Country Report

Vietnam

May 2008 Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

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Vietnam Executive summary 2

Highlights

Outlook for 2008-09 3 4 5

Political outlook Economic policy outlook Economic forecast

Monthly review: May 2008 9 9 10

The political scene Economic policy Economic performance

Data and charts 14 15 16 17 18

Annual data and forecast Quarterly data Monthly data Annual trends charts Monthly trends charts

Country snapshot 19

Editors: Editorial closing date: All queries: Next report:

Monthly Report May 2008

Political structure

Hilary Ewing (editor); Kilbinder Dosanjh (consulting editor) May 12th 2008 Tel: (44.20) 7576 8000 E-mail: [email protected] To request the latest schedule, e-mail [email protected]

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Executive summary Highlights May 2008 Outlook for 2008-09

• The ruling Communist Party will remain indifferent to calls for political pluralism in 2008-09, and will continue to reject demands for major political reform. • The government will struggle to prevent small-scale protests calling for wage increases in the light of currently high food price inflation, and could face larger-scale demonstrations if its measures to curtail inflation are ineffective. • The implementation of measures to combat inflationary pressures will continue to pose policy dilemmas. • Real GDP growth will slow to 7.3% in 2008 before picking up to 8% in 2009. • Consumer price inflation is accelerating. The Economist Intelligence Unit forecasts that inflation will average over 19% this year before slowing to 9.4% year on year in 2009. • The dong is set to depreciate slightly against the US dollar in 2008-09. • Owing to the large merchandise trade deficit in 2008-09, the current account deficit will stand at the equivalent of 7.5% of GDP in 2008 and 5.4% in 2009.

Monthly review

• People in many parts of the country have been hit by a series of outbreaks of acute diarrhoea. By late April 2,490 patients, including 377 suffering diarrhoea as a symptom of cholera, were being treated in 20 provinces and cities. • The government has prioritised tackling inflation, calling on public agencies to restrain their spending. The government has also put a lid on price increases for power, coal, cement and steel until June. • Consumer price inflation has continued to rise, reaching 21.4% year on year in April. The most obvious cause was a 34.2% increase in the price of food and foodstuffs in the same period • The VNIndex, which tracks the stock market in Ho Chi Minh City, has begun to recover gradually, after a prolonged downwards slide. • The relative stability of the exchange rate against the US dollar, coupled with lower borrowing rates for US dollars than for dong, has prompted firms to borrow heavily in the currency. • New commitments of foreign direct investment were buoyant in the first quarter of 2008. By March 22nd, 147 new projects were approved, representing investments worth US$5.2bn.

Monthly Report May 2008

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Outlook for 2008-09 Political outlook Domestic politics

The ruling Communist Party will remain indifferent to calls for political pluralism in 2008-09, and will continue to reject demands for major political reform. The government will struggle to prevent small-scale protests calling for wage increases in view of current high food price inflation, and could face larger-scale demonstrations if its measures to curtail inflation are ineffective. The Asian Development Bank is also concerned about the negative impact that higher food prices will have on poor households, who spend the majority of their income on food. The National Assembly (the legislature) will remain dominated by party members, but it will become more assertive, shedding its tag as a rubber stamp for the government as its directly elected deputies play a greater role in scrutinising policy. Calls by the assembly for greater spending on social welfare are likely to be met with approval by senior officials, especially as social stability is necessary to maintain the party!s control. A major challenge that the party will face is the need to manage people!s expectations of continued strong economic growth. There are clear signs that the economy is overheating, and there is also a risk that the forecast recession in the US in the first half of 2008 could slow growth in Asian markets by more than the Economist Intelligence Unit expects, leading to slower economic expansion in Vietnam than currently forecast. Vietnam!s leadership continues to be plagued by revelations of endemic corruption and it will need to prove that progress is being made in the party!s fight against graft in order to maintain its authority. International donor funding and foreign direct investment could also be affected if the government is unable to crack down on graft. Efforts will be led by the National Steering Committee for Corruption Prevention and Control under the direction of the prime minister, Nguyen Tan Dung. However, the failure to create a fully independent committee has raised doubts regarding the impartiality of investigations, particularly in cases involving senior members of the party. Ongoing crackdowns on corrupt officials and state-owned enterprises (SOEs) are a good indication that the government takes graft seriously, but are also a sign of the pervasiveness of the problem. The government will continue to punish harshly those found guilty of political dissent. Terrorism and other national security-related charges are often used by the government to justify arresting human rights activists and dissenters. Although cosmetic gestures may be made in the short term to placate aid donors and foreign governments, it is unlikely that the government will make major changes in its treatment of political dissidents in the forecast period.

International relations

Monthly Report May 2008

Vietnam will play a much greater role in international affairs in 2008-09, owing to its position as a non-permanent member of the UN Security Council since January 1st 2008. Vietnam will take on an expanded diplomatic role both regionally and internationally as a result, which will allow the government to

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showcase its recent economic transformation. Mr Dung has stated that the seat will allow Vietnam to promote itself as a peace-loving country. However, it will also pose a challenge to Vietnam!s traditional stance of neutrality, which will be difficult to sustain once it has to vote on specific UN resolutions. In terms of bilateral ties with important allies, the outlook is not greatly encouraging. Relations with the US and the EU will continue to be negatively affected by Western governments! concerns regarding human rights, as well as by commercial disputes stemming from Vietnam!s rapid export-led economic growth. Vietnam!s links with China will continue to strengthen in most spheres, partly reflecting the government!s desire to ensure that it does not alienate its northern neighbour by growing too close to the US. However, tensions have recently heightened between the governments of Vietnam and China in relation to the disputed sovereignty of the Paracel and Spratly islands. There is unlikely to be any binding resolution of this issue in 2008-09.

