COUNTRY REPORTinterior Bui Thien Ngo justice Nguyen Dinh Loc labour, war invalids & social welfare Tran Dinh Hoan national defence General Doan Khue planning & investment Do Quoc Sam

COUNTRY REPORT

Vietnam

2nd quarter 1996

The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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Summary

Vietnam 2nd quarter 1996

May 9, 1996

Political and economic structures Pages 2-3

Outlook: Rapid economic growth will persist in 1996, but the widening tradedeficit may require a corrective slowdown and a devaluation by 1997. Economicreform will continue after the Eighth Party Congress, but the pace and extent ofchanges will depend on the complexion of the new leadership. Pages 4-9

The political scene: The jockeying for position within the leadership hasweakened both the contending groups. The main winners in the short term arelikely to be the security apparatus. No consensus has yet emerged on whoshould take the top leadership posts that will be decided during and after theParty Congress. The draft report to the Party Congress has been released andfavours a mixed economy in which the state and cooperative sectors will growto produce 60% of output. The campaign against social evils has abated. Hanoiacted quickly to try to defuse a border row with Cambodia, and relations withChina have taken a turn for the worse over the Spratlys. Pages 9-17

Economic policy and the economy: In the first quarter, GDP continued togrow at an annual rate of 9-10%. Figures for the first three months suggest thatinflation may be held to around 10% for the year. Despite a spurt in receipts inthe first quarter there is growing concern about the slow rate of growth ofgovernment revenue. Rapidly growing exports have been eclipsed by fastergrowing imports, leading to an increased trade deficit in the first quarter.Foreign investment approvals have moved below the very high level of 1995.

Pages 17-21

Sectoral trends: Rice production was boosted by a good harvest in theMekong Delta. Energy shortages are expected this year in Ho Chi Minh City, butare due to end in 1997 when the Phu My gas-fired plant is complete. Road-building is now under way on five main stretches of highway. Pages 22-25

Money and finance: A new proposal to permit the use of land-use rights ascollateral will eventually energise the banking system. Foreign debt is large andgrowing, but manageable because the terms are mainly concessional. T-bill saleshave resumed, and the annual coupon rate has fallen to 12.3%. Pages 25-27

Foreign trade and payments: Exports rose by 25% in dollar terms in thefirst quarter, compared with a year earlier. Imports rose by 34%, and the tradedeficit grew to $840m for the quarter. Talks have begun with the USA on acomprehensive trade agreement. Page 28

Statistical appendices Pages 29-30

Editor:All queries:

Anthony GoldstoneTel: (44.171) 830 1007 Fax: (44.171) 830 1023

Vietnam 1

EIU Country Report 2nd quarter 1996 © The Economist Intelligence Unit Limited 1996

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 and both hold office forfive-year terms

Head of state: the president, currently Le Duc Anh

National legislature: unicameral 395-member Quoc Hoi (National Assembly); elections take place every fiveyears. The assembly appoints the president and the cabinet

Local government: centrally controlled provinces and municipalities are subdivided into towns, districts andvillages, which have some degree of local control under their elected People’s Councils

Legal system: the regional People’s Courts and Military Courts operate as courts of first and second instance,with the Supreme Court at the apex

Last national elections: July 19, 1992

Next elections due: 1997

National government: the Communist Party of Vietnam, and in particular its Politburo, control both theelectoral process and the executive

Main political organisations: the Communist Party of Vietnam; the Vietnam Fatherland Front

Main members of the cabinetPrime minister Vo Van KietDeputy prime ministers Nguyen Khanh

Tran Duc LuongPhan Van Khai

Key ministers agriculture & rural development Nguyen Cong Tan construction Ngo Xuan Loc culture & information Tran Hoan education & training Tran Hong Quan finance Ho Te foreign affairs Nguyen Manh Cam industry Dan Vu Chu interior Bui Thien Ngo justice Nguyen Dinh Loc labour, war invalids & social welfare Tran Dinh Hoan national defence General Doan Khue planning & investment Do Quoc Sam population & family planning Mai Ky science, technology & environment Dang Huu trade Le Van Triet transport & communications Bui Danh Luu

Governor of the State Bank of Vietnam Cao Si Kiem

2 Vietnam


Economic structure

Latest available figures

Economic indicators 1991 1992 1993 1994 1995a

GDP at current prices D trn 76.7 110.5 136.6 170.3 210.2

Real GDP growthb % 6.0 8.7 8.1 8.8 9.5

Consumer price inflation % 67.5 17.5 5.2 14.4 12.7

Population m 67.8 69.3 70.9 72.5 74.0

Exports fob $ m 1,921 2,581 2,988 4,251 5,200

Imports fob $ m 2,063 2,541 3,878 5,834 7,520

Current account $ m –132 –8 –869 –1,510a –1,930

Reserves excl gold $ m 707 1,170 643 876 n/a

External debtc $ bn 3.8 4.1 4.6 n/a n/a

Exchange rate (av) D:$ 9,390 11,181 10,641 10,900 11,000

May 3, 1996 D11,013:$1

Origins of gross domestic product 1995 % of total

Agriculture 27.2

Industry 30.6

Services 42.2

Total incl others 100.0

Principal exports 1994 % of total Principal imports 1995 % of total

Crude oil 20.0 Fuel, raw materials & machinery 87.8

Textiles & garments 13.4 Consumer goods 15.6

Coffee 10.7

Rice 10.5

Main destinations of exports 1994d % of total Main origins of imports 1994d % of total

Japan 28.6 Singapore 17.4

Singapore 8.9 South Korea 15.6

Germany 7.6 Japan 9.8

China 5.0 Hong Kong 7.8

Australia 4.9 China 5.5

France 4.8 France 3.7

a EIU and official estimates. b Constant 1989 prices. c Excludes transferable rouble debt. d Excludes Taiwan.

Vietnam 3


Outlook

The Party Congress willseek to restore the balance

In the absence of any clearer indications as to what direction the party is likelyto set for Vietnam at the forthcoming Eighth Party Congress scheduled forJune, reliance has to be placed on the slender clues so far provided by theleadership. The two most concrete pieces of evidence are the draft politicalreport, which was released to the domestic and foreign media at a press confer-ence in Hanoi on April 9, and the expulsion of the Politburo member, NguyenHa Phan, on April 17 during the tenth plenum of the Central Committee.

These two developments taken together appear baffling. The aspect of the draftpolitical report which most caught the eye of the international press was itsconservativism—in particular its call for strengthened state management andfor the share of the state sector in total output to increase rather than shrink. Yetaround the same time the ground was being laid for the expulsion from theCommunist Party of Nguyen Ha Phan, who as head of the Central Committee’seconomic commission was probably the party’s leading conservative economist,and who might therefore have been expected to have been relishing the reportas a triumph for his faction rather than suffering the indignity of house arrest.

