Despite concerns about corruption, bureaucracy and a weak legal framework, Vietnam’s growth is based on sound fundamentals

By Dwarka Lakhan | May 2007

Vietnam is regarded as the next Asian tiger in the making. In some circles, it is seen as the most exciting investment alternative to China. And even though its market is relatively small and expensive, the consensus opinion is that Vietnam offers tremendous opportunity for first movers who are willing to take the high-risk/high-reward road to investing.

Optimism about Vietnam is based on sound fundamentals. Its economy and stock market are booming on the back of more than two decades of reconstruction and reform following the devastating war between North and South Vietnam that ended in 1976. Animosity toward the U.S., which backed South Vietnam in the war, is now water under the bridge in the wake of the dramatically improved relationship between the two countries, providing the catalyst for a flood of investment into the rapidly emerging economy.

“Rising domestic income levels, a large, cheap and hungry work force, the improving regulatory environment and rising foreign investments are among the factors driving the economy,” says Mark Mobius, portfolio manager of Templeton Emerging Markets Fund at Franklin Templeton Investments Inc. in Singapore.

Vietnam’s GDP has grown by a cumulative average rate of 7% over the past decade, peaking at 8.4% in 2005, making it the second-fastest growing economy in Asia, behind China. And growth is expected to remain strong in the foreseeable future, according to Hong Kong-based brokerage CLSA Asia-Pacific Markets’ January research report, On the Road in Vietnam: Sizing up the next Asian tiger.

“Unlike other tigers in the Association of Southeast Asian Nations, Vietnam’s economic expansion has been remarkably resilient,” the report states. “Growth has accelerated each year since the late 1990s and is now past 8%, a level the government hopes to sustain for at least the next five years.”

Vietnam is at the beginning of a multi-year macroeconomic boom, predicated on a steady shift from agriculture to industry and services — enhanced by being one of the “youngest and most balanced countries in the region,” the report says. Agriculture’s share of the GDP declined to 21% at the end of 2005 from 39% in 1990, while the share of industry has grown to 41% from 23% over the same period, with services remaining almost flat, at 38% of GDP in 2005.

The boom in the former agrarian economy — which is abandoning central planning in favour of a market-based economy — is being fuelled by increasing domestic and foreign investment, rising exports, strong domestic demand, and high levels of domestic savings. The private sector — domestic as well as foreign — is becoming increasingly dominant as it currently makes up two-thirds of the overall economy and employs 90% of the total workforce.

Domestic savings, rising foreign direct investment and high levels of remittances from Vietnamese living overseas currently account for one-third of GDP and are expected to reach more than 40% over the next five years.

Although inflation remains high, at about 7.5%, government finances are healthy and public indebtedness is low. And the government is committed to boosting the country’s social infrastructure to buttress the macroeconomic foundation.

Vietnam is also expected to benefit significantly from its Nov. 7, 2006, entry into the World Trade Organization, says Patricia Perez-Coutts, vice president of AGF Funds Inc. in Toronto and portfolio manager of AGF Emerging Markets Fund.

The WTO entry is expected to be a catalyst for foreign investment by companies seeking to take advantage of Vietnam’s strategic location as an export hub. Over the past decade, Vietnamese exports have risen to 66% of GDP from 40%, with growth in exports of soft commodities — such as pepper, coffee, rubber, tea and rice — making Vietnam a key player in global commodities. In fact, Vietnam is ramping up its exports of everything from shrimps to ships to shoes, with more than one-fifth of all exports headed to the U.S., which signed a bilateral trade agreement with Vietnam in 2001.

As a result of all this, far more attention is being paid to the country’s soaring stock market, which rose 143% in U.S. dollars last year, making it the best-performing emerging market. Comparatively, the MSCI Far East price index gained 27.6% in 2006. Since 2004, the Ho Chi Minh stock index has risen by an average of almost 71%, following three previous years of negative growth between 2001 and 2003, during which it experienced an average annual loss of 14.5%.