beyondbrics

“Vietnam has a lot of potential,” the Vietnamese country head of a large American company told beyondbrics recently. “But it had a lot of potential 10 years ago and it’ll still have a lot of potential in ten year’s time.”

His attitude is typical of a growing number of international investors in Vietnam who have become frustrated by the ongoing financial instability and apparent inability of the government to drive through much-needed reforms in a timely fashion.

The macro-economic situation is challenging enough with annual inflation over 20 percent and the government facing big trade and budget deficits at a time when foreign currency reserves have shrunk to less than two months of imports.

But investors also have a long list of sector-based gripes, from power companies unhappy with unprofitably low electricity prices to hoteliers perturbed by Vietnam’s reluctance to ease its restrictive visa policy.

At a bi-annual meeting between the government and the private sector last month, one foreign investor after another stood up to pour forth their grievances. These veteran Vietnam investors were well aware that the government, represented at this forum by investment minister Vo Hong Phuc, prefers to discuss sensitive subjects behind closed doors. But they let fly regardless, in a sign of their sheer frustration trumping their usual pragmatism.

Economists, the World Bank and the International Monetary Fund have welcomed the government’s efforts to stabilise the economy in the short term via a package of fiscal and monetary tightening measures known as Resolution 11.

But investors are not so convinced that this fire-fighting approach will pave the way for necessary structural changes such as more independence for the central bank, reforms of bloated state-owned enterprises and cuts to inefficient public investment projects.

There remains widespread scepticism about the government’s apparently Damascene conversion from a focus on growth to stability, as summed up in a recent note to clients by Citi:

While monetary policy will need to manage the growth-inflation tradeoff, given the government’s poor track record of sustaining policy tightening in recent history, we think the market (and ourselves) remain wary that commitment to macro stability could prematurely ease the moment headline inflation comes off, and like before, unhinge expectations on the dong and inflation.

The challenges facing Vietnam are profound. Even if the government does have the political will to tackle vested interests in the state-owned enterprises, ministries and provinces, it will still likely take years to resolve these complex issues.

The Vietnam bulls argue that, as in other frontier markets, if you want to benefit from rapid growth in Vietnam, you have to adopt a long-term view and take the rough with the smooth.

But, in the five-star hotels and fancy restaurants of Hanoi and Ho Chi Minh City, the mood among the foreign money men is not good.

Oliver Massmann, a German lawyer who is one of a few foreigners in Hanoi who speak fluent Vietnamese, argues that the problem is partly one of expectations:  some hope for too much too soon while others are too quick to write off a country that has come through tough times in the past.

“The outside world has always under-estimated and over-estimated Vietnam,” says Massmann, a partner at Duane Morris.

But even he believes that Vietnam is losing its reputation as an attractive investment destination and that the government must “walk the talk” or risk losing out once the free trade agreement between China and the Association of Southeast Asian Nations creates a level-playing field across the region from 2015.

“Vietnam must speed up reform or it will be left behind,” he says.

Related reading:
Vietnam struggles to realise its potential, FT
Vietnam rulers reach out to business people, FT
Vietnam leaders leave problems unresolved, FT
Vietnam: slow down? what slow down?, beyondbrics
Vietnam file, beyondbrics