There are various ways of reconciling these two, apparently contradictory,events. One is to take the official explanation for Mr Phan’s expulsion at facevalue. According to a foreign ministry spokesman, he was expelled for “havingcommitted serious mistakes in his past activities”, apparently a reference to hisbetrayal of fellow fighters and their bases after capture by the South Vietnamesein 1959. This and rumours of corruption would have made him ineligible foroffice on the criteria set out by the party general secretary, Do Muoi, during theplenum: “Candidates should meet both ethical and professional qualifications,with the stress on the former.”

A more convincing explanation is that Mr Phan had simply gone too far in hiszeal for the conservative cause, and that he had thereby broken the consensualprinciples that govern intra-party politics in Vietnam. In this respect he was nodifferent from other expelled Politburo members, from the “pro-Chinese”Hoang Van Hoan in 1976 to the “liberal” Tran Xuan Bach in 1990. Moreover,eye-catching as its conservative elements may be, the draft political report isitself a consensus document. On the one hand, the report calls for strength-ened state management “along the socialist line”. On the other hand, “privatecapitalists” are to be encouraged to undertake long-term investment. Some-thing called the “state capitalist” economy, consisting of joint ventures be-tween state enterprises and “local and foreign capitalists”, is also to play animportant role. Since the report is so open to interpretation, the decisions onpersonnel will be all the more crucial. Despite—indeed partly because of—thestrains within the party revealed by the expulsion of Mr Phan and the contentof the draft political report, the EIU still expects that the shape of the leader-ship that emerges from the congress will be little changed.

Only the securityapparatus is likely to

emerge stronger

Maintaining balance at a time of potential instability is a task for the “vigilant”security apparatus, represented by the army and the interior ministry. Theirnumbers on the Politburo increased to unprecedented levels at the last party

4 Vietnam


congress in 1991 when with east European socialism in its death throes polit-ical conservatism became the watchword of the day. For similar reasons themain gainers at this year’s congress are again likely to be the security apparatus.This analysis received apparent confirmation at the army’s party congresswhere Mr Muoi talked of the importance of maintaining political unity be-tween the armed forces and the party.

The reformists are unlikely to emerge strengthened from the congress. Someanalysts have seen the expulsion of Mr Phan as a victory for the reformists. Onthis view it opens the way to a rout of the conservatives, including the pros-pective general secretary, Dao Duy Tung, and the present heads of the party’sOrganisation and Control Department, whose vetting procedures failed to un-cover Mr Phan’s past misdeeds. More likely than a rout is an attempt to restorebalance through a distribution of the top posts very much along current lines:a general secretary who can reassure conservative party opinion while notobstructing reform, a prime minister who can continue to drive the economyforward without seriously destabilising social consequences, and a presidentembodying the stability represented by the security apparatus. This assumesthat all of the current triumvirate step down from the Politburo at the congress.There is a real possibility that they will be persuaded to stay on as symbols ofcontinuity, leaving it to another mid-term conference in early 1999 to carrythrough changes in the top leadership.

There is a real danger ofpolicy incoherence

The congress itself is unlikely to resolve the major issues of development strat-egy that supposedly divide conservatives from reformists. The fact of the matteris that the conservatives are wedded to the free market and foreign investment,while the reformers are promoting state-run conglomerates and the merits ofbalanced growth that mitigates income disparities. In pursuit of the ambitiousgrowth targets to which everyone subscribes, all sides are also committed toimproved budgetary management, trade liberalisation, encouraging domesticsavings and some form of privatisation. The outcome of the debate on equitis-ation has come to be regarded as a litmus test, measuring which faction isdominant. In fact the elements of a compromise solution are already in place. Inpresenting the draft political report the secretary of the party Central Commit-tee made it clear, as does the draft report, that equitisation is a more appropriateword for what is envisaged than privatisation, since the state is to retain amajority stake in the enterprises it now owns. The main function of equitisationwill therefore be to mobilise capital for the large state corporations which arenow regarded as the main catalysts for rapid growth over the next 25 years.

Whether in fact this sort of compromise will generate the desired rates ofgrowth is questionable. There is a real prospect that the search for consensuswill simply produce policy incoherence. It is apparent from the draft reportthat a consensus view has also emerged in another area, on the question ofhow an “open door” to the world is to be balanced against the dangers ofsubversion through peaceful evolution. The report rather hopefully asserts thatVietnam must both preserve its national cultural character and “accumulatethe essence of the world”. What this means in practice can be seen in therecent campaign against social evils, such as drug addiction, prostitution andcrime, which are regarded as a by-product of the reform process. After

Vietnam 5


thoroughly rattling the foreign community, the campaign against social evilsquickly petered out with effusive thanks from Mr Muoi to overseas investorsfor their contribution to the economy. That this has not put an end to allxenophobic sentiment is clear from articles that still appear, particular in thearmy newspaper, telling people to beware of foreigners, and from Mr Muoi’swarnings to the party congress in Ho Chi Minh City, the hub of the neweconomy, that the city was a focus of “the conspiracies of peaceful evolution”.

Relations with Chinacould worsen—

The period of Vietnam’s rapprochement with its immediate neighbours whichwas made possible by the Cambodian settlement of October 1991 may becoming to an end. Relations between Hanoi and its two main antagonists ofrecent times, China and Cambodia, are on a knife edge. For Vietnam the mostimmediately threatening element in what it calls the complex internationalsituation is its dispute with Beijing over competing claims in the South ChinaSea. The latest tensions arise from Chinese objections to Vietnam awardingexploration rights, in a disputed area, to a US oil company, Conoco. Trade andtravel between the two countries is growing rapidly, and with both intent onthe development of their economies, neither might seem to have an interest inseeing their differences escalate. However, both countries are facing difficultpolitical transition periods. China, which faces the more difficult task, looks forthat reason the more likely of the two to engage in foreign adventures, as itsrecent belligerence in the Taiwan Straits has already indicated. Vietnam’s owninternal politics would demand a tough response to any Chinese sabre-rattlingover the status of the Spratlys.

—but disagreements withCambodia pose a more

immediate threat

Political instability in Cambodia will inevitably have consequences for Vietnam.The Vietnamese bogey still looms large in Cambodian politics, particularly attimes of crisis. With the coalition government in Phnom Penh looking in dan-ger of collapse it seems likely that the uneasy lull that followed the 1993 elec-tions will soon be over. These developments are setting off alarm signals inHanoi. In January the Cambodian co-prime minister, Prince NorodomRanariddh, accused Vietnam of “a border invasion” and threatened to use forcein response. The Vietnamese prime minister, Vo Van Kiet, hurried to PhnomPenh hoping to defuse a potentially troublesome problem. If the Cambodiancoalition does fall apart, relations between the two countries will almost cer-tainly be inflamed. There are several pretexts to hand: the border demarcationdispute; the treatment of ethnic Vietnamese inside Cambodia; and charges thatthe Vietnamese are trying to squeeze trade up the Mekong to the port of PhnomPenh. A weakened Khmer Rouge and a new alignment of regional forces bent onpreventing rather than fuelling conflict may be enough to stop these tensionsfrom getting out of hand.

