Vietnam: Overheated Economy

- Inside Counsel magazine, Novemer 2008

By Mary Swanton
(Quoted Chris Runckel, President of Runckel & Associates,
www.Business-in-Asia.com)

The streets of Ho Chi Minh City today might stun a middle-aged American who grew up with images of a destitute communist nation battered by a brutal war with the United States. Today, Vietnam's youthful population--more than 60 percent under 35 years old--is fueling an economy that grew 8.5 percent in 2007, the same year the Ho Chi Minh Stock Exchange doubled its value. The Vietnamese are eager consumers of western goods, spurring an influx of U.S. companies, which find both a growing market and an entrepreneurial spirit in the country.

"In Vietnam today, there is very little memory of the war," says Khoa Do, a partner at DLA Piper. "The populationis young, and the Vietnamese admire Westerners and embrace capitalism. Ho Chi Minh City, for example, is full of U.S. household names such as Coca-Cola, Intel, eBay and Yahoo."

But recently Vietnam has found itself sharing more with America than brand names. Rising global prices of food and oil and a speculative real estate bubble at home wreaked havoc on the country's economy this year. By May, Vietnam's trade deficit already had surpassed by $3 billion its total 2007 trade deficit.

Year-to-year inflation reached a 17-year high of 28.3 percent in August before falling only slightly in September. And the Ho Chi Minh Exchange, once wildly successful, fell 68 percent and saw trade activity plummet as the economy's growth slowed to 6.5 percent.

Yet despite all this, Vietnam remains firmly on the foreign investment radar. Against all odds, foreign direct investment in the country is actually up 37.3 percent this year, with some massive projects in the iron and steel, oil and gas, and real estate sectors that make up for fewer projects overall. And experts believe the crisis has begun to subside as prices come back down to earth following government measures to control inflation through credit restrictions and higher interest rates.

"I think Vietnam will prevail as one of the obvious picks for foreign direct investment with regard to emerging growth companies," Do says.

Technology Push

In the technology sector, Vietnam is already an obvious choice for many multinationals. Moving forward in Vietnam this year despite inflation are projects from giants such as eBay, Sun Microsystems, Samsung, Canon, Fujitsu and Intel, which plans to open its $1 billion assembly and testing facility next year--all part of the government's announced goal to double or triple technology revenues by 2010 and for technology to become "a main driver of the nation's socioeconomic development" by 2020, employing 500,000. The government has offered tax incentives and more procedural efficiency, with promises to improve laws governing the sector.

"The government has been able to clear some of the logjams in terms of individual income tax and bandwidth in terms of infrastructure and other constraints that we'd been facing in years past," says Fred Burke, managing partner of Baker & McKenzie's Vietnam office. Burke is chairman and a member of the prime minister's Advisory Council on Administrative
Reform and chairman of its legal committee.

But obstacles remain in the legal and regulatory codes. The WTO approved Vietnam as a member just two years ago, and in the years running up to accession, the government rushed to put its legal code into order. To give an idea of the scope of the undertaking, Vietnam didn't have a formal civil procedure code until 2005. Other existing laws had to be adjusted to comply with WTO rules.

The speed with which some laws were updated resulted in a number of unstable laws. The major laws governing foreign and domestic investment and business establishment and licensing remain unclear and untested on any significant level. And while venture capital and private equity deals are growing in popularity, Vietnamese law must evolve to accommodate them. "It takes a lot of creativity and patience," says Do. "But I think the rough patches will work themselves out over time."

The good news is that the government has been open to consultation on business issues and is committed to making things easier on foreign investors. Tran Thi Thanh Ha, a Baker & McKenzie partner who worked on Vietnam's Civil Procedure Code, says, "The court system is open to advice for improvements to respond to the needs of society."

Real Estate Woes

The other recent hurdle to business growth in Vietnam is the stress that rampant inflation has put on the economy.

"It's really put the brakes on some of these projects that are having to go back to the drawing board and cut costs by either cutting out part of their plans or stalling the project," Burke says. "[Many projects] seem to be going as planned, but I do hear rumblings that there are really unprojected cost overruns that [some companies] are going to be facing due to the inflation and construction prices."

Still, the real estate market continues to be a hot area for foreign investment following a 2007 decree that allows foreign investors to own land for 70 years with unlimited renewals--previously they were allowed only 50-year leases. While demand for construction materials and services remains high, land prices have come down thanks to the government's efforts to control credit.

"Nine months ago, it was a huge problem for these companies coming in to set up industrial zones," Burke says. "[Clients were complaining], 'The price of rent goes up every 45 minutes.'"

While growth continues in the short term, long-term economic success in Vietnam hinges on how fast the government can overhaul the new, underdeveloped legal and regulatory codes and, of course, on whether the economy stabilizes. But experts across the board have confidence that the country will regain its status as the next Asian tiger.

"The World Bank, the Asian Development Bank and a number of the major economic agencies have looked at what the government has done and feel that it's done a credible job, and that in fact the inflation is falling and what the government has done has been effective," says Christopher Runckel, a former U.S. diplomat in Vietnam. Runckel, who now consults businesses on Asian expansion, compares Vietnam's rapid economic growth to that of China--which has fought inflation problems of its own.

The economic setbacks of the past year, he says, "were all the sort of necessary things that Vietnam had to go through to get its growth down to a less heated and more measured approach.