Economic policy outlook

Monthly Report May 2008

Policy trends

The government is set to face a number of challenging policy issues in 2008-09, most notably the need to control inflation. The government is acutely aware of the threat that rampant inflation poses to the country!s economic and social stability, and has unveiled a raft of measures designed to dampen inflationary pressures. However, the implementation of these measures continues to pose policy dilemmas, given that such moves could also slow economic growth and widen the trade deficit. In addition, the conditions of Vietnam!s membership of the World Trade Organisation (WTO) will require the government to push ahead with liberalising reforms. The programme of SOE equitisation (partprivatisation) has decelerated, and confidence has been dented by the recent stockmarket slump. In terms of its general policy aims of reducing poverty and bringing the country up to middle-income status, the government will retain the full support of foreign donors. In December 2007, during the annual meeting of the Consultative Group (including both international donors and the government), foreign donors promised to provide a record US$5.4bn in official development assistance in 2008, up from the US$4.4bn pledged for disbursement in 2007.

Fiscal policy

The government!s budget deficit (excluding on-lending) is estimated to have reached an equivalent of 1.9% of GDP in 2007, up from 0.3% of GDP in 2006. The deficit will widen in 2008-09, to an average of 2.3% of GDP, although the government has indicated that its fiscal policy may now be less expansionary than previously planned, owing to concerns about rising inflation. Strong economic growth will ensure that tax revenue remains buoyant in 2008-09, and from January 2009 a reformed personal income tax system will help to swell the government!s coffers. The new income tax structure will broaden the taxpayer base by making benefits as well as salaries taxable, and will apply the same tax brackets for both Vietnamese and foreign workers (the tax threshold for foreign workers is currently twice as high as that for local workers). The Ministry of Finance forecasts that under the new scheme 2.3m people will pay personal income tax, and revenue from the tax will more than double when the new

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system comes into effect. The boost that the government received in 2007 from the oil price boom will be repeated this year"the continued upward trend in global crude oil prices in 2008 is a positive factor for Vietnam in terms of increasing tax revenue from the petroleum sector. Although the government may cut back some spending programmes, expenditure will remain high, as the government is still committed to programmes to improve infrastructure and social welfare. Monetary policy

The authorities have sharply tightened monetary policy, aiming to cool the economy and rein in inflation. The State Bank of Vietnam (SBV, the central bank) remains keen to prevent excessive growth in domestic credit, and it has had some success recently, following moves to increase the reserve requirement (from 10% to 12%) and to force banks to buy D20.3trn (US$1.3bn) in Treasury bills in order to decrease liquidity in the market. Commercial banks have also come under pressure to reduce deposit rates, so as to limit growth in their deposit bases. In a clear sign that the SBV is intent on tightening policy, it raised benchmark dong interest rates in late January, pushing the discount rate up to 6%, from 4.5% previously, and raising the base rate from 8.25% to 8.75%, the first such change since December 2005. Nevertheless, inflation is set to remain in double digits, and further measures to tighten policy will be needed. The SBV is thus likely to raise reserve requirements again, possibly to 13%, and to push up its policy rates even higher. In addition, many observers are calling on the government to develop a more effective monetary policy, including loosening the US dollar peg.

Economic forecast International assumptions

International assumptions summary (% unless otherwise indicated) Real GDP growth World China EU27 Exchange rates ¥:US$ US$:€ SDR:US$ Financial indicators ¥ 3-month Gensaki rate US$ 3-month commercial paper rate Commodity prices Oil (Brent; US$/b) Gold (US$/troy oz) Food, feedstuffs & beverages (% change in US$ terms) Industrial raw materials (% change in US$ terms)

2006

2007

2008

2009

5.0 11.6 3.1

4.8 11.9 2.8

3.7 9.6 1.7

3.8 9.0 1.9

116.2 1.3 0.68

117.8 1.4 0.65

101.0 1.5 0.61

96.0 1.5 0.62

0.28 5.03

0.61 5.06

0.73 1.93

0.88 2.43

65.3 604.5

72.7 696.7

91.3 934.0

85.0 848.8

10.2 49.6

37.8 11.1

27.4 1.1

-3.7 -15.1

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

We forecast that growth in the world economy (measured using purchasing power parity weights) will slow to an average of 3.7% in 2008, down from 4.8%

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in 2007, owing to the forecast recession in the US and global financial market turmoil. Economic growth in the US, Vietnam!s leading export market, will slow from 2.2% in 2007 to 0.8% in 2008, before accelerating slightly, to 1.4%, in 2009. These slower rates of US expansion may hamper Vietnam!s export growth, but continued strong growth in China will partly offset this effect. We have revised up our forecast of global crude oil prices, with prices (dated Brent Blend) set to average US$91.3/barrel in 2008 and US$85/b in 2009. This will support Vietnam!s export revenue (crude oil is a major export earner), but imports of petroleum products, on which it relies heavily, will stay expensive. Economic growth

Gross domestic product by expenditure (D bn at constant 1994 prices where series are indicated; otherwise % change, year on year) Private consumption Public consumption Gross fixed investment Final domestic demand Stockbuilding Total domestic demand Exports of goods & services Imports of goods & services Foreign balance GDP

2006 a 2007 b 273,585 293,682 7.3 7.3 27,797 29,882 8.8 7.5 144,595 160,500 8.6 11.0 445,977 484,064 7.8 8.5 12,050 10,750 0.5 d -0.3 d 458,027 494,814 8.1 8.0 384,180 b 440,883 15.3 b 14.8 407,273 b 473,845 14.6 b 16.3 -23,093 b -32,962 -0.2 bd -2.3 d 425,135 461,189 8.2 8.5

2008 c 306,931 4.5 31,973 7.0 178,637 11.3 517,542 6.9 11,750 0.2 d 529,292 7.0 501,426 13.7 542,014 14.4 -40,588 -1.7 d 494,704 7.3

2009 c 326,753 6.5 34,467 7.8 198,823 11.3 560,044 8.2 12,500 0.2 d 572,544 8.2 582,324 16.1 625,440 15.4 -43,116 -0.5 d 534,428 8.0

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Contribution to real GDP growth (as a percentage of real GDP in the previous year).