The economy willcontinue to grow rapidly

in the medium term—

During the first quarter of 1996 the economy continued to grow at an annualrate of 9.5%, about the same pace as in 1995. The situation was helped by agood harvest in the Mekong Delta, and the continued rise in inflows of foreigninvestment and aid. Foreign investment helped fuel industrial growth ofaround 13%. These inflows will continue to power the expansion well into1997. In the first quarter foreign investment approvals were running at a slowerpace than in 1995. There is also evidence that some investors are hesitating to

6 Vietnam


make commitments to projects in Vietnam until the new leadership team isknown. If our analysis of the likely outcome of the Party Congress is correct,reformists will continue to be at the helm in government after the congress, butin the absence of clear policy guidelines this may not be sufficient to halt theslowdown in approvals. The slowdown will not be reflected in slowerimplementation for some time yet, however. Because of the lag between com-mitment and disbursement, actual realised foreign direct investment (FDI) isexpected to continue to rise in 1996 before levelling off in 1997.

The large-scale infrastructure projects which are so important to sustainedgrowth are now getting under way, led by the upgrading of Vietnam’s neg-lected highways. There are now 770,000 installed telephones, and the Post andTelecommunication Corporation aims to raise the number fivefold by the endof the century. Work has begun on upgrading several major highways, al-though it will probably be ten years before all of Highway 1, which runs fromthe north to the south along the spine of the country, will be fully rehabili-tated. Electricity production in the south has been unable to keep up withrapidly growing demand, and shortages are predicted for later in the year, butthe problem will be solved early in 1997 when the gas-fired Phu My plantcomes on line. These infrastructural improvements are expensive and theyarrive slowly, but they are providing a more solid foundation for continuedeconomic growth over the medium term. They also indicate that aid disburse-ment is at last beginning to pick up.

—without fuelling highrates of inflation

As in 1995, rapid growth looks like being accompanied by reasonably lowinflation. In the first four months, when month-on-month inflation rates tendto peak because of the Tet (Lunar New Year) holiday and food shortages in therun-up to the main rice harvest, cumulative month-on-month inflation wasjust 4.4%. This rate has been bettered only once in recent times, in 1993 whenthe annual average rate fell to a record low of 5.2%. We do not expect inflationto fall that low this year, but continued monetary restraint and fiscal prudence,aided by the pre-emptive stockpiling of such strategic items as rice and cement,and the continuing strength of the dong, will make the government’s newinformal target of 10% for the year achievable.

Another restraint on inflation has been the widening trade gap. Despite rapidexport growth in the first quarter the trade deficit reached $840m as a conse-quence of an even sharper jump in imports. If this pattern continues for therest of the year, it will result in a trade deficit equivalent to about 15% of GDPand an even larger current-account deficit. For the present the deficit appearsto be sustainable, as it is in large measure caused by foreign firms bringing theirinvestments into the country. Certainly the State Bank of Vietnam (the centralbank) has managed to continue to accumulate significant foreign exchangereserves, and to do so without triggering unduly rapid inflation. Attempts tocontrol imports directly will only lead to a resumption of smuggling, andhigher inflation. We still believe that the dong will need to depreciate in realterms in 1997, to compensate for the continued differential in inflation bet-ween Vietnam and the dollar-using world, and to ensure that the trade deficitdoes not become unmanageable. Allowing the dong to depreciate would be aless painful way to address an unmanageable trade deficit than deliberately

Vietnam 7


slowing down the economy to reduce imports, although some slowing will beneeded to control the inflationary consequences of depreciation. The deprecia-tion and the likelihood that by 1997 full commercial normalisation with theUSA will allow easier access to that all-important market will give a boost toexports, which we expect to grow by 28% in dollar terms next year. Theslowing of import growth to around 25% will not be sufficient to bring thecurrent-account deficit down in absolute terms, although it will fall to around9% of GDP.

The more effectivemobilisation of domestic

savings is becoming urgent

The prospect that inflows of FDI will be levelling off by the end of 1997 and theuncertainty surrounding the disbursement of overseas development assistancemean that domestic savings will have to be boosted if growth is to be sustainedat the annual average rate of 9-10% envisaged in the current five-year plan(1996-2000). Public savings (current receipts minus current expenditure)continued to grow as a percentage of GDP in 1995 despite the wider overallbudget deficit and the fact that revenue did not grow as fast as nominal GDP.However, the prospects for their continued growth over the next two years arenot good, as the tax administration will have to adjust to the recent tax amend-ments (whose main thrust is to lower tariffs and raise consumption taxes) andto the new budget law which redefines the division of labour between centralgovernment and the provinces.

A survey of the sources of savings in 1995 revealed that the contributions of thebanks and state enterprises to overall savings is still strikingly small. The finan-cial system is gradually improving, but the pace is slow. The State Bank hasresumed its fortnightly Treasury-bill auctions, which will boost the size of thismarket. Several banks are in the process of introducing credit cards. And if, asexpected, new rules are introduced which allow the use of land-use rights ascollateral, the banking system will be poised for more rapid expansion. Moredoubtful are prospects for raising the internally generated funds of state enter-prises. A number of foreign banks have now made large medium-term loans tostate enterprises, fuelling fears in the multilateral lending institutions thatVietnam’s foreign debt will run out of control. In this context defining thenature and scope of the privatisation programme will be crucially important indetermining the enterprises’ access to funds.

Forecast summary(% change on previous year unless otherwise indicated)

1994a 1995b 1996c 1997c

GDP growth 8.8 9.5 9.8 8.5 of which: agriculture 3.9 3.8 3.8 3.0 industry 14.1 13.3 14.1 11.0

Consumer prices 14.4 12.7 10.0 12.0

Current-account balance ($ m) –1,510b –1,930 –2,900 3,000

Average exchange rate (D:$) 10,900 11,000 11,400 12,400

a Actual. b EIU estimates. c EIU forecasts.

8 Vietnam


Review

The political scene

The struggle for positionwithin the party

intensifies—

As the Eighth Party Congress, scheduled for June, approaches, the struggle bet-ween party factions in the two areas in which the congress will have a decisivesay—personnel changes and the direction of policy—have been intensifying.The most dramatic development to date has been the fall of Nguyen Ha Phan,the head of the Central Committee’s economic commission. At the tenth ple-num of the Central Party Committee which took place in mid-April, Mr Phanwas officially expelled from the Communist Party, with 135 of the 164 partici-pants voting against him. Mr Phan had been a member of the Politburo (ranked16th on the 17-strong body) since the mid-term party conference in January1994, as well as deputy chairman of the National Assembly since 1992. Heserved as the head of the economic commission of the Central Committee, andoversaw another committee which was screening personnel changes to be madeduring the Party Congress. There has been speculation that Mr Phan was usingthese positions to try to tilt the balance of forces in favour of the conservative“party bloc” and against the more reformist “government bloc”. In this enter-prise he was said to be acting on behalf of Dao Duy Tung, number four on thePolitburo and often mentioned as the likely successor to Do Muoi as partygeneral secretary (just as Mr Phan himself was being mentioned as a strongcontender to succeed the prime minister, Vo Van Kiet). Rumours that Dao DuyTung was suspended from the Politburo in the wake of Mr Phan’s expulsionhave been officially denied, but it may now be that Mr Tung is out of therunning for the top party post.

