Chi Minh City's tiny stock exchange is eerie: unlike any of its kind in the world, it's dead quiet. A dozen clerks softly tap keyboards in the grocery store-sized trading floor. "It's probably not what you're used to," concedes Phan Thi Thuong Tam, deputy director of the Ho Chi Minh City Securities Trading Center, as it's officially known. She talks in a whisper, as if a raised voice could send it scurrying back into oblivion.
Indeed, the centre is a fragile thing. Just six companies trade on its unblinking electronic board - fewer than there are licensed securities brokers. Before it opened in July 2000, stock trading was a lusty, informal affair. Entrepreneurs, refused loans by the staid, official-run banks, often sought capital from the yuppies in the coffee shops. There is still a thriving "grey market" in Ho Chi Minh City (the more daring call it the "free market") for shares in unlisted companies. It is self-regulating, and as such, anathema to communist Vietnam; Tam would like to see the "grey market" painted white and put under the care of the stock exchange.
That sums up Vietnam in 2001: an uneasy mixture of freewheeling capitalism and strict state control. Nong Duc Manh, who became Communist Party general secretary in April, has moved cautiously towards market reforms. Since the Enterprise Law was enacted last year to encourage private businesses, about 20,000 new companies have been established. Yet, discrimination against private-owned companies remains one of the biggest issues in Vietnam.
Privately held businesses are routinely denied bank credit and are ruled ineligible for tenders with the flimsiest of excuses. "Local authorities should respect us more," says Le Thi Giau, general director of Ho Chi Minh City-based rice trader Tan Hung Co in a rare outburst on the eve of an annual meeting between businesses and Prime Minister Phan Van Khai. "They think of business people as sharks," she said.
Nevertheless, the love affair with the free market continues. Authorities are already clearing the site for another exchange in the capital, Hanoi, next year. Hanoi officials have their eye on nailing a proposed second board for their new exchange. Tam says no decision has been made on the role of the second bourse. Far more important, she says, is getting more companies to list. The plan is to have 10 companies on the exchange by the end of the year.
Vietnamese firms are reluctant to turn private, however, because of the requirement for increased transparency. Having shareholders means holding shareholders' meetings, where books can be scrutinised and awkward questions asked of management.
One option the Vietnamese government is considering is simply forcing eligible companies to list on the exchange, whether management resists or not. "Madness," says a foreign fund manager in Ho Chi Minh City. More soberly, Huynh Kim Hoang, general director of medical-supply company Yteco, says forced listing is a kind of administrative sanction. He says the government should instead provide incentives to encourage enterprises to list. "It's just an option," Tam counters.
Vietnam will weigh such options more often as it grows closer to the global marketplace. Its membership of the Association of Southeast Asian Nations means many tariffs are being progressively cut to 0-5% over the next few years, pressuring domestic manufacturers. "Globalisation presents us with not only opportunities, but also challenges," Khai told a meeting of Asean economic ministers in Hanoi on September 15. "However, we should avoid the case where globalisation benefits only rich countries while leaving poor nations further behind."
Leaders realise the country is in for some hard times within an integrated world market. Few Vietnamese could pinpoint the connection between the terrorist attacks on the US in September and the rising price of liquefied petroleum gas in Ho Chi Minh City a few days later. (Thailand, Vietnam's main supplier, feared a global shortage and temporarily halted exports). Vietnam Airlines lost up to US$1 million a day after its code-share flights connecting Vietnam and the US via Taipei were halted after the attacks.
Similarly, the bursting of the US dotcom bubble and the Japanese stagnation have taken their toll. Fujitsu Computers Vietnam, one of the largest foreign ventures in the country, announced in September it would lay off 500 workers. Another Japanese company, electric motors maker Mabuchi Corp, laid off 400 in the same week.
It has been a while coming: Vietnam's first quarter economic growth offered little hint of the coming impact from the regional slowdown: real GDP rose 7.2% year-on-year, compared with full-year growth of 6.7% in 2000. Since then, growth has slowed, while manufactured exports growth fell from 16% last year to nearly zero in the first half of 2001.
Andrew Steer, the World Bank's director in Vietnam, predicted that full-year GDP growth in 2001 would hover around 5.5%, while the International Monetary Fund's estimate is just 5%. In June, the World Bank criticised the Hanoi leadership over slow reforms and continued reliance on state-owned businesses.