Real GDP growth will slow in 2008-09 from the impressive rate of 8.5% recorded in 2007. We forecast that growth will fall to 7.3% in 2008 before picking up to 8% in 2009. The government!s policy focus is now on bringing about a degree of economic stability rather than striving to meet lofty real GDP growth targets. Owing to the fact that the authorities are tightening the reins on credit growth, consumption growth will slow in 2008. Consumer demand overall will continue to be fuelled by the expansion of employment. Private investment will carry on growing on the back of the government!s moves to level the playing field for private companies relative to state entities in 2008-09. Foreign direct investment (FDI) also remains robust, with commitments for new and existing projects reaching US$20.3bn in 2007, up from US$12bn in 2006. Growth in exports of goods and services will moderate in 2008 as US import demand weakens and global economic growth slows. There will be a subsequent drop in imports (as exporters cut back on their imports of intermediate goods), but falling tariff barriers will make imports, particularly of consumer goods, increasingly affordable in comparison with domestic Monthly Report May 2008

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products. Net exports will therefore continue to make a negative contribution to growth in 2008-09. On the supply side, economic growth will continue to be driven by the industrial sector, which will expand by about 10% a year (on a value added basis) during the forecast period. This strong growth will be the result of the continued deepening of the industrial base, together with the resilience demonstrated by the textile and garment sector in an increasingly liberalised global trading environment for this category of products. GDP expansion will also be fuelled in 2008-09 by strong growth in services, particularly tourismrelated and financial services. Inflation

Consumer price inflation is still accelerating, reaching 21.4% year on year in April, up from 19.4% in March and 15.7% in February. The upward trend in the general price level is primarily being driven by supply-side factors"prices for food and foodstuffs rose by 34.2% year on year in April. However, inflationary pressures have also been amplified by large capital inflows that have increased the money supply. The government!s expansionary fiscal policy stance, combined with the SBV!s failure hitherto to rein in credit growth, have added to the upward pressure on the general price level. The government has introduced lower import duties on certain products, has capped rice exports and has taken firm steps to tighten monetary policy. However, we forecast that inflation will average over 19% this year. As the effects of tighter monetary policy become more apparent in 2009, inflation will slow, dropping back to an average of 9.4% for that year.

Exchange rates

The dong has weakened against the US dollar since late March, dropping back to around D16,094:US$1, bringing to an end a six-month period of appreciation. (The dong averaged around D15,950:US$1 in the first quarter of 2008.) The authorities continue to struggle with the policy dilemma of whether to hold down the value of the dong against the US dollar in an effort to support exporters (thus helping to prevent the trade deficit from widening further) or to support the appreciation of the dong so as to alleviate inflationary pressures. In a move contrary to the broad policy priority of tackling inflation, in late March the SBV announced that it would again buy foreign currency from credit institutions, a move that will support the weakening of the dong. Although the dong is set to appreciate slightly in 2008 on an annual average basis, we forecast that it will resume a weakening trend during the year. The dong will also be more volatile in 2008-09, with the SBV widening the trading band within which the dong is permitted to fluctuate daily against the US dollar. Since March the dong has traded in a band of 1% either side of the daily rate set by the SBV, compared with the previous band limit of 0.75% either side. A further widening of the trading band, to 2%, is likely in the near future.

External sector

Although the slowdown in the global economy (and that of the US in particular) will hurt Vietnam!s export sector, merchandise export revenue will still be strong in 2008-09. Vietnam!s exporters have succeeded in widening their trade links (China and Australia, for example, are increasingly important destinations for exports), while membership of the WTO since January 2007

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also means that Vietnamese goods now face fewer restrictions and lower tariffs. However, the rise in the real effective exchange rate will hamper the competitiveness of the export sector. The import bill will continue to expand sharply, although imports of intermediate goods used to produce goods for export will be tempered by the slight slowdown in export volume growth in 2008. Demand for imported machinery and other capital goods will remain strong, and consumer goods will become more readily accessible as Vietnam lowers tariff barriers to fulfil its Association of South-East Asian Nations (ASEAN) Free-Trade Area and WTO membership commitments. Owing to the large deficit on the merchandise trade account in 2008-09, the current account will remain in negative territory, with the deficit standing at the equivalent of 7.5% of GDP in 2008 and 5.4% in 2009, up from the estimated deficit of 4.4% in 2007. The services and income accounts will remain in deficit. Stronger growth in tourism receipts will be offset by rising imports of traderelated services. The upward trend in the repatriation of foreign investors! income and profits will continue in line with the expansion in the operations of foreign-invested enterprises. Inflows of current transfers will remain buoyant, and the current transfers surplus will offset the combined deficits on the services and income accounts. Forecast summary (% unless otherwise indicated) Real GDP growth Industrial production growth Gross agricultural production growth Consumer price inflation (av) Consumer price inflation (year-end) Lending rate Government balance (% of GDP) Exports of goods fob (US$ bn) Imports of goods fob (US$ bn) Current-account balance (US$ bn) Current-account balance (% of GDP) External debt (year-end; US$ bn) Exchange rate D:US$ (av) Exchange rate D:¥100 (av) Exchange rate D:€ (year-end) Exchange rate D:SDR (year-end)

2006 a 8.2 17.0 3.4 7.7 6.9 11.2 -0.3 b 39.9 b 40.2 b 0.3 b 0.5 b 20.2 15,994 13,762 21,186 24,152