—weakening theconservatives—

When Mr Phan was moved on to the Politburo in 1994, expert opinion wasdivided on where to place him politically. His southern roots (he was born in theMekong Delta province of Ben Tre) and a career that had at various pointsbrought him into close association with the present prime minister, Vo VanKiet, suggested that he might be a reformist. On the other hand, the fact that he

6

7

8

9

10

1993 94 95(a) 96(b) 97(b)

Vietnam

Asia excl Japan

Gross domestic product % change on previous year

(a) EIU estimates. (b) EIU forecasts. (c) Nominal exchange ratesadjusted for changes in relative consumer prices.Sources: EIU; IMF, International Financial Statistics.

70

80

90

100

1990 91 92 93 94 95(a) 96(b) 97(b)

Dong: real exchange rate (c)1990=100

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Vietnam 9


had worked with two of the country’s most prominent hardliners—the long-serving party general secretary, Le Duan, and another prime minister, PhamHung—pointed to a more conservative position. The second view seems to havebeen the correct one. In the past year he reportedly emerged as one of thestrongest critics of the “secret” memorandum (arguing for greater economicliberalisation) which Mr Kiet wrote to the Politburo last August (1st quarter1996, pages 10-11). The ostensible reason for Mr Phan’s expulsion is that afterbeing captured by the South Vietnamese government in 1959 he revealed thenames of comrades in arms and the location of resistance bases in the south.Particularly in view of the many vetting processes to which a person who hadrisen as high as Mr Phan would have been subjected, this explanation for hisexpulsion is not convincing. In the wake of the expulsion there have also beenrumours that Mr Phan was guilty of corruption. Mr Muoi’s speeches to theplenum as well as the final communiqué stressed the importance of “virtue” and“character” in selecting personnel for top party posts, giving some credence tothe view that Mr Phan was being made an example of for failings in these areas.

—and strengthening thesecurity apparatus

It seems more likely, however, that the real reason for Mr Phan’s fall was hisrole as “hit man” for the conservatives. According to some reports, he has longbeen known for his forthrightness, and played a leading role in the last expul-sion of a Politburo member; that of Tran Xuan Bach in 1990 after he hadbroken the party consensus on the limits of political debate. Although Mr Bachwas a liberal in Vietnamese terms and Mr Phan a conservative, the key to thedownfall of both is probably that they had overstepped the mark by breakingwith the consensual style of politics that has been the hallmark of Vietnam’sparty-state. In both cases their outspokenness had threatened the delicate bal-ance of forces within the party. This balance threatened to be thrown seriouslyout of kilter by the intensifying debate over policies and personnel. In so far asthe security apparatus, headed by the state president, Le Duc Anh, regards itselfas the ultimate maintainer of this balance, the expulsion of Mr Phan has prob-ably strengthened that faction, putting it in a position to call the shots over theeventual distribution of posts and the overall tone of the congress. The securityapparatus gained most from the instability threatened by the “crisis of worldsocialism” and the ensuing debate over the limits of political reform in theperiod surrounding the last congress in 1991.

The three top leaders mayretire

According to some foreign news agencies, the Central Committee plenum alsodecided that all three top leaders— Mr Muoi, Mr Kiet and Mr Anh—will stepdown from Politburo at the congress and will give up their party and stateposts. On the grounds both of his relative youth—he is 73 whereas the othertwo are in their late 70s—and the recent reformist victory over Mr Phan,Mr Kiet seems the most likely of the three to stay on, but he could just as wellbe succeeded by his no less reformist deputy, Phan Van Khai. Mr Muoi, who is79, has said that he wants to retire, although he implicitly offered to stay onwhen he remarked: “If the people and the party ask, then what should I do?”

The party political reportis a compromise—

On April 9 the Communist Party issued a draft of the political report which itintends to submit to the Eighth Party Congress in June. The long report firstreviews the achievements of the ten years since doi moi (renovation) became

10 Vietnam


official policy at the Sixth Party Congress, and then seeks to outline the wayforward for the next five years and beyond. The report sends mixed signals, asit attempts to marry continued support for market-driven economic growthwith a commitment to socialism. At the very least the report shows that thestruggle within the party over the role of the state in economic affairs has notyet been resolved.

—between those favouringa stronger private sector—

In the time-honoured consensual style the report has something for everyone.For those favouring more emphasis on a market economy, the report stresses theimportance of continued rapid economic growth and indicates that privateenterprise has an important role to play, which will be facilitated by giving itlong-term ownership rights. The report wants “the private-sector capitalist eco-nomy to invest in and operate long-term businesses”. This is a much clearercommitment than was made in the documents produced for the Seventh PartyCongress five years ago. State enterprises are to be encouraged to sell stock totheir employees, and a comprehensive capital market, including a stock market,is to be established. The report criticises corruption, smuggling, and “the squan-dering of public property,” and calls for faster reform in the financial sector,land management and public administration. The secretary of the CentralCommittee, Hong Ha, said at a press conference where he presented the reportthat although the equitisation of the state business sector was a very difficulttask, it was state policy to encourage it. He added that the details of implement-ation would be decided at the Party Congress, suggesting that the new acceler-ated timetable for privatisation recently announced by senior ministers maywell slip (see Economic policy and the economy). The report also calls for the“uniform establishment of market factors” and the limitation of monopolypower to fields where it is in the national interest, describing as unacceptableany monopolies which “maintain privileges and special benefits and ... manipu-late the market”.

—and those favouring anenhanced role for the state

On the other hand the rhetoric of the report draws heavily on Vietnam’s social-ist heritage. The goal is to “firmly uphold socialist orientations while developingthe multisectoral economy [comprising state, collective and private sectors]”.Thus the state sector is to play the leading role and, with the cooperative sector,is to become the foundation of the economy. The report claims that the role ofthe state in managing socioeconomic development is weak, and “the marketmechanism must be accompanied by the strengthening of the role of statemanagement along socialist lines”. In other words, Vietnam “will not stray onto the capitalist path”. Thus, by 2020 (the target date for Vietnam’s transform-ation into a fully industrialised economy) 60% of GDP is to come from state-owned businesses and rural cooperatives, up from just over 40% at present. Thereport expresses concern about what it sees as a growing polarisation of wealth,across regions, between urban and rural areas, and between different segmentsof the population, and sees a need to tackle this problem more actively.

Political pluralism willnot be allowed

Party members are not to be allowed to engage in private capitalist economicactivities except on a “modest scale”, although this is a hotly debated topic.Mr Ha told the press conference categorically that party members were not tobe allowed to engage in such activities because they are not allowed “to resort

Vietnam 11


to exploitation”. Efforts are to be made to develop party cells in private enter-prises and joint ventures. Not surprisingly, the report favours the continuationof “democratic socialist centralism”, centred on the party, and has no truckwith political pluralism and multipartyism.

