Side Views

Vietnam bounces back, for now — Richard Hartung

May 03, 2012

MAY 3 — Driving into Ho Chi Minh City, along streets teeming with motorbikes and with business piling from shop fronts out onto the pavements, the city looks as busy and familiar as it has for a decade.

Head across the river, however, and it’s like entering a different world.

Just as Pudong rose across the river from Shanghai to become a centre of finance and commerce, so does the far side of the river in “District 7” seem to be growing into a thriving new lifestyle and business hub.

Myriad condos are under construction and turning off the main road can lead to the gated Villa Riviera community built by Keppel Corporation. Go just a little further and you’re in the planned community of Phu My Hung, which looks more like Singapore than Vietnam.

Students walk home from international schools to their new condo or house in Phu My Hung, familiar shops and new shopping malls are popping up all the time and Domino’s Pizza is just a phone call away.

But outside the growth of places like District 7, the scene isn’t nearly so positive. Even though Vietnam’s headline gross domestic product (GDP) grew 6 per cent last year, the inflation rate of 18 per cent means that real per capita GDP most likely declined.

The government devalued the Vietnamese dong by 9 per cent in February alone last year. And Knight Frank expects real estate prices, which dropped 10 to 20 per cent last year, to dip another 5 to 10 per cent this year.

Even though Vietnam is touted as one of the “next-generation tiger economies” known as the CIVETS — Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa — according to the Wall Street Journal, and the World Bank forecasts GDP will continue to grow at more than 6 per cent this year, continuing double-digit inflation and a shaky banking sector are among the factors resulting in an outlook for this year and the next that remains a bit murky.

DOWNSIDE CARRIES INTO 2012

While Vietnam continued to grow even during the 2008 crisis and came out of it stronger, as Singapore Vietnam Business Association’s Hanoi president Bobby Liu described it, last year was a difficult year.

Even though GDP growth reached nearly 6 per cent last year, high inflation and sinking property prices as well as a weak financial sector still hurt Vietnamese businesses and consumers alike. The net result, Singapore Business Group president Benjamin Yap told me in Ho Chi Minh City, is that “recent reports are not so good, so that 2012 may be a challenging year”.

Inflation continues to be a drag on the economy. While the official number for last year was just above 18 per cent, some residents said anecdotally that they saw food prices rise by more than 30 per cent. Even a drop to 12-14 per cent this year would represent high inflation.

The value of the dong has continued to fall. After the February devaluation, it dropped by about 1 per cent over the course of the rest of last year and is forecast to decline another 2 to 3 per cent this year.

“The real battle is on the inflation front and the value of the dong,” said one senior foreign banker.

LIQUIDITY RISK

The banking sector also faces tremendous hurdles. Liquidity is the single biggest risk, said a senior banker, since demand from weak banks drives up the need for liquidity in a system that is already too overbanked.

Bad debt is piling up, especially in real estate, and one banker said he knows non-performing loans are at 8 to 10 per cent rather than the official level of about 3.5 per cent.

Systemic risk, said another banker, is high enough that there could be a run on a weak bank if it faces problems and lack of confidence in one bank could spread to stronger banks as well. Legitimate borrowers thus find credit hard to get and rates high, so they are not out borrowing and growing the economy.

Consumers have been hit to some extent. Jolen Consulting director Adrian Phua said retail goods sales offering 50 per cent discounts are more common and, while consumers are still spending, they are buying less at F&B or fashion stores than they did only a couple years ago.

FROM MALLS TO FACTORIES, A BUZZ

Despite all the negative news, a walk around the streets of Hanoi or Ho Chi Minh City makes it easy to see why CIVETS advocates are so positive. Vietnam is a big market with close to 90 million people, said deputy general director of Sembcorp’s Vietnam Singapore Industrial Park, Anthony Tan, with a relatively young average age and a growing middle class.

Shops line the streets and consumers are out buying everywhere, from roadside food stalls to high-end fashion stores, at all hours of the day. Stores sell everything from baby goods and soft drinks to mobile phones and new motorbikes, and even the occasional Lexus or Bentley.

One young Vietnamese banker said inflation actually had little impact for her and her friends, since their salaries kept climbing and paying a few thousand more dong (about 50 sen) made little difference for them.

While consumer spending is quite visible, “the real driver in Vietnam is manufacturing”, said Tan, and he expects more manufacturing companies to continue coming in to Vietnam.

Even though foreign direct investment (FDI) dropped 35 per cent from 2010 last year, most of the drop was due to less money flowing into real estate. Tan said there was healthy demand from manufacturing companies seeking to take up land in Sembcorp’s industrial parks.

Moreover, there is a shift away from lower-value goods like garments and shoes towards higher value-added products like electronics and pharmaceuticals that will drive manufacturing revenue higher. And along with Vietnam benefiting from Japan’s traditional “China + 1” strategy of building factories in China plus one other location, more Japanese companies are coming in after the earthquake in Japan and the flood in Thailand that hit them so hard.

OVER THE WORST?

Standard Chartered Bank’s Vietnam chief executive Louis Taylor says the data confirms the trend. Inflation is dropping and the trade balance is positive, with exports growing 33 per cent in recent months while imports grew by only 27 per cent.

