Vietnam's Problems, Promises

Continuing growth is matched by stubborn inflation




With average per-capita annual incomes of just over US$1,000, Vietnam is now officially a lower-middle income country, and in Hanoi, the seat of government, and the commercial capital Ho Chi Minh City - still popularly known as Saigon - property prices are on an upward curve and new building and property developments appear shoot up faster than new growth in Vietnam's lush tropical rainforests.

Unfortunately the appearance is somewhat illusory. The country faces crushing inflation, forecast by Standard Chartered Bank at 19.7 percent in December, with an11.3 percent rise forecast for 2012. The country’s currency, the dong, is expected to continue to depreciate throughout the year given Vietnam’s US$8 billion current account deficit and low foreign currency reserves. With the State Bank of Vietnam attempting to sop up liquidity, tight monetary policy is starting to put pressure on the banking sector with the result that some small banks have raised annual interest rates as high as 18 percent despite a central bank request to keep rates at 14 percent. That is placing considerable pressure on investment although loan rates have fallen considerably from their 2011 levels, which averaged 22-27 percent, according to the World Bank.

In particular the high interest rates, rising inflation and property oversupply have turned the boom to a bust and the urban areas are suffering from the hangover. In addition to curbing lending through monetary tightening, the government has categorized some property as high risk for commercial banks, making it difficult for state banks to extend loans for new projects. According to Marketresearch.com. developers are now seeking joint venture partners for financing because of the scarcity of bank loans.

Nonetheless, there is a sense of a country on the up, with continuing government announcements of overseas investments, new brand-name shop fronts and luxury cars cruising amid the endless din of tens of thousands of motorbikes careering along the streets of Hanoi and Saigon. Asean estimates suggest that Vietnam and Indonesia are the top two destinations for foreign direct investment in Southeast Asia, with FDI inflows for Indonesia and Vietnam increasing by 174 percent and140 percent respectively over 2011.

“When I first came here eight years ago, it was so different,” recalled one European investor who asked not to be named. “Even then, there were much fewer motorbikes, and big cars were rare, especially in Hanoi.”

Vietnam's doi moi policy, or economic 'opening-up', reduced poverty from 75 percent in the mid-1980s to 14.5 percent in 2008. Per capita income averaged around US$400 in 2000. The doubling in a decade is the result of 7 percent annual average economic growth. GDP growth was 6.5 percent in 2011, expected by the World Bank to fall to 5.5 percent in 2012.

Vietnam still has areas of raw poverty, particularly in rural areas where many the country's 53 ethnic minorities live. All told, more than 80 percent of the population are Kinh, speaking Vietnamese, while the rest is made up of groups such as Khmer Krom and Hmong.

The decade of robust growth has generated an urgent need for efficient transportation networks and modern infrastructure of all kinds from electricity to transport, which has spurred the government to release US$7 billion for highway, rail and other transport infrastructure over the next two years through the end of 2014.
Rural poverty provides the push to match the pull of urban growth and job prospects in Hanoi and Saigon. Internal migration ensues, and the Vietnamese government estimated in 2009 that there were 7 million migrants in Saigon and 26 million across the country, huge numbers in a country of 90 million people. As with most other Asian countries, the total fertility rate has been dropping sharply, from more than 2.5 live births per woman in 2000, to 1.9 today – below the 2.1 rate to maintain equilibrium. But with 25 percent of the population under the age of 14, even as the total fertility rate falls below replacement, the absolute number will continue to rise until those in the early baby boom generation age past their reproductive cycles.

In the endless industrial park suburbs ringing Saigon, a vast city of 12 to 14 million people that spills out into neighboring provinces, around 65 percent of the population are migrants. People on the move offer investors a low-cost and flexible labor supply, but sometimes this is not without trouble. The mostly young, female, rural-origin workers earn an average of US$120 per month, in keeping with Vietnam's minimum wage requirements.

The raises are being eaten up by Vietnam stubborn inflation, which that could undermine progress and send some of the new “middle income” Vietnamese back into poverty. Food prices have doubled over the past year, meaning that in Vietnam, as in many other poorer countries where people spend a high proportion of their income on food, low-wage workers are struggling to make ends meet. Asia Sentinel