The party continues togrow

The party’s membership campaign of 1995 (3rd quarter 1995, page 9) has beendeclared a success. There were 85,900 new members during the year, equivalentto about 4% of total membership. The figures show an increase of 46.5% in thenumber of new members enrolled compared with 1994. This is the highestnumber of new memberships in any year since 1986. It is not clear whether thissuccess was due to more vigorous recruitment efforts or to a lowering of admis-sion standards. The party continues to bemoan the low proportion of newmembers who are young, students, and come from ethnic minorities.

The prime ministerdefines roles for the

private sector

In an address to the National Assembly on March 12, Mr Kiet set out hisprogramme for the coming year or two. It is highly pragmatic, favouring astronger role for the private sector on the grounds that to meet its developmentobjectives Vietnam must be able to mobilise all available domestic resources.He argued for allowing the private sector to set up education and health-careservices, and to invest in infrastructure on a build-operate-transfer (BOT) basis.He also called for appropriate steps to encourage the legal amassing of wealth;favoured a simple, open and clear tax system with “low and reasonable” taxes;and made the case for reduced state intervention in business and productionand for allowing greater independence to enterprises. He stressed the need topress ahead with all aspects of administrative reform and to overcome short-comings in the legal system, particularly in such areas as land management,finance and taxation, company formation and registration, and the imple-mentation of the Domestic Investment Law (which was passed in 1994 with aview to creating a more level playing field for the private sector).

The social evils campaignfizzles out—

The campaign against social evils has lost much of its ardour, and the govern-ment has gone out of its way to reassure foreign business people that no harmis intended against them. In February the police had fanned out through Hanoiwithout warning and ordered shops, restaurants and businesses to remove anyforeign words from their signs. In response to complaints, the director ofHanoi’s Culture and Information Department asserted that: “We don’t want tolimit advertising; we just want to make it more orderly and attractive,” and hemade it clear that foreign names and words would be permitted provided theywere displayed less prominently than the Vietnamese words. The culture andinformation minister, Tran Hoan, added that: “Government policy ... aims topreserve our national culture and at the same time learn from the culturalbeauties of the world’s people.” On March 12 Mr Muoi reiterated his welcometo foreign investors, saying that: “Vietnam will create favourable conditions forforeign investors working in the country.” On March 23 he returned to thetheme, with a message to foreign business conveyed through Reuters: “We saythank you, thank you and thank you.”

There is a commercial twist to the objections against English-language signs.Media billings reached an estimated $63m in 1995, much of which was spenton billboards and other signs. Advertising billboards are supposed to be taxed

12 Vietnam


and licensed. The campaign may have had the secondary objective of forcingadvertisers to comply with these regulations.

—but xenophobia has notdisappeared

The welcome is not extended by everyone, and on March 27 a sharplyxenophobic article appeared in the army newspaper, Quan Doi Nhan Dan,calling on citizens to examine closely their relationships with foreigners. Thecommentary claimed that: “They [foreign reactionaries] label themselves astourists, visitors, representative offices and survey groups seeking investmentopportunities. ... There have been hundreds of cases in which foreigners havetried to take our military, national economic, scientific and technologysecrets.” This salvo is but the latest in an ongoing debate about how openVietnamese economy and society should be.

The National Assemblyenacts laws on mining—

The Ninth National Assembly met for three weeks in March. It approved lawson mining, cooperatives, and the budget, and expressed concern about thebudgetary situation (see below). The mining law clarifies the rights of pros-pectors, including foreign companies, and provides for environmental protec-tion and the safety of miners. Among its important provisions is one allowingcompanies to be granted simultaneously the rights to explore, develop andexploit concession areas. Under the previous mining code these three types ofactivity had been dealt with as distinct phases requiring separate agreements.By removing some of the uncertainty involved, the new mining law is expectedto encourage additional foreign investment in this sector, which has so farbeen quite modest.

—on cooperatives— The Law on Cooperatives gives greater autonomy to these units. Cooperativemembers will be viewed as shareholders, entitled to profits corresponding tothe amount of capital they have contributed. Cooperatives will be allowed toseek outside funding, both domestically and abroad. In the ten years sinceeconomic reform began, three-quarters of all cooperatives have folded, leavingabout 25,000 functioning at present. The new legislation is in line with thecommitment of the draft political report for the Eighth Party Congress toreverse the decline of the cooperatives.

—and on the budget The Organic Budget Law aims to clarify the division of responsibilities betweenthe central government and local (provincial, district and local) authorities.Only central government will handle loans or aid from abroad. The functionsand obligations of central government bodies have also been defined moreclearly, which is expected to reduce the large amount of overlapping jurisdic-tion which occurs at present. The law will take effect on January 1, 1997, andonly provides a framework for central-local fiscal relations; the details will needto be worked out more fully. In his speech to the National Assembly in MarchMr Kiet was studiously vague on the question of whether the thrust of themeasure would be centralising or decentralising. The World Bank’s annualreport on Vietnam, which will be published next October in time for the nextdonors’ meeting, is expected to consider the underlying issues and to makerecommendations on the implementation of the law.

Vietnam 13


The Hanoi dike scandal— The saga of the Hanoi dikes (2nd quarter 1995, pages 11-12) continues. Until ayear ago, some of the most spectacular private villas in Hanoi were constructedon the large dikes to the north of the city, which protect the city from seasonalhigh water in the Red River. Public outcry led Mr Kiet to order the destructionof the offending buildings, and bulldozers were sent in to start the job. Themove was seen as symbolic of the struggle of the rule of law against the rule ofpower and influence. Fines of about D20m ($1,800) were imposed on 236offending families.

—tests the limits of therule of law

In March the local party newspaper, Hanoi Moi, criticised the local authoritiesfor failing to prevent further construction on the dike, and noted that only 3%of the fines had been paid because some residents had gone into hiding. LastNovember at least four senior officials, who had been sacked earlier in the yearin connection with the scandal, were reinstated. It is still uncertain that therule of law will prevail in this test case.

The boat people facepressure to return

On June 30 the UN High Commissioner for Refugees (UNHCR) will end fundingfor all the camps housing Vietnamese boat people, except for the one in HongKong. The imminent deadline is focusing the minds of host governments onfinding ways to expedite the return of the boat people. The people in the campsare given two choices. They may return voluntarily, in which case they willreceive a grant of $240 and a bonus of $150. Or they may be forced to returnunder the Orderly Repatriation Program, in which case they will not receive thebonus. Vietnam, as a new member of the Association of South-east AsianNations (ASEAN), is under strong pressure to cooperate with its neighbours tofacilitate the speedy and smooth repatriation of the boat people. Since 1989some 79,000 people have returned to Vietnam, but about 34,000 still remain inthe camps.

Number of Vietnamese boat people in South-east Asia and Hong Konga

No

Hong Kong 19,689

Indonesia 4,600

Malaysia 3,128

Philippines 1,900

Singapore 102

Thailand 5,000

Total 34,419

a As of mid-April 1996.

Source: Press reports.