2007 b 8.5 17.3 3.4 a 8.4 a 12.6 a 11.4 -1.9 48.1 52.3 -3.1 -4.4 21.7 16,080 a 13,653 a 23,474 a 25,653 a

2008 c 7.3 15.4 2.5 19.2 15.0 11.8 -2.2 60.7 68.9 -6.5 -7.5 24.4 16,099 15,948 24,621 26,347

2009 c 8.0 16.5 3.0 9.4 8.9 12.0 -2.5 72.4 79.7 -5.5 -5.4 26.5 16,220 16,896 23,384 26,062

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

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Monthly review: May 2008 The political scene Disease outbreaks are a significant concern

People in many parts of the country have been hit by a series of outbreaks of acute diarrhoea. By late April 2,490 patients, including 377 suffering diarrhoea as a symptom of cholera, were being treated in 20 provinces and cities. The problem was particularly severe in the capital, Hanoi, where the water from contaminated lakes is sometimes used to clean food. Hanoi has 110 lakes, of which only 13 are not contaminated with untreated sewage. Food vendors close to Linh Quang Lake were closed down when the lake was found to harbour the cholera bacterium; the lake had not been cleaned for more than 40 years, and there is no adequate local sewage system in the vicinity. Disease can spread easily in Vietnam, given the subtropical climate and high population density. Although the winter has passed, the H5N1 strain of avian influenza (bird flu) remains a concern, and in early April there were still reported cases affecting birds in three provinces. Vietnam imported 80m doses of vaccine against the virus in April, and has begun to test a locally developed vaccine on human subjects.

Vietnam will chair the UN Security Council in July

Since January 1st Vietnam has been a member of the UN Security Council. In July it will chair the council"a job that rotates each month. As a member Vietnam is increasingly finding itself forced to take a stand on issues that in the past it would have ignored. In April the deputy foreign minister, Vu Dung, visited Israel and the Palestinian Territories, mainly to encourage business links, but also to engage politicians on current issues affecting the region. Mr Dung said that Vietnam supports the two-state solution to the conflict there and called on both sides to implement strictly the agreement reached at a summit meeting held in the US in November 2007. Many Vietnamese are wary of China, but at the official level Vietnam has lined up behind Chinese positions. The government supports the Chinese stance on Taiwan and Tibet, and promised to organise a protest-free Olympic torch procession in Ho Chi Minh City in the spirit of “good neighbours, good friends, good comrades and good partners". In April the prime minister, Nguyen Tan Dung, took the opportunity of a visit by the Chinese foreign minister, Yang Jiechi, to call for a speeding up of the border demarcation between the two countries, in the hope of completing the process this year.

Economic policy The government’s short-term priority is cutting inflation

Monthly Report May 2008

The government has switched its short-term economic priorities from boosting GDP growth to tackling consumer price inflation. Mr Dung has called on government agencies to restrain their spending (and to spend more efficiently), and has put a lid on price increases for power, coal, cement and steel until June. The government is willing to sacrifice some economic growth"it has lowered

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its GDP growth target for 2008 from 9% to 6.5-7.5%"in the interest of keeping inflation below the rate of 12.6% year on year recorded at the end of 2007. Around 88% of the software used in Vietnam is pirated

Much to the chagrin of a US-based lobbying group, the Business Software Alliance, Vietnam has one of the world’s highest rates of software piracy. An estimated 88% of software used in Vietnam in 2006 was pirated, down from 90% in 2005, but higher than the level of 82% found in China or the 21% rate in the US. The director of the Copyright Office of Vietnam, Vu Manh Chu, blames “lax enforcement, ignorance and disrespect for copyright laws” for the high levels of piracy. The modest reduction in the piracy rate was a result of government and businesses buying more copyrighted software. To avoid the high cost of software, some government ministries are turning to open-source software, although this often requires more human resources if it is to run smoothly. Vietnam is considering imposing criminal charges against copyright violators, and has raised the fine for violations.

More small businesses will be equitised

The government is sending mixed signals on equitisation (the process whereby state-owned firms are turned into joint-stock companies and then partly or fully privatised). It has announced that it has no plan to equitise state-owned agricultural and forestry farms, mainly out of concern for the possible effects on workers. On the other hand, 19 small companies currently managed by the State Capital Investment Corporation (Vietnam’s sovereign wealth manager) will be equitised between now and 2010. The VNIndex, which tracks the stockmarket in Ho Chi Minh City, may be recovering gradually after a prolonged downwards slide. The bourse bottomed out at 497 on March 25th, but stood at 520 by the end of April. Limitations on access to credit for share purchases brought the market down in 2007, and are now limiting its rebound. The vigorous government efforts to reduce inflation are likely to be good for long-term economic growth and hence for the stockmarket, but in the short-term will continue to limit the capital available for investment in the market.

Economic performance Real GDP roseprice by 7.4% in the Consumer inflation first quarter continues to accelerate

Monthly Report May 2008

Consumer price inflation has continued to accelerate, reaching 21.4% year on year in April. The most obvious cause is a 34.2% increase in the price of food and foodstuffs in the same period, which have a strong weighting (43%) in the Vietnamese consumer price index. The price of housing and construction also rose significantly, by 23%, in the same period. The high rate of inflation is in part a result of the government!s monetary policy, which in effect pegs the dong to the US dollar, coupled with rising US dollar prices for a wide range of commodities, especially food. It also follows from particularly rapid credit expansion in 2007, which was caused in large measure by significant inflows of foreign capital; the State Bank of Vietnam (SBV, the central bank) bought up much of this foreign exchange, providing dong in return, which boosted credit growth.

