Vietnam rides crest of an economic wave

HONG KONG // Vietnam is on a roll; the country that seemed destined for great things in the mid-2000s, only to lose its way, is back.

Its economy expanded by 6.7 per cent in 2015, one of the highest rates of growth in the world, and its best set of annualised data since 2007.

While large swathes of Asia struggle for traction – weighed down in some cases by high oil prices and in others by tepid export figures, reflecting a wider global economic malaise – this crescent-shaped country continues to power ahead. Final consumption rose by an average of 11 per cent a month in the year to March 2016, according to data from the general statistics office of Vietnam, driven by rising demand for cars and residential property.

New car purchases totalled 23,775 in December, a year-on-year increase of 45 per cent and a single-month record, according to the Vietnam Automobile Manufacturers Association. Lorry sales rose 51 per cent over the same period.

Inward remittances – a key constituent of the economy – are set to jump 15 per cent this year to US$14 billion, according to the state bank of Vietnam, further boosting state coffers. HSBC expects economic growth to remain strong, coming in at just shy of 7 per cent this year and next.

There is an aura of confidence that you do not find in many regional nation-states, whether that is decelerating and overleveraged China, low-growth Japan, or Malaysia, where exports contracted by 2.8 per cent in January from a year earlier.

“Whether you talk to corporates, banks, investors or consumers, they all believe that Vietnam’s economy is in a very good place,” says Bill Stoops the chief investment officer at Ho Chi Minh City’s Dragon Capital. “The macro-economy is solid, growth is accelerating, the currency is stable, and there isn’t much commercial bank debt. There’s little to feel bad about.”

This positivity is sucking in capital as investors and corporates chase rising returns in a young nation of more than 90 million.

Jonathan Bowden, a partner in Singapore at White & Case, points to the nation’s “appealing demographics”, and compares Vietnam favourably with Indonesia, another nation benefiting from rising rates of car and home-ownership, greater financial inclusion, and a government wedded to privatisation and deregulation. Lien Le Hong, the head of institutional research at Maybank adds: “Investors love the opportunities presented by a mix of strong growth, low inflation and cheap valuations. It’s one of the best-performing countries in the region, whatever angle you look at it from.”

Deal activity reflects this rediscovered sense of optimism. In March, the Dubai developer Limitless began work on a long-delayed $550 million housing and tourism project in Halong Bay in north-east Vietnam. Limitless first unveiled plans to build 340 villas and apartments, along with retail and leisure facilities, in 2007, only for the financial crisis to intervene. With Vietnam’s economy again ticking up sharply, now was deemed the right time to kick off the project in earnest.

In mid-March, the government of the Socialist Republic of Vietnam embarked on a seven-day trip to the United States, where party officials met with fixed income investors in Boston, New York, Los Angeles and San Francisco. Also in March, one of the country’s largest privately owned firms, Masan Group, whose interests stretch from natural resources to consumer goods, issued a record $139m block trade, underlining the global hunger for financial instruments issued by one of the fastest-growing frontier markets.

Nor is Vietnam content merely to pull in global capital and put it to work. The country is bursting with ambitious corporates and entrepreneurs.

Nguyen Thi Phuong Thao, the chief executive of VietJet Aviation, has publicly outlined his intention to transform the nation’s sole privately run carrier into the “Emirates of Asia”. VietJet is pushing ahead with plans to complete an initial public offering in either Hong Kong or Singapore as early as the second or third quarter, with the aim of raising up to $800m.

So what has gone right for this long and beautiful sliver of a country? Well, for one thing, it has had a good mentor in the shape of its giant northern neighbour. China and Vietnam do not always get on – a bloody border war in the late 1970s is testament to that. But the former’s developmental model, based on a strong export-focused manufacturing sector, has been assiduously and successfully replicated by the latter. China’s economy took off after it joined the World Trade Organisation in 2001; Vietnam’s accelerated sharply after being admitted to the fold five years later.

“Vietnam is following in China’s footsteps,” notes Marie Owens Thomsen, the chief economist at Indosuez Wealth Management. “They both have a single ruling party, but they also recognise the benefits of allowing foreign and local private capital to permeate non-core industries, and in integrating economically with the wider world.”

Vietnam’s political leaders have also shown flexibility, proving willing to mend fences with old foes (China, the US) and to decipher, soothe and heal inevitable growing pains.

So while corporate debts have fallen in Vietnam in recent years (another boon, in the eyes of global investors), they are at record levels in China. In the same vein, non-performing loans (NPLs) are again on the march in China, while in Vietnam they have fallen to less than 2 per cent, having peaked at 17 per cent in September 2012.

Vietnam’s leaders have also listened to multilaterals, heeding their advice to invest in heavily in infrastructure to boost growth rates. The country is building new motorways, airports, ports, canals and rail lines. The capital, Hanoi, no longer suffers from interminable power cuts.

“Fast-growing economies often hit a brick wall because they aren’t willing or able to invest in good infrastructure,” says Mr Stoops. “Vietnam has not made that mistake.”

Still, much remains to be done. Vietnam ranked 90th in the World Bank’s 2016 Doing Business rankings, a rise of just three notches over the previous year. Securing access to power has improved markedly, but the country remains a global laggard in key metrics such as resolving insolvency, paying taxes and starting a business.

Infrastructure, for all the improvements, remains a work in progress. Last year, the government said it would need to source around $50bn in fresh capital between now and 2020 just to improve urban and pan-national transport links. Much of that will need to come from the private sector, creating huge new opportunities for construction firms and finance providers in from North America to Europe and the Middle East to Asia.

Two final, positive economic and financial forces are at work here – both born far from Vietnam’s golden shores; each set to benefit the local economy for years and even decades to come.

First is a new trade deal with the European Union, agreed in December and aimed at eliminating 99 per cent of tariffs on all Euro-Vietnamese trade over a 10-year period. Second is the far more systemically important Trans-Pacific Partnership.

Assuming it is ratified, the TPP should boost income and wages across a 12-nation bloc that includes the biggest developed nations (the US, Japan) and a sprinkling of vibrant frontier states ranging from Vietnam to Brunei. In an influential report published in January, the Peterson Institute for International Economics tipped the TPP to add $492bn to annual global income by 2030.

While the US will prove the biggest beneficiary in absolute terms, the agreement “will generate substantial gains for Japan, Malaysia and Vietnam as well”, the report noted, benefiting everyone from Vietnamese shrimp fishermen to local brewers and chip makers, all of whom will be knitted more firmly than ever into the global supply chain.

These are good times for Vietnam. But the best days of all may still be yet to come.

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