Malaysia has begunforcible repatriations—

Malaysia has moved with the most speed and determination. In mid-April itsent 215 Vietnamese volunteers back to Ho Chi Minh City by air, and another317 were forcibly repatriated by sea. A total of four boatlifts are planned toreturn the 1,765 non-volunteers. The remaining 1,363 Vietnamese have agreedto return voluntarily.

—while the Philippineshas backed down—

The Philippines began forcibly to repatriate its approximately 1,900 boat peoplein mid-March. This sparked a protest in the camp, and television reports showed

14 Vietnam


soldiers pulling Vietnamese, kicking and screaming, to the plane to be senthome. The subsequent outcry led to a government commitment to avoid forc-ible repatriations in the future, but the country is not eager to foot the bill formaintaining the camp and its inmates, which comes to about $1m per year. It isquite possible that the country will eventually decide to absorb the boat peopleinto the community.

Thailand has set a schedule for flying its 5,000 or so Vietnamese back in Mayand June. The flow of repatriations from Indonesia slowed to a mere 300 duringthe first quarter of 1996, and it is not clear if the 4,600 Vietnamese, who arecurrently being held on Galang Island near Singapore, will be returned beforethe end of June.

—and Hong Kong proceedsgingerly

The situation in Hong Kong is the most complex. It is also the place where thelargest number of boat people—more than 19,000—are being held. After theUK’s Privy Council deemed the continued detention of some of the boat peo-ple to be an affront to the standards of civilised society, the Hong Kongauthorities were obliged to release about 250 of those detained. A small numberof people returned to Vietnam in March, and about 1,600 were moved to aholding centre in mid-April, presumably in preparation for returning themforcibly. Hong Kong is moving cautiously, mindful of the riots which flared upin the detention centre in May 1995, but it is under pressure from Beijing toempty the camps before the colony reverts to Chinese control next year.

Ties with China werecordial—

Until mid-April relations with China appeared to be on an even keel. Meetingin Bangkok on the occasion of the Asia-Europe summit, the two countries’prime ministers, Mr Kiet and Li Peng, agreed to make compromises and ap-proach their problems in “a fair and reasonable manner”. The working groupfor the delineation of the Gulf of Tonkin held its sixth session in Beijing in anatmosphere of “friendship and frankness”. And the Chinese Xinhua newsagency reported that about 1.8 million Chinese had taken one-day tours toVietnam last year. The rail links between the two countries, which opened inFebruary for passenger traffic (1st quarter 1996, page 11), will begin to carryfreight as early as June, and crossborder trade is expanding rapidly. Some 36Chinese investment projects with a value of $64m have so far been approvedby the Vietnamese authorities.

—until a disagreementarose about oil

exploration rights

The atmosphere turned chilly after Vietnam signed a deal in April with a USfirm, Conoco, giving the company oil exploration and production rights in theTu Chinh area. China claims the area, which it calls Wan An-bei, as its own,and one of its spokesmen called the Conoco deal null and void. In 1992 Chinaawarded a contract to a small US oil firm, Crestone, to explore the area. In Aprilit renewed Crestone’s contract for another two years. A spokesman for theVietnamese foreign ministry responded by saying that: “All acts of interferenceare illegal and are running against international law and causing instability inthe region.”

Vietnam bases its position on the 1982 convention of the International Law ofthe Sea, which gives it a 200-mile economic zone extending beyond its conti-nental shelf. It has retained the Washington law firm of Covington and Burling,

Vietnam 15


which argues that China could not claim the area under international law evenif it had jurisdiction over the Spratlys, because the islands are too small to permitan economic zone. The dispute over the Spratlys is the most serious area ofdisagreement between the two countries, but this latest difference will not beallowed to upset the growing commercial and economic ties between them.

The border dispute withCambodia has been

patched up—

A border dispute with Cambodia which threatened to get out of hand has beendefused for the moment. In January Cambodia’s co-prime minister, PrinceNorodom Ranariddh, accused the Vietnamese of encroaching into Cambodia’sSvay Rieng Province and of moving boundary markers. In a speech in March,after claiming that he wanted to resolve the problem of what he called the“border invasion” peacefully, he went on to say that “if we cannot do that, wecan also solve the problem militarily”. It is widely believed that Prince Ranarridhis playing to anti-Vietnamese sentiment in Cambodia in order to strengthen hisposition vis-à-vis the second prime minister, Hun Sen, in the escalating battlegoing on in the ruling coalition in Phnom Penh. Hun Sen is regarded as vulner-able to such a ploy because of his history of close ties with Hanoi.

—after high-level talks inPhnom Penh—

The Vietnamese response was fairly restrained, but the matter was consideredsufficiently serious that in mid-April Mr Kiet flew to Phnom Penh to try toresolve the issue. Under the procedure which was agreed in the subsequenttalks, when border disputes arise an effort must first be made to resolve thedifficulty through negotiation at the local level. If this does not work, negoti-ation is to take place at the provincial level. And if this fails, then negotiationsare to take place at the central level, with the participation of the villagesconcerned and of the bilateral border expert working group. When a dispute isbeing handled, no comments will be made to the press.

—but other sources offriction remain

The differences between the two countries are not confined to border demarc-ation disputes. In November 1994 Vietnamese authorities stopped about tencargo ships bound for Phnom Penh, claiming they were carrying goods whichwere not permitted entry into Vietnam. Cambodia claimed that Vietnam’saction arose from a dispute over the status of ethnic Vietnamese in Cambodia.Whatever the cause, cargoes are increasingly being routed throughSihanoukville rather than up the Mekong to Phnom Penh. The amount of drycargo handled by the port of Phnom Penh fell from 75,000 tons in the firstquarter of 1994 to 45,000 tons in the first quarter of 1995, before revivingmodestly to 48,000 tons in the first quarter of 1996.

Hostility to Vietnam in Cambodia is voiced most loudly by Prince Ranariddh’sFUNCINPEC within the governing coalition and by the Khmer Rouge outsideit. Anti-Vietnamese sentiment is being used within Cambodia mainly to dis-credit Hun Sen and his Cambodia People’s Party (CPP), the successors to thegovernment installed by Hanoi when it invaded and occupied Cambodia in1978-79. As if to confirm its pro-Hanoi inclinations, the interior ministry,which is under CPP control, arrested three men on March 9. The men werebelieved to be members of the Free Vietnam Movement, a group based in theUSA which has established a “provisional government” for Vietnam and isreported to have been training troops in the jungles of Cambodia, in prepar-ation for mounting an armed insurrection over the border. The three men

16 Vietnam


arrested, who according to some reports were ethnic Vietnamese withCambodian citizenship, were then escorted to the border, where they weretaken into custody by the Vietnamese authorities. The most prominent of thethree, Ly Chandara, was the editor of the Vietnamese language magazine, VietNam Tu Do (Free Viet Nam), based in Phnom Penh. Amnesty Internationalconsiders him to be a prisoner of conscience.