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Foreign investors remain keen on Vietnam

Total investment continues to be fairly buoyant, rising by 16% year on year in the first quarter of 2008 to reach a total of VND105trn (US$6.6bn). Of this total, one-quarter consists of foreign direct investment (FDI) spending, which rose by 24% in the first quarter; a further 29% represents investment by domestic private firms; and the remaining 46% is accounted for by investment in the state-sector.

Some state-owned firms want to operate banks

Mr Dung has stated that state-owned firms in the industrial, technology and construction sectors should “focus on their core businesses” and not set up banks. A number of large state-owned enterprises, including Vietnam National Oil and Gas Group, and an information technology firm, FPT, have been attracted into banking and have recently obtained banking licences. Some of these companies are asking for permission to hold stakes of 40-50% in the banks that they establish (the current limit is 20%, and anything above 15% requires prime ministerial approval). The reason for the limits is concern that the banks would be unduly influenced to lend to their parent firms and might not diversify adequately in order to manage risk.

The ceiling on deposit rates works against small banks

The banking system is struggling to deal with the effects of the voluntary 11% ceiling on deposit rates. Until recently only smaller joint-stock banks that were hungry for deposits and eager to expand paid interest rates at the ceiling level. However, with inflation surpassing 21% year on year in April, nearly all of the 38 members of the Vietnam Banking Association now offer the maximum rate for deposits over six months. This is posing serious problems for small banks, which no longer stand out from the crowd by offering attractive rates on deposits. These banks are increasingly being forced to turn to the inter-bank market for liquidity, where they borrow excess cash from the larger banks at interest rates that can be as high as 18-24% a year.

Firms are borrowing heavily in US dollars

By the end of April the exchange rate had depreciated slightly, to D16,094:US$1 from D15,897:US$1 at the end of March. The most striking feature of the dong recently has been its stability relative to the US dollar; in the twelve months to April 2008 the Vietnamese currency appreciated (in nominal terms) by 0.35% relative to the US dollar. In real terms too, the dong has appreciated against the US currency over the past year, as inflation has been far higher in Vietnam than in the US. The relative stability of the exchange rate, coupled with lower borrowing rates for US dollars (about 9-10% per year) than for dong (18-20%), has prompted firms to borrow heavily in US dollars. In late April newly equitised Vietnambased Vietcombank had to borrow US dollars on the interbank market in order to meet demand from its customers; and Vietnam!s Asia Commercial Bank estimates that the demand for US dollars rose by almost one-third in the last fortnight of April. Since December 2007 the growth of US dollar credit has been more rapid than the rise in dong credit. The SBV has reacted to the apparent return to dollarisation"which was also popular in the early 1990s when dong inflation was high"by limiting the purposes for which bank customers may borrow US dollars. In an effort to resist the flight to dollars, borrowing in the US currency is now only allowed

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for buying imports, servicing foreign debt and investing abroad. The enormous trade deficit is likely to play a role too: since late March, US dollars have no longer been in surplus. The US dollar is therefore likely to rise against the dong, which would hurt those who have borrowed in the US currency. New FDI commitments are up significantly

New commitments of FDI were buoyant in the first quarter of 2008. By March 22nd 147 new projects had been approved, representing investments worth US$5.2bn. This is 31% higher than in the corresponding period of 2007, which itself was a strong year for FDI. Actual disbursements of FDI were US$1.7bn in the first quarter, up by 24% year on year. The pattern of recent FDI commitments differs sharply from that of even two years ago, when about onehalf of the investment was destined for industry and construction, whereas now almost 90% is aimed at the real estate (including construction) and services sectors. Recent industrial projects have been relatively modest in size, worth an average of US$7m each, but recent projects in the real estate sector have been worth over US$250m apiece. Some of these large projects may never come to fruition, as they could easily be mired down in bureaucratic delays and could face financing hurdles. A number of tourism projects that have not yet been approved are enormous: a US-based investment firm, Oaktree Capital Management, wants to invest at least US$4bn in a project on a former leper colony island near Danang, Hoa Van island; Banyan Tree of Singapore hopes to spend US$1bn on an integrated resort complex in Thua Thien Hue province; and US-based Global C&D and Tano Capital want to build a US$10bn resort with casinos in Quang Nam province. Most of the largest resort developers want to include casinos in the new resorts. Vietnam currently only has one official casino, although a number of “clubs” have gaming on a modest scale. The demand for casinos is strong, especially since China recently set limits to the expansion of casinos in Macau. Until Vietnam puts a legal framework in place that would regulate gaming"and this is unlikely anytime soon"casino operators will be slow to set up in Vietnam. Foreign aid continues to flow into Vietnam, but is increasingly of only marginal importance. Total official development assistance (ODA) inflows came to US$369m in the first quarter, a rise of 16% year on year. Of this total, US$342m consisted of loans, with the remaining US$27m in the form of grants. However, debt servicing (including reimbursement) of ODA loans cost US$210m, so the net aid inflow was just US$159m, a modest amount compared with the trade deficit of US$7.4bn during the same period.

The production of rice is stable

Monthly Report May 2008

Vietnam is heavily dependent on rice. Total production in 2007 came to 36m tonnes of paddy rice, equivalent to 25m tonnes of milled rice. Of this total, some 18% was exported. This left 20.5m tonnes for domestic consumption, equivalent to 20 kg of rice per person per month. Vietnam is the world’s second-largest exporter of rice, after Thailand. A relatively small fraction of world rice production enters the world market, with the result that even minor supply or demand disruptions can cause wide fluctuations in the world price. In 2007 Vietnam earned US$323 per tonne of rice exported; by March 2008 this

