Highlights
– Vietnam’s economy grew by nearly 8.5 percent in 2007
– Despite high growth rates, inflation and poor infrastructure remain major problems in maintaining high economic growth rates
– Economic growth is expected in 2008
While China’s double digit annual growth rate dominates some international headlines, many of its Asian neighbors, to include Vietnam, are experiencing similar levels of economic expansion.
Vietnam has come a long way from the underdeveloped, planed-economy state it was in the 1980’s.
Economic Progress
In 2007, Vietnam’s economy grew nearly 8.5 percent, the fastest rate in 11 years. The fact that the country recently joined the World Trade Organization (WTO) is a major factor in its rapid economic growth. The country’s Gross Domestic Product–which reached 8.48 percent compared to 8.2 in 2006–is one of Asia’s highest and only outpaced by neighboring China.
When it comes to foreign investment, South Korea currently tops the list of nations that are investing in Vietnam. Since launching market reforms two decades ago and joining the WTO in January, Vietnam has been able to attract 20.3 billion dollars in investment pledges after governmental promises to further open its doors to foreign business under WTO rules and regulations. Total foreign investment in 2006 reached 12 billion dollars and that number is expected to continue rising.
At a recent economic conference titled, “Vietnam: A Rising Star in Asia”, Vietnamese Prime Minister Nguyen Tan Dung met with nearly 500 local and international investors to discuss the country’s economic future. At the conference, Vietnamese government officials hoped to convince international companies and investors to invest in the country and play a role in Vietnam’s economic future.
Structural Challenges
Based on several media reports, the government aims to achieve a growth rate of 9 percent per year. The most significant obstacles to achieving this target is Vietnam’s relatively undeveloped critical infrastructures, direct to foreign investment, economic liberalization and inflation; all of which impact the overall business climate.
• The General Statistics Office released a statement on December 31, 2007, stating “There have been a number of shortcomings and weaknesses in our economy. Prices of important imported raw materials such as petroleum, gasoline, steel, fertilizer, plastic have been rising quickly in the world market.”
• Prime Minister Nguyen Tan Dung recently advised investors at the “Vietnam: A Rising Star in Asia” meeting about an implementation process of various technological infrastructure projects, ranging from transportation to power to telecommunications.
Critical infrastructures continue to be a challenge. According to General Electric’s Southeast Asian President, Stuart Dean, to maintain rapid economic growth Vietnam needs to develop modern critical infrastructures commensurate with economic growth. For instance, he noted that to ensure economic growth of 9 percent a year, the energy sector must grow at 15 percent per year.
Vietnam also needs foreign investment to maintain its high rate of economic growth. Vietnamese officials have hosted several conferences, with the most recent on January 8, 2008 with the sole purpose of informing investors of the benefits of investing in the Asian country.
Foreign investors’ trust in Vietnam is on the rise as official development assistance (ODA) pledges from foreign donors hit 5.4 billion USD last year, 20 percent higher than in 2006. 2007 marked the first time Vietnam’s ODA disbursement surpassed its plan of 2 billion USD, a year on year of 10 percent.
Another economic worry is Vietnam’s slow economic liberalization. The government has taken several steps to speed up equitization. By 2010, all State-owned enterprises are expected to be equitized; a very ambitious target in our view.
Responding to the challenge of a globalized economy, the government also has been prodding local businesses to be more active and not to rely on the state. In December, the government launched three websites to provide information about the implementation of World Trade Organization (WTO) commitments, trade, and trade barriers to make it easier for businesses and sectors in mapping out their strategies.
Finally, Vietnam’s rapid economic growth and transformation has also spurred inflation. Consumer prices rose 12.6 percent in December 2007, eroding the overall economic gains achieved by economic expansion during the year .
Future Outlook
Despite Vietnam’s high inflation rate and other shortcomings, the country’s economic future is bright. With the growth rate in 2007 equaling 8.5 percent,
Membership in the World Trade Organization also has helped Vietnam’s ability to engage in global commerce, but brought challenges of international competition business practice.
If Vietnam continues to focus on infrastructure development, liberalize its economy and manage inflation, it will continue its remarkable economic developing. Balancing all those macro-level transformations will be difficult however, and Vietnam faces significant competition in many areas—particularly manufacturing—from other countries in the region. We believe Vietnam will continues to economic development process, but hitting the 9 percent rate of growth, year over year, will likely be a challenging effort.