Relations with Thailandare improving

The overlapping territorial claims of Vietnam and Thailand in the Gulf ofThailand have yet to be resolved, but relations between the two countries havebeen warming up. In February Vietnam had accused Thailand of venturing intoits territorial waters and seizing local fishing boats and their crews. The twocountries’ foreign ministers met in Hanoi in April and agreed that negotiationson the disputed areas, which will be conducted by a joint commission, would“reach a basic and durable solution”. The disputed area is believed to be rich inminerals. Thai businesses rank 13th among foreign investors with approvedprojects in Vietnam, and Vietnam is keen to maintain a good working rel-ationship with its fellow ASEAN member.

Economic policy and the economy

Strong economic growthcontinues—

The economy remained buoyant during the first quarter. Compared with thefirst quarter of 1995, industrial output rose 13%, the dollar value of exportsgrew by 25%, imports increased by 34%, and the rice crop in the Mekong Deltawas excellent, offsetting a poorer harvest in the north. The rapid growth hasbeen made possible by the high proportion of GDP spent on investment. Do LeMinh of the Institute of World Economy estimates that 27% of GDP wasinvested in 1995. He breaks the sources of financing down into foreign directinvestment (8.7% of GDP), the state budget (5.5%), bank loans (3.3%), privateindividuals and companies (6.9%) and state enterprises’ own resources (2.2%).The most striking element of this breakdown is the very modest contributionsby the banks and by state-owned enterprises out of their own funds.

—while inflation is keptfirmly in check

The government is particularly pleased that consumer price inflation was heldto just 4.3% during the first quarter, well below the 7.5% recorded in the sameperiod in 1995, and lower even than the 5.1% rate experienced in the firstquarter of 1994. Inflation is traditionally high during the annual Tet (LunarNew Year) period. If prices continue to rise month on month at the March paceof 0.8%, the inflation rate for the year may be held to about 10%, and this hasbecome the new, informal government objective. In fact the month-on-monthrate for April was well below this target figure, at just 0.1%. In March the IMFwas projecting an inflation rate of 9% for 1996.

The government sets anunrealistic growth target

Emboldened by the rapid economic growth of the past few years, the govern-ment has raised its sights. Instead of aiming to double income per head duringthe 1990s it now wants to raise it by 150%, according to the deputy primeminister, Tran Duc Luong. The old target was ambitious, but the new one issimply unrealistic. During the first five years of the decade real GDP per headrose by 34%. Just to meet the target of doubling GDP per head by 2000, realGDP will have to grow by 10.7% for each of the next five years. This represents

Vietnam 17


a higher growth rate than has ever been seen in modern Vietnam, and is aboveeven the most optimistic projections.

The budget deficit causesconcern within Vietnam—

There is growing concern, and controversy, about the persistent budgetarydeficit. During the Ninth National Assembly, ministers were grilled about thebudgetary situation. At the end of its session the assembly issued a resolutionwhich emphasised that: “The country needs to overcome problems in budgetmanagement, low state revenue collection, tax evasion and illegal trading.”

—driven by disappointingrevenue

Total revenue in 1995 came to D56.6trn ($5.1bn), an increase of 21.9%compared with 1994. Over the same period, nominal GDP rose by 23.4%, so thegovernment mobilised a smaller fraction of GDP in 1995 than in 1994. It alsofell far short of its planned (and unrealistic) increase in revenue of 33.5%.

Many explanations have been offered for the lacklustre revenue performance.The deputy prime minister, Phan Van Khai, spoke to the National Assembly inMarch of widespread tax evasion and inefficient tax collection. He also blamedthe shortfall on disappointing receipts from land-rights transfer fees, and cutsin trade taxes; the latter were mainly adjusted to comply with Association ofSouth-east Asian Nations (ASEAN) obligations, and were typically replaced byexcise taxes. He noted that taxes in arrears and taxes evaded by companies(mainly state-owned enterprises) amounted to about D1trn. Tax revenue waslost on non-licensed “cultural service establishments and illegal businesses”.An estimated 40% of private business is unlicensed, and hence untaxed,according to Mr Khai.

The shortfall forced areduction in capital

spending

Comparatively weak revenue collection forced the government to curtail someof its planned capital spending in 1995, and this in turn may have slowed downthe disbursement of aid (which often requires a counterpart contribution out oflocal resources). Despite this adjustment, the budget ended with a substantialdeficit.

The IMF finds the deficitsmaller and less troubling

There has been some dispute about the size of the budget deficit. The govern-ment reported it at 4.3% of GDP for 1995, or slightly higher than the estimateof 3.8% made last October. This implies that total spending was about D66trn,including D4trn for debt repayment. Because the IMF does not include debtrepayment as a budgetary expense, it puts the deficit at 1.7% of GDP for 1995,which is fairly low, and is also below the deficit of 2.6% of GDP observedfor 1994.

The government has planned for budget revenue in 1996 to be 22.7% higherthan in 1995; this is lower than the 26.5% rise in revenue which had beenprojected earlier (1st quarter 1996, page 18), mainly because inflationary expec-tations have been lowered. The proposed increase is still ambitious, given thatnominal GDP is expected to rise by about 20.5% (assuming 10% inflation anda 9.5% increase in real GDP) and that the government already mobilises quitea high proportion of GDP (about 24%).

18 Vietnam


The budget(% of GDP)

1991 1992 1993 1994 1995a

Domestic revenue 13.5 19.0 22.3 24.7 24.4

Current expenditure 11.4 14.0 18.8 18.3 17.5

Public savings 2.1 5.0 3.5 6.4 6.9

Capital spending 2.8 5.8 7.0 6.9 7.3

Primary deficit 0.7 0.8 3.5 0.4 0.6

Interest payments 0.8 0.9 1.3 1.3 1.1

Overall deficit 1.5 1.7 4.8 1.7 1.7

Repayments 0.7 0.7 0.9 0.8 2.6

Financing requirement 2.3 2.4 5.7 2.6 4.3

a EIU estimates.

Sources: Vo Van Kiet, Vietnam in 1993 and Socio-economic Prospects for 1994-95; World Bank, Vietnam: Economic Report on Indus-

trialisation and Industrial Policy; press reports.

Budget receipts rosesharply in the first quarter

The government claims that budget collections rose by 47.3% during the firstquarter of 1996 over the first quarter of 1995. If confirmed, this is a remarkableturnaround, but it also points to the instability, and hence fragility, of therevenue structure. Greater stability might be achieved with a value-added tax(VAT), but the date for introducing VAT has been pushed back to 1998.

In the first quarter, government spending on capital projects was again run-ning well below the targeted level, for reasons which are not clear. Based onpast behaviour, the government is likely to make a point of tackling problemswhich it has identified from the previous period. Thus, government spendingon capital projects may well rise sharply during the second and subsequentquarters.

Foreign investmentapprovals are down—

The pace of approvals for new foreign investment projects is slowing, from theunsustainably high level of 1995. During the first quarter of 1996 the Ministryof Planning and Investment granted licences for projects worth $1.27bn, in-cluding $169m which was added to existing projects. If approvals continue atthis rate, total commitments will come to about $5bn in 1996, or about

-120

-80

-40

0

40

80

120

160

1990 91 92 93 94

Foreign grants and loans

State bank

Bonds

Financing the budget deficit% of total

Source: World Bank.