“We think we’re over the worst and we can see a path to more assured growth in the second half of the year. Vietnam could by then be in a relatively good position,” he said.

While few people doubt that manufacturing will continue to grow (with the caveat that there could always be blips depending on what happens in Europe or the United States), three domestic components of the economy in Vietnam are especially important if this growth is to happen.

One is improvements in the banking sector, which is critical for providing the loans that can power business growth. A second is what happens in the real estate market, which has been a drag on the economy. A third is the regulatory environment.

TURNAROUND IN BANKING

While bank lending would normally be an important enabler of business growth, a combination of limits on lending and caps on interest rates has reduced loan growth.

The State Bank of Vietnam put a cap on the deposit interest rate at 14 per cent, designed to make sure weak banks don’t put depositors at risk by paying too much for deposits; it has constrained the rate of growth in loans at 17 per cent on down to zero, depending on the strength of each bank. The lack of liquidity as well as high levels of non-performing loans at some banks has also had a negative effect.

However, the banking environment looks set to change. While enforcement of banking rules in the past has been weak, a senior Vietnamese banker sees greater prospects for change.

The new governor of the state bank is knowledgeable and decisive, according to the banker, and for the first time in years the governor gets along well with the minister of finance. The alignment makes it more likely that the central bank will follow through on its policies to stabilise the banking sector. While much of the change is happening behind the scenes, Taylor told me that he, too, has more confidence that the central bank is on top of the problem and has a plan.

Moreover, the state bank compelled a merger of three weak banks last year and bankers said at least eight more will be merged this year. One well-informed industry observer went so far as to forecast that the number of banks would drop from more than 40, to 15, by 2015.

This consolidation could strengthen the larger banks and eliminate the smaller or weaker banks that observers say put the banking system at risk.

REGULATORY UNCERTAINTY

Another key factor in how the year turns out revolves around government and regulation.

Virtually everyone I spoke with agreed that effective regulations for most sectors, from manufacturing and banking to consumer goods real estate, are already in place. The problem, they said, is that laws can be opaque and the rules are not enforced.

One informed observer said that even though laws have improved tremendously, they are “still far behind” other countries and the problem is implementation. Another said “licensing is not transparent and there is no clear yes or no”, but if investment rules and licensing were made clear far more money would come in.

Moreover, different ministries and even the different departments in them interpret the rules differently. One banker said, for example, that the lack of clarity in regulations makes banks confused, and even different departments at the state bank have different interpretations.

While licensing practices vary widely, Tan said for manufacturing, it can typically take about two weeks to get registered and production can start in nine to 12 months. At the other end of the spectrum, another expert gave the example of an education company that took a whole year to get a company registration — and then another year to obtain an education licence.

CORRUPTION “STILL SERIOUS”

Underlying the opaqueness is the question of whether extra payments are needed.

Even the simplest approval for a business activity can go through five layers or more — the counter clerk who accepts the application, an expert who reviews it, a supervisor who approves it, potentially, staff at other ministries who need to review it, and finally, a People’s Committee.

While some companies have said no extra payments were needed, others say they have a different experience. One businessperson, for example, said the company automatically adds about 10 per cent to the cost for any activities that require government permission.

The government acknowledges the issue, saying in its National Strategy for Preventing and Combating Corruption Towards 2020 document that “corruption is still taking place in a rampant, serious and complicated fashion in multiple areas”. While some observers do say there are improvements, Transparency International said in its annual report last December that Vietnam ranks 112th out of 183 countries and there was “no significant change from last year in its perceived level of public sector corruption”.

As World Bank country director for Vietnam Victoria Kwakwa wrote recently, “Vietnam has made great strides in improving clarity in many areas, but there remains a long way to go” and growth can be faster if corruption is reduced. Whether corruption will drop and clarity will rise remains uncertain.

REAL ESTATE RECOVERY THIS YEAR?

Then there is the property factor. Real estate prices have taken a dive over the past two years and they have an outsized effect on the overall economy in Vietnam.

Prices started to decline about two years ago, said Ecopark investment director Edward Lee. Soon afterwards, the government started to tighten credit as banks ran into problems with real estate loans.

The price decline hit investors, which dampened investor confidence, and it also hit developers when their properties didn’t sell. As developers stopped building, a chain reaction led to reduced sales at suppliers to the industry. FDI targeted at real estate also declined, a key reason for the 35 per cent drop in overall FDI.

A related factor is that the decline in real estate prices hit the wealthy the hardest. World Bank data shows that the top 20 per cent of the population controls 45 per cent of income. A significant percentage of these wealthy individuals had started to dabble in real estate. When real estate prices dropped, they reduced their spending on everything from real estate and other investments to consumer goods.

The combination of lower real estate purchases, less spending, reduced investor confidence and credit tightening at banks was part of what led to the troubles in the overall economy.

Now, observers say, the real estate market is ready for a turnaround later in the year. Whether it happens this year or next, it could help increase investor confidence and drive faster economic growth. — Today

* Richard Hartung is a financial services consultant who has lived in Singapore for more than 20 years and worked with financial institutions in Vietnam on strategic planning and training.

* This is the personal opinion of the writer and does not necessarily represent the views of The Malaysian Insider.