Vietnam business forced to look overseas for growth

Is the sun rising for Vietnam’s well-educated population or setting on its damaged ecosystem? Source: Wikimedia 

 Vietnam’s environmental degradation and glowing economic prospects both largely rely on international factors, as the once-insular state seems likely to return to its place as a focal point for global attention.

Farms and rice paddies in Vietnam’s two main deltas of Vietnam are forecast to dry up in the next few years as river levels fall raising questions about how sustainable the nation’s development really is.

The spread of salt water into the Hong River Delta and the Mekong Delta, Vietnam’s two main agricultural centres, is exacerbating the problem.

Scientists at a climatic change conference hosted by the French Institute of Research and Development and the Ho Chi Minh City University of Technology presented the bleak vision.

Dr Ho Long Phi from the Vietnam National University in Ho Chi Minh City said the Mekong Delta would see a 30-60 per cent increase in floods during the rainy season and increasingly severe droughts through the dry season.

Around 60 per cent of farmland in the delta would suffer from drought, Phi added.

Climatic change is working with the construction of reservoirs and hydropower plants upriver in China and Laos to reduce the flow of water into the delta.

The Mekong River fills around 120 reservoirs with a capacity of around 100 billion cubic metres.

The reservoirs block around 15 to 20 per cent of floodwater.

Currently Vietnam loses around 60 per cent of alluvium (a deposit of clay, silt, and sand left by flowing floodwater in a river valley or delta, typically producing fertile soil) in its rivers along the Mekong Delta because hydropower plants block it.

Around 90 per cent of alluvium for the delta would disappear when all current reservoirs being planned were built, Phi said.

The Hong River Delta in the north has suffered similar problems, according to Dr Pham Thi Huong Lan from the Hanoi-based Water Resources University.

“Reservoirs in China have caused a change to the water flow of rivers Da and Thao in Vietnam,” she said.

“Erosion has badly affected the areas [in the north of Vietnam].”

She said it would impact the lifestyle, production and sustainable development of the region.

Migration from the Mekong Delta to other areas of Vietnam is rising.

About 370,000 delta residents left between 2004 and 2009, with half migrating to Ho Chi Minh City.

In contrast to the warnings of environmental meltdown, investors are looking how other global trends will affect Vietnam.

Carl Delfeld, managing director of Tiger Cub Partners and a columnist for Forbes Asia, is confident the Trans-Pacific Partnership (TPP) will work wonders for Vietnam’s economy.

He assesses: “Two of the TPP’s winners hail from Southeast Asia – Malaysia and Vietnam, which still lack bilateral trade agreements with four countries in the pact, including the United States.

“Both count on TPP members for roughly one-third of their trade, and Bank of America Merrill Lynch estimates that the TPP would push Malaysia’s exports up roughly 10 per cent and Vietnam’s up 30 per cent.”

Delfeld continues: “While Japan and America will get a modest boost of economic growth as this agreement takes effect, the big winner will be Vietnam. According to UBS report, the TPP could potentially boost Vietnam’s economy by 14 per cent over the next five years.

“This country of 93 million is bursting with youthful energy, with 50 per cent of its tech-savvy citizens under the age of 30. Its manufacturing wages are 60 per cent of China’s, which is why Samsung makes half of its cell phones here.

“About 20 per cent of Vietnam’s GDP is attributed to foreign investment, and that will likely surge even higher. So far in 2015, foreign direct investment is up a stunning 53 per cent, most of it headed to the manufacturing sector,” Delfeld argues.

“A consumer boom is already underway. To put the potential in perspective, right now only 1.7 per cent of Vietnamese own a car, in Thailand that figure is 40 per cent.”

Delfeld enthuses: “Vietnam also has the lowest GDP per capita among TPP member states: US$1,900. Peru is the next lowest at US$6,800.

“Vietnam will become a manufacturing destination for industries that require low-wage labour to remain competitive. Sectors that need cheap wages, such as apparel, footwear and textiles, should greatly benefit,” Delfeld opines.

He continues: “Eurasia Group estimates that footwear and apparel exports will see a 50 per cent boost over the next 10 years due to the trade pact.

“Vietnam’s exports have tripled in US dollar terms since 2007 and its exports to North American markets are up an amazing 30-fold since 2000. The TPP should lessen the country’s reliance on the Chinese market and widen its appeal to markets such as Canada and Mexico.’

He says: “Meanwhile, the country’s macro situation has markedly improved. A few years ago, inflation was running at 20 per cent, but it’s now down to 2 per cent. Interest rates have fallen from 15 per cent to 6 per cent, property markets have stabilised and credit growth is up.

“Despite this progress, Vietnam’s stock market is still well off its high and trading at just eight times earnings. In addition, the current market value of all publicly traded companies in Vietnam is 30 per cent of its GDP, while Thailand and the Philippines are trading at 95 per cent and 115 per cent, respectively.

“These gaps won’t last forever,” Delfeld concludes.

Johanna Chua, an economist at Citigroup, agrees. He says: “Vietnam has already made huge gains in garment and footwear production, and these deals will help boost its comparative advantage as factories look to relocate from China, promoting more job creation and technology transfer.”

While Vietnam’s business landscape is known to be challenging, the potential of 90 million people and the pro-business, one-party government continue to attract firms hoping for big returns.

The Thais are keen to tap the lucrative Vietnamese market.

“Thai investors should invest in Vietnam but don’t forget to do a lot of homework, be well-prepared on rules and regulations and undertake in-depth scrutiny of the pros and cons of the market,” says Panyarak Poolthup, Thai ambassador to Vietnam.

The lack of transparency remains a major challenge.

The requirement to pay “tea money” to cut through the endless bureaucracy is a tiresome reality of business in Vietnam and a reason while Japanese investors prefer doing business elsewhere.

Corruption and bureaucracy create a huge burden for foreign small- and medium-sized enterprises (SMEs) because they cannot afford the frequent fee collections. Only big firms tend to survive in the long run, said Panyarak.

The mismatch between the workings of officials at different levels of government and their contrasting interpretations of Hanoi’s edicts provided another impediment, he said.

Poor interaction between town, provincial and central government made it easier for officials to take advantage of investors, he explained.

Domestic businesses in the nominally communist country, meanwhile, were not wholly enthused about totally open markets.

Some powerful Vietnamese firms expect civil servants to provide non-tariff barriers to protect them against international competition.
Mr Panyarak was recently quoted saying: “Don’t forget that Vietnam won the war against the US and France. They are no different today.” He omitted Vietnam’s decisive victory over China in 1979.

The ambassador urges prospective investors to carefully study investment rules which change between provinces.

Panyarak insists Vietnam still has abundant untapped opportunities, along with 6 per cent average growth.

Businesses should not delay, he says, because the country is opening suddenly through new trade agreements, including the Trans-Pacific Partnership.
It seems a nation that was so prized by political leaders during the Cold War for its strategic location is again becoming an international focal point, this time for the world’s business community.

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