredibly fragmented with hundreds of thousands of tiny retail outlets and very few large outlets. Lion Nation couldn't crack the Chinese beer market in the 1990s because the market was similarly fragmented and Vietnam presents the same hurdles today, as it is probably at least 10 years behind China in terms of economic development.
However the presence of Fonterra and New Zealand Natural Ice Cream demonstrates that New Zealand needs to create far more large and entrepreneurial companies that are willing to take a long-term approach to market development.
Vietnam's major sharemarket is the Ho Chi Minh Stock Exchange, which has 151 listed companies with a total market value of $34 billion. In addition there is the Hanoi Securities Trading Centre, which is based in the capital and has 135 companies with a total value of $11 billion.
The Vietnamese Government has a stated objective to encourage the stock exchange to achieve a 50 per cent capitalisation to GDP ratio by 2010 and a 70 per cent ratio by 2020. Ho Chi Minh Stock Exchange currently has a market capitalisation/GDP ratio of 39 per cent compared with the NZX's 36 per cent.
The Ho Chi Minh Stock Exchange had a fantastic first seven years with the benchmark index surging from 100 in mid-2000 to nearly 1170.67 on March 12, 2007. In the first quarter of 2007 stock broker offices "were crammed with excited small investors, eyes glued to the giant display screens as shares hit ever more extravagant highs", according to the Economist.
This year has been a completely different story with the index plunging 44 per cent in the first quarter and trading below 530 this week. Foreign investors continue to pour money into the market but domestic interest has dissipated as inflation has reached 16.4 per cent, interest rates have risen and the property market has weakened.
The best way to invest in Vietnam is either through dedicated funds (i.e. DWS Vietnam Fund or JF Vietnam Opportunities Fund) or through large emerging market funds (i.e. Templeton Emerging Markets Investment Trust).
Vietnam is an emerging economic force but its sharemarket is not for the faint hearted. Many of its listed companies are still partially state-owned, corporate governance and disclosure is extremely poor and the country is ranked 123 out of 179 countries in Transparency International's Corruption Index. A major improvement in disclosure, governance and transparency is required before Vietnam becomes a more attractive destination for sharemarket investors.
Disclosure of interest: Brian Gaynor is an Executive Director of Milford Asset Management and his disclosure statement is available on www.milfordasset.com under his profile.
bgaynor@milfordasset.com