But reforming the state sector means shedding jobs, creating the spectre of social unrest. Unemployment figures are hard to pin down, but the International Labour Organisation estimates underemployment at around 50%. Skilled workers, however, are harder to find. To catch up with its wealthier, free-market Southeast Asian neighbours and absorb the 1.4 million to 1.7 million people entering the job market each year, Vietnam needs to grow at a much quicker pace, the IMF notes.
Not everyone is discouraged. "While the pace of reform may not be to all investors' liking, over the past two years the government has demonstrated its commitment to reform across a wide range of sectors," says Damian Clowes, managing partner in PricewaterhouseCoopers Vietnam and one of the more bullish analysts. "I currently see both the short-term and long-term prospects for Vietnam as very positive," he adds.
While foreign direct investment (FDI) inflows to Vietnam do appear to be reviving, signs of stability are not yet apparent. Statistics from the planning and investment ministry show that the total investment capital registered over the first six months of 2001 amounts to US$1.25 billion in 97 projects, which is nearly triple the year-earlier period. However, 26 projects pulled out, taking with them US$700 million. The World Bank estimates Vietnam attracted US$600 million in new investments in 2000, down from US$700 million a year earlier and well down from the 1990s levels of US$2 billion a year.
Nguyen Tran Bat, director of InvestConsult, a Hanoi investment advisory firm, says Vietnam is unlikely to attain its goal of US$16 billion of foreign direct investment from now until 2005 unless it loosens rules for foreign companies, eases restrictions on the private sector and cuts red tape.
Moreover, say foreign analysts, the battle against official graft must be fought and won. "Of most importance in Vietnam are the issues of foreign firms' freedom to invest without concerns of corruption, access to currency and repatriation of earnings," says Anne Ramstetter Wenzel, a principal at Econosystems, a Menlo Park, California, consultancy that analyses emerging-market economies.
The General Statistical Office (GSO) has forecast that the consumer price index (CPI) will rise by 2-3% this year, well below the forecast 5%. But statistics showed that the CPI actually declined 0.7% in the first half. "Consumer demand is weak as underscored by a growing deflationary environment," a third-quarter outlook by ANZ Bank noted.
The State Bank has continued with a slow devaluation of the local currency, the dong, which has eased from 14,000 to the dollar a year ago to a shade over 15,000 at September 30, 2001.
Most experts say any psychological effect of the decline is offset by the benefits to exports. "I think 15,200 [dong to the dollar] is now a possible year-end rate," says Tom Bowen, who heads Standard Chartered Bank in Hanoi.
While Vietnam is warning domestic companies that closer integration within the Association of Southeast Asian nations (Asean) will bring more competition, many Vietnamese exporters are looking beyond the region. Of the growth in total export earnings in 2000, 60% was attributable to exports to Asian markets outside Asean, mainly Japan and China. "The US market also expanded significantly, although from a low level," notes the latest World Bank analysis of Vietnam. Seafood export earnings growth in 2000 was highest in shipments to North America, and non-Asean Asia.
Vietnam's industrial production in the first half of 2001 rose 14.1% to US$7.5 billion, according to the Government Statistics Office. Bicycles, electric fans, steel products and crude oil are among the fastest growing exports. Vietnam expects the growth rate of industrial output for the whole year to be 14%. Private-sector enterprises showed 17% growth while centrally managed state-owned businesses posted only 11.5% growth and locally managed state firms only 8%.
For commodities such as rice, the outlook is dimmer, with steep declines in most agricultural prices. In the first six months, revenue from exports of such commodities as coffee, pepper, rice, cashews, and tea fell by a combined US$497 million (about 15.8%). Quality remains an issue: low-grade Vietnamese coffee is often exported to South America, rebagged, relabelled and sent on to the West. On the other hand, there is growing demand for Vietnam's smaller, darker cashews. "They are firmer and sweeter than the cashew pieces shipped from India," says Gene Cohen, a trader from Greenacres, Washington, who buys more than 10 tonnes of nuts from Vietnam a year.
Most analysts seem to believe that the Vietnamese government is essentially committed towards economic reform. But it will remain a hard road to hoe in the face of increasing competition, especially from China. Officially, Vietnam supports Beijing's entry to the WTO, but is concerned about China's ability to undersell its own products. "Entry into the World Trade Organisation makes China a more formidable competitor," says Asean secretary-general Rodolfo Severino.
In other words, competition, globalisation and a world recession are likely to hamper Vietnam's already slow and painful transition to a market economy.