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Vietnam

13

figure had risen to US$440; and at the beginning of May, Vietnamese exporters were getting US$1,000 for a tonne of rice. The rapid rise in the world price of rice has been reflected to a degree in the domestic price of food, which rose by 34.2% year on year in April. Salaries have not kept up with this rise, and poor households, which are typically highly dependent on rice as a staple food, are feeling the pinch. The General Statistics Office (the national statistics office) reports that in the first quarter of 2008 a total of 282,000 households, comprising 1.2m people, were suffering from food shortages; this represents an increase of 26% in the number of hungry people compared with the same period of 2007. There is actually no shortage of rice within Vietnam. The winter-spring crop looks promising; early reports suggest that production in Vietnam’s main ricesurplus area, the Mekong Delta, rose from 9m tonnes during the winter harvest to 9.3m tonnes in the spring harvest, while production in the northern provinces is expected to remain steady at 6.5m tonnes in the spring harvest. The government is being cautious about granting export licences for rice, and will allow just 3.2m tonnes to be exported in the first nine months of 2008, and perhaps 3.5-4m tonnes by the end of the year"slightly below the level seen in 2007. However, as of the end of April 2008 Vietnam had actually exported 1.4m tonnes of rice, or 7.8% more than during the same period of 2007. The rapid rise in the world price of rice reflects both cyclical and structural factors. In particular, lower world stocks of food, adverse weather conditions in0020cereal-producing countries and policy responses (including, in Vietnam!s case, limiting rice exports) are all cyclical factors that are affecting current prices. Structural factors, such as rising demand for biofuels, increased fuel costs (agriculture has become increasingly fuel-intensive) and stagnating productivity growth are also having an impact on the price of rice. The cyclical factors are likely to ease in the second half of 2008, but the structural factors are set to remain a burden on the price of cereals, including rice, over the medium-tolong term.

Monthly Report May 2008

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Vietnam

Data and charts Annual data and forecast P ro d uc t io n to rem o v e

GDP Nominal GDP (US$ bn) Nominal GDP (D trn) Real GDP growth (%) Expenditure on GDP (% real change) Private consumption Government consumption Gross fixed investment Exports of goods & services Imports of goods & services Origin of GDP (% real change) Agriculture Industry Services Population and income Population (m) GDP per head (US$ at PPP) Recorded unemployment (av; %) Fiscal indicators (% of GDP) Central government balance Net public debt Prices and financial indicators Exchange rate D:US$ (end-period) Exchange rate D:€ (end-period) Consumer prices (end-period; % change) Stock of money M1 (end-period; % change) Stock of money M2 (end-period; % change) Lending interest rate (av; %) Current account (US$ m) Trade balance Goods: exports fob Goods: imports fob Services balance Income balance Current transfers balance Current-account balance External debt (US$ m) Debt stock Debt service paid Principal repayments Interest International reserves (US$ m) Total international reserves

2003 a

2004 a

2005 a

2006 a

2007 b

39.6 613.4 7.3

45.4 715.3 7.8

52.9 839.2 8.4

60.9 b 973.8 b 8.2

70.3 1,131.0 8.5

86.4 1,390.3 7.3

102.1 1,655.7 8.0

8.0 7.2 11.9 19.9 22.7

7.1 7.8 10.4 25.7 21.9

7.5 7.9 9.8 20.5 15.9

7.3 8.8 8.6 15.3 b 14.6 b

7.3 7.5 11.0 14.8 16.3

4.5 7.0 11.3 13.7 14.4

6.5 7.8 11.3 16.1 15.4

3.6 10.4 6.5

4.4 10.3 7.3

4.0 10.7 8.5

3.4 10.4 8.3

3.4 a 10.6 a 8.7 a

2.5 8.9 7.7

3.0 10.2 7.9

81.6 1,765 b 5.8

82.7 1,931 b 5.6

83.8 2,126 b 5.3

84.9 b 2,342 b 4.8

85.9 2,575 5.3

87.0 2,805 5.3

88.1 3,062 5.0

-1.2 41.1

0.9 42.7

-1.2 44.0

-0.3 b 43.4 b

-1.9 42.8

-2.2 39.9

-2.5 38.4

15,646 19,736 2.9 25.3 33.1 9.5

15,777 21,359 9.7 26.1 31.1 9.7

15,916 18,775 8.7 22.2 30.9 11.0

16,054 21,186 6.9 20.7 29.7 11.2

16,198 24,621 15.0 22.9 22.6 11.8

16,239 23,384 8.9 23.1 24.9 12.0

-2,581 20,149 -22,730 -778 -811 2,239 -1,931

-2,287 26,485 -28,772 -872 -891 3,093 -957

-839 32,442 -33,281 -1,106 -1,219 3,380 217

-281 b 39,904 b -40,184 b -1,224 b -1,575 b 3,402 b 322 b

-4,212 48,067 -52,278 -1,363 -1,436 3,930 -3,081

-8,134 60,720 -68,855 -1,058 -2,044 4,739 -6,497

-7,385 72,360 -79,745 -1,060 -2,064 5,019 -5,490

15,991 807 507 301

18,049 787 430 357

19,212 957 519 438

20,202 918 464 454

21,693 944 533 411

24,426 1,024 571 453

26,468 1,252 697 555

6,359

7,186

9,217

13,591

19,741

23,182

27,523

16,075 a 23,474 a 12.6 a 24.0 30.9 11.4

2008 c

2009 c

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Source: IMF, International Financial Statistics.

