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Infrastructure priority for growth in Vietnam
Ron Corben, Special Correspondent, ATI
11-01-2010
ATI ASIA2010 Magazine
HANOI – Vietnam's economy, buoyed by an US$8.6 billion stimulus package, is on the mend after the global recession really tested the mettle of its economic managers. Positive growth is forecast for 2010.
The key to the recovery was a 147 trillion dong – US$8.6 billion – stimulus package, says Ayumi Konishi, Asian Development Bank Country Director for Vietnam. "Many of the economic activities are coming back; some of the factories which laid off people earlier are getting people (again)," Konishi told ATI.
The package included an interest rate subsidy scheme to boost local consumption, and investment of funds targetted to upgrade Vietnam's infrastructure.
The recession's test for the authorities came after more than 20 years of economic reform that began with the policy of 'Doi Moi' (renovation), from 1986, and marked the start of a long path of expansion.
Economic growth has had its rewards. In 1993, almost half the population was classified as below the poverty line. Since then, the economy has more than doubled its economic output per capita, leaving the poverty ratio below 20 per cent.
But even as the global economic crisis approached, the Government, in early 2008, was already being called upon to take aggressive steps to combat galloping inflation and overheating investment in the property sector. Inflation reached double digit levels of up to 25 per cent as pressures built. The trade deficit blew out to US$14.4 billion, due to soaring import costs.
Clive Randall, President of the Australian Chamber of Commerce in Vietnam, says the Government moved quickly to temper the economic threat. "They took control of fiscal policy in a very dramatic way, and this had the effect of getting inflation down to a very manageable level," Randall says. "They're coming out of the cycle quicker than some of the more developing economies in Asia, or indeed worldwide, will. So I'd say they did a pretty good job (in managing the recession).”
ADB's Konishi points to issues of a rising fiscal deficit and inflation as recovery moves on. "Inflation . . . is showing signs of coming back," he says. “The Government will need to keep a close watch on the currency to avoid further weakening that may add to inflationary pressures – and the Government certainly has to look at keeping a balance between growth and stability very carefully."
The ADB recently agreed to provide a US$500 million loan to Vietnam to finance public expenditure programmes over 2009 and 2010. Growth, which will fall to just over 4.0 per cent in 2009, is expected to pick up to 6.5 per cent next year. "We do believe that regaining stability will provide necessary confidence for outside investors to put more money into Vietnam," Konishi says.
Vietnam, like many developing and newly-industrialised nations, has faced an investment freeze as international funds held their breath, with global credit tight. The outcome was a sharp decline in foreign direct investment. Over the first nine months of 2009, FDI pledges slumped to US$12.54 billion, just one-fifth of the amount recorded over the same period last year.
But Government officials remain upbeat, despite the decline, blaming the fall on the global recession. Businesses have re-assessed Vietnam's outlook. "A lot of companies said: 'Well, look at Vietnam, it is as good as it was pre-September last year,’” says Randall, who is also an executive with the Australian engineering company, Leighton.
The main potential inflows in 2009 have been focussed on investment in hotels and restaurants (US$4.57 billion), followed by the property sector (US$3.65 billion). Investors are also looking at new geographical areas, with special promotions by the Ministry of Planning and Investment (MPI) in the central highland regions. The central regions, bordering southern Laos and north-eastern Cambodia – the so-called Development Triangle of Vietnam, Laos and Cambodia – offer opportunity for expanded trade between the three countries. Business Monitor International, in a report this year, says Vietnamese FDI is set to expand into other regions in years to come. At the end of 2008, Vietnamese companies had invested more than US$812 million into Laos, in projects ranging from hydropower, to mining and wood processing. In Cambodia, a similar story has been seen, with Vietnam investing more than US$210 million, focussed on agro-forestry, construction and services. Such investment, Business Monitor noted, will offset downturns in the international economy.
But foreign investors in Vietnam see the major challenge for the country as that of matching shortfalls in infrastructure brought by economic growth. Thomas Siebert, Chairman
of the American Chamber of Commerce (AmCham) in Vietnam, has joined a growing chorus pointing to problems of insufficient infrastructure. "Infrastructure constraints threaten current and future foreign direct investment," Siebert told a business forum.
The Australian Chamber’s Randall says demand for infrastructure is wide-ranging. "When you look at infrastructure in Vietnam and at what needs to be done, Vietnam needs pretty much everything. It's racing towards becoming an industrialised nation at breakneck speed, and obviously with that comes a great need for infrastructure," he says. In energy, demand is set to more than triple over the next decade. Vietnam is investing in several new thermal and hydropower plants, but concerns also arise
of the projects' environmental impact.
An ADB assessment notes that, in Vietnam's goal of reaching industrialised country status by 2020, infrastructure needs "remain vast". These range from transport – roads, expressways, railways, ports, and energy – to improvements to urban infrastructure, including urban transport systems.
Randall says meeting the financing needs of infrastructure remains a challenge, given Vietnam’s reliance on taxation receipts from its industrial base in a still largely-agricultural country. "It's one of those vicious cycles that, the more industrialisation you undertake, the more infrastructure you need," he says.
Randall, with long experience of working in Asia, says he can see Vietnam in the same light as Thailand and China years earlier, as it now grapples with growth and infrastructure demands. "Vietnam reminds me very much of Southern China perhaps 20 years ago; there, industrialisation went ahead of the infrastructure, and there were some very serious birthing pains as they went through that transition," he says.
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