Monthly Report May 2008

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Quarterly data P ro d uc t io n to rem o v e

Prices Consumer prices (2000=100) Consumer prices (% change, year on year) Financial indicators Exchange rate D:US$ (av) Exchange rate D:US$ (end-period) Deposit rate (av; %) Lending rate (av; %) Refinancing rate (end-period; %) Treasury bill rate (av; %) M1 (end-period; D bn) M1 (% change, year on year) M2 (end-period; D bn) M2 (% change, year on year) Foreign trade (US$ m) Exports fob Imports cif Trade balance Foreign payments (US$ m) Merchandise trade balance Services balance Income balance Net transfer payments Current-account balance Reserves excl gold (end-period)

2006 2 Qtr

3 Qtr

4 Qtr

2007 1 Qtr

2 Qtr

3 Qtr

4 Qtr

2008 1 Qtr

133.1 7.6

134.8 7.5

136.3 7.0

140.4 6.6

143.0 7.4

146.4 8.6

150.8 10.6

163.3 16.3

15,964 15,996 7.6 11.2 5.0 5.6 238,276 22.0 727,165 33.5

16,015 16,055 7.7 11.2 5.0 3.7 236,480 17.6 753,012 30.3

16,077 16,054 7.7 11.2 5.0 3.4 292,215 20.7 841,011 29.7

16,022 16,024 n/a n/a n/a n/a n/a n/a n/a n/a

16,064 16,079 n/a n/a n/a n/a n/a n/a n/a n/a

16,169 16,148 n/a n/a n/a n/a n/a n/a n/a n/a

16,060 16,046 n/a n/a n/a n/a n/a n/a n/a n/a

15,947 16,002 n/a n/a n/a n/a n/a n/a n/a n/a

n/a n/a n/a

n/a n/a n/a

10,133 -11,591 -1,458

10,565 -12,277 -1,712

11,901 -14,783 -2,882

n/a n/a n/a

n/a n/a n/a

n/a n/a n/a

-767.0 -280 -424 765 -706 11,293

n/a n/a n/a n/a n/a 11,904

n/a n/a n/a n/a n/a 13,384

n/a n/a n/a n/a n/a 18,317

n/a n/a n/a n/a n/a n/a

n/a n/a n/a n/a n/a n/a

n/a n/a n/a n/a n/a n/a

n/a n/a n/a n/a n/a n/a

Sources: IMF, International Financial Statistics.

Monthly Report May 2008

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Vietnam

Monthly data P ro d uc t io n to rem o v e

Jan Feb Mar Exchange rate D:US$ (av) 2006 15,924 15,924 15,914 2007 16,061 15,994 16,012 2008 15,992 15,951 15,898 Exchange rate D:US$ (end-period) 2006 15,922 15,910 15,927 2007 16,036 15,990 16,024 2008 15,971 15,931 16,105 Money supply M1 (% change, year on year) 2006 29.8 18.2 24.4 2007 n/a n/a n/a 2008 n/a n/a n/a Money supply M2 (% change, year on year) 2006 34.6 32.5 35.4 2007 n/a n/a n/a 2008 n/a n/a n/a Deposit rate (av; %) 2006 7.5 7.7 7.7 2007 n/a n/a n/a 2008 n/a n/a n/a Lending rate (av; %) 2006 11.2 11.2 11.2 2007 n/a n/a n/a 2008 n/a n/a n/a Consumer prices (av; % change, year on year) 2006 9.1 8.8 8.1 2007 6.5 6.5 6.8 2008 14.1 15.7 19.4 Goods exports fob (US$ m) 2006 3,065 2,404 3,100 2007 3,759 2,925 3,881 2008 n/a n/a n/a Goods imports cif (US$ m) 2006 2,599 2,714 3,200 2007 4,331 3,468 4,478 2008 n/a n/a n/a Trade balance fob-cif (US$ m) 2006 466 -310 -100 2007 -572 -543 -597 2008 n/a n/a n/a Foreign-exchange reserves excl gold (US$ m) 2006 9,993 10,199 10,742 2007 15,265 16,967 18,317 2008 n/a n/a n/a

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

15,930 16,039 n/a

15,973 16,062 n/a

15,989 16,101 n/a

15,997 16,120 n/a

16,011 16,192 n/a

16,038 16,196 n/a

16,065 16,083 n/a

16,093 16,062 n/a

16,073 16,034 n/a

15,934 16,047 n/a

15,959 16,087 n/a

15,996 16,113 n/a

16,007 16,127 n/a

16,014 16,226 n/a

16,055 16,092 n/a

16,083 16,083 n/a

16,089 16,044 n/a

16,054 16,101 n/a

21.5 n/a n/a

23.1 n/a n/a

22.0 n/a n/a

23.9 n/a n/a

22.7 n/a n/a

17.6 n/a n/a

18.7 n/a n/a

20.5 n/a n/a

20.7 n/a n/a

33.8 n/a n/a

34.1 n/a n/a

33.5 n/a n/a

34.1 n/a n/a

32.7 n/a n/a

30.3 n/a n/a

30.4 n/a n/a

30.6 n/a n/a

29.7 n/a n/a

7.7 n/a n/a

7.5 n/a n/a

7.7 n/a n/a

7.7 n/a n/a

7.7 n/a n/a

7.7 n/a n/a

7.7 n/a n/a

7.7 n/a n/a

7.7 n/a n/a

11.2 n/a n/a

11.2 n/a n/a

11.2 n/a n/a

11.2 n/a n/a

11.2 n/a n/a

11.2 n/a n/a

11.2 n/a n/a

11.2 n/a n/a

11.2 n/a n/a

7.6 7.2 n/a

7.7 7.4 n/a

7.6 7.8 n/a

7.7 8.4 n/a

7.7 8.6 n/a

7.1 8.8 n/a

6.9 9.3 n/a

7.2 10.0 n/a

6.9 12.6 n/a

n/a 3,650 n/a

n/a 4,066 n/a

n/a 4,185 n/a

n/a 4,250 n/a

3,674 n/a n/a

3,378 n/a n/a

3,343 n/a n/a

3,290 n/a n/a

3,500 n/a n/a

n/a 4,493 n/a

n/a 5,279 n/a

n/a 5,011 n/a

n/a 5,050 n/a

4,151 n/a n/a

3,968 n/a n/a

3,845 n/a n/a

3,746 n/a n/a

4,000 n/a n/a

n/a -843 n/a

n/a -1,213 n/a

n/a -826 n/a

n/a -800 n/a

-477 n/a n/a

-590 n/a n/a

-502 n/a n/a

-456 n/a n/a

-500 n/a n/a

11,180 19,300 n/a

11,391 20,267 n/a

11,293 n/a n/a

11,357 n/a n/a

11,684 n/a n/a

11,904 n/a n/a

12,015 n/a n/a

12,291 n/a n/a

13,384 n/a n/a

Sources: IMF, International Financial Statistics; Haver Analytics.

Monthly Report May 2008

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Vietnam

17

Annual trends charts P ro d uc t io n to rem o v e

Annual trends charts Real GDP growth

Consumer price inflation

(% change)

(av; %)

Vietnam

Asia (excl Japan)

World

Vietnam

9.0

20.0

8.0

18.0

Asia (excl Japan)

World

16.0 7.0

14.0

6.0

12.0

5.0

10.0 8.0

4.0

6.0 3.0

4.0

2.0

2003

04

05

06

07

08

2.0

09

2003

04

05

06

Source: Economist Intelligence Unit.

Source: Economist Intelligence Unit.

GDP per head

Trade balance

(US$; PPP)

(% of GDP)

Vietnam

Asia (excl Japan)

World

Vietnam

12,000

07

08

09

07

08

09

Asia (excl Japan)

6.0 4.0

10,000

2.0 8,000

0.0

6,000

-2.0 -4.0

4,000

-6.0 2,000

-8.0

0

2003

04

05

06

07

08

-10.0

09

2003

04

05

06

Source: Economist Intelligence Unit.

Source: Economist Intelligence Unit.

Main destinations of exports, 2006

Main origins of imports, 2006

(share of total)

(share of total)

Other 36.7%

US 21.6%

UK 3.8%

Japan 12.5%

Germany 4.9% Singapore 5.2%

Australia 9.5% China 5.8%

Singapore 12.7%

Hong Kong 3.5% Malaysia 4.1%

Japan 9.5%

Thailand 7.2%

South Korea 9.0%

Source: Economist Intelligence Unit.

Monthly Report May 2008

China 17.4%

Other 36.6%

Source: Economist Intelligence Unit.

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Vietnam

Monthly trends charts P ro d uc t io n to rem o v e

Monthly trends charts Consumer price inflation

Foreign trade

(% change, year on year)

(US$ m; goods only)

16.0

Exports

15.0

6,000

14.0

5,000

13.0

4,000

12.0

3,000

11.0

Imports

Balance

2,000

10.0

1,000

9.0 8.0

0

7.0

-1,000

6.0

-2,000

Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 2004 05 06 07 08

Jul Oct Jan Apr Jul 2004 05

Oct Jan Apr Jul 06

Source: Economist Intelligence Unit.

Source: Economist Intelligence Unit.

Foreign-exchange reserves

Exchange rate

(US$ m)

(D:US$; av; inverted scale)

22,000

Oct Jan Apr Jul 07

15,700

20,000

15,800

18,000 15,900

16,000

16,000

14,000 12,000

16,100

10,000 16,200

8,000 6,000

Jul Oct 2004

Jan 05

Apr

Jul

Oct

Jan 06

Apr

Jul

Oct

Jan 07

Apr

16,300

Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 2004 05 06 07 08

Source: Economist Intelligence Unit.

Source: Economist Intelligence Unit.

Coffee: Robusta, ICO price

Oil: WTI crude price

(US cents/kg)

(US$/b; av)

240

100

220

90

200 80

180 160

70

140

60

120

50

100 80

40

60

30

Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 2004 05 06 07 08 Source: Economist Intelligence Unit.

Monthly Report May 2008

Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 2004 05 06 07 08 Source: Economist Intelligence Unit.

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Country snapshot Political structure Official name

Socialist Republic of Vietnam

Form of state

One-party rule

The executive

The cabinet is constitutionally responsible to the National Assembly, which is elected for a five-year term

Head of state

The president, currently Nguyen Minh Triet

National legislature

The unicameral 493-member Quoc Hoi (National Assembly) meets biannually; an election takes place every five years. The Assembly appoints the president and the cabinet

Local government

Centrally controlled provinces and municipalities are subdivided into towns, districts and villages, which have a degree of local accountability through elected people!s councils

Legal system National elections National government Main political organisations Main members of the cabinet

Key ministers

Central bank governor

Monthly Report May 2008

The regional people!s courts and military courts operate as courts of first and second instance, with the Supreme Court at the apex of the system Elections for the National Assembly and People!s Councils took place in May 2007; the next are due in 2012 The Communist Party of Vietnam, and in particular its politburo, controls both the electoral process and the executive The Communist Party of Vietnam (general secretary: Nong Duc Manh); the Vietnam Fatherland Front Prime minister Deputy prime ministers

Nguyen Tan Dung Nguyen Sinh Hung Pham Gia Khiem Hoang Trung Hai Nguyen Thien Nhan Truong Vinh Trong

Agriculture & rural development Construction Culture, sports & tourism Education & training Finance Foreign affairs Industry & trade Information & communications Interior Justice Labour, war invalids & social affairs National defence Natural resources & environment Planning & investment Public health Transport

Cao Duc Phat Nguyen Hong Quan Hoang Tuan Anh Nguyen Thien Nhan Vu Van Ninh Pham Gia Khiem Vu Huy Hoang Le Doan Hop Tran Van Tuan Ha Hung Cuong Nguyen Thi Kim Ngan Phung Quang Thanh Pham Khoi Nguyen Vo Hong Phuc Nguyen Quoc Trieu Ho Nghia Dung

Nguyen Van Giau

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