Vietnam 19


two-thirds of the (high) level achieved in 1995, and well below the officialtarget of $6bn.

The deputy planning and investment minister, Tran Xuan Gia, has dismissedany suggestion that investors were holding back until after the Eighth PartyCongress, and noted that the level of investment applications and approvalscombined was higher during the first quarter of 1996 than during the equiv-alent period of 1995. There is little doubt, however, that the uncertainty sur-rounding the congress is having a chilling effect on both Vietnamese officialsand investors. National security considerations are reported to have delayedthe award of $1.4bn of business cooperation contracts to four foreign telecom-munications giants: Telstra of Australia; Cable & Wireless of the UK; NTTInternational of Japan; and France Télécom. It was thought that the contractswould be finalised in April, but agreement is now not expected until after theParty Congress. The release of the draft political report in April with its empha-sis on an enhanced role for the state in economic management and productionconfirmed many prospective investors in their wait-and-see attitude.

—and are concentratednear the two major cities—

Almost four-fifths of all approved foreign investment projects, by value, arelocated either in or near Ho Chi Minh City or in the Hanoi-Haiphong area.Concerned by this “dumb-bell effect”, the government has sought by a mixtureof diktat and incentives to steer foreign investors outside the two main growthcentres. Its decision to locate Vietnam’s first sizeable oil refinery at Dung Quatin central Vietnam has been the most controversial instance of this policy(1st quarter 1996, page 23).

—but disbursements willcontinue to rise

The cumulative total value of approved foreign investment projects reached$19bn by the end of February, spread over a total of 1,376 projects. Thus theaverage project was valued at $13.8m, counting both the contributions of theforeign investor and the local partner (if any). Approximately one-quarter ofthe committed total has actually been disbursed. Despite the fact that theamount of foreign investment approved is falling, actual spending on foreigninvestment projects will continue to rise because of the large backlog of pro-jects still in the pipeline. This is expected to sustain overall investment andeconomic growth over the coming year or two at least.

Industry 46.9

Agriculture & forestry 1.6

. 34.0

1.3

Oil & gas 5.9Other 1.9

. 5.6

IZs & EPZs 2.8

Industry 811.0

Agriculture & forestry 35.0

. 241.0

18.0Oil & gas 21.0

Other 138.0

. 45.0

IZs & EPZs 67.0

Distribution of foreign direct investment by main sectors (a)

a) As of end-February 1996.Source: Ministry of Planning and Investment.

Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6

Transport &communications 45.0Transport &communications 45.0

Transport &communications 5.6


Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6Transport &communications 5.6





Transport &communications 45.0Transport &communications 45.0Transport &communications 45.0Transport &communications 45.0Transport &communications 45.0Transport &communications 45.0

Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0


Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0Hotels &tourism 34.0

Hotels &tourism 241.0Hotels &tourism 241.0

Finance &banking 1.3

% of total No of projects Transport &communications 45.0Transport &communications 45.0Transport &communications 45.0

Hotels &tourism 34.0









% of total% of total No of projects

20 Vietnam


Much overseas Vietnameseinvestment is unrecorded

The official figures on foreign investment do not include the sums which arequietly being sunk into hundreds of small projects by overseas Vietnamese(Viet Kieu). Such investments are typically undertaken in projects, such asmini-hotels and stores, run by relatives or former business partners, and mayexceed the estimated $100m in official investment originating from Viet Kieusources. Some 2 million Vietnamese live outside Vietnam, almost half of themin the USA. There is a flow of skilled Viet Kieu back to Vietnam, mainly to workin foreign-invested firms. Overseas Vietnamese made 265,000 visits to Vietnamin 1995, a 20% increase compared with 1994. They are believed to remit closeto $1bn per year to Vietnam.

Equitisation continues tobe delayed—

The question of equitisation, the Vietnamese version of privatisation, contin-ues to be deeply divisive. Some leaders, most notably Mr Khai, have called forfaster equitisation “to harness the potential of the state sector,” but the domi-nant sentiment is to move slowly on the issue. The minister in charge of theCommittee for the Renovation of Enterprises, Phan Van Tiem, said in Marchthat as many as 200 state-owned enterprises could be equitised in a pilotprogramme later this year. In April he said that 1.5-2% of state firms (about90-120) should be put up for equitisation in 1996 and 1997. The plan is thatthe experience thus gained would be used in drafting a law on equitisation bythe end of 1997, and that this in turn would provide “a firm legal base forequitisation of state firms ... at least for the period from 2000 to 2005".

—as it faces resistancefrom many quarters

Resistance to equitisation comes from many sides. The managers of state enter-prises, and their employees, benefit from hidden subsidies in the form of cheapaccess to land, inexpensive bank loans obtained with little or no collateral, andeasier access to import and other licenses. As state-owned enterprises, they findthemselves to be attractive to foreign investors, because they can boast of thebacking of, and access to, the government as well as the privileges alreadynoted. Many leaders are ideologically opposed to equitisation, and there istherefore what Mr Tiem terms “a lack of consensus on the concept of equitis-ation at various levels”. No movement on this front is likely until after theParty Congress, when the choice of new leaders will determine whether large-scale equitisation will occur before the millennium.

. 27.0Region 4 (Danang, Quang Ngai, and Binh Dinh) 4.0

. 52.0All other regions 17.0

Distribution of foreign direct investment by main region (a)% of total

a) As of end-February 1996.Source: Ministry of Planning and Investment.

Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0

Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0

Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0

Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0

Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0Region 6 (Ho Chi Minh City, Dong Nai, Ba Rai, Tay Ninh and Song Be) 52.0





Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0Region 2 (Hanoi, Haiphong, Hai Hung and Nam Ha) 27.0







Vietnam 21


Industry

Twenty-three specialcategory enterprises are

created

The prime minister, Vo Van Kiet, issued a resolution in March giving 23 state-owned enterprises a special category classification. Special category enterprisesmust have a minimum legal capital of D500bn ($45m), and be “independentstate-run businesses which play a key role in the country’s economy”. Theimportance of the classification is that the prime minister appoints the generaldirectors of these enterprises, which may help insulate them from interferencein their day-to-day activities by the line ministries. The roster of special categoryenterprises includes all the blue-chip corporations, among them the VietnamAviation Corporation, the Vietnam Post and Telecommunications Corporation,the Vietnam Cement Corporation, the Vietnam Electricity Corporation, theVietnam Coal Corporation, the Vietnam Rubber Corporation, the Vietnam Oiland Gas Corporation, the Vietnam Bank for Commerce, the Vietnam Bank forAgriculture, and the Vietnam Bank for Investment and Development.

The prime minister favours the development of a core of large enterprises, basedon the South Korean chaebol, as a way to create world-competitive local busi-nesses, separated from ministerial meddling. In January the government an-nounced that it would proceed with a plan to merge about 2,000 stateenterprises into 90 large corporations, most of which would come under thetutelage of the central government. Some observers fear that such conglomer-ates will use their size and political connections to stifle competition, and so willserve ultimately to thwart, rather than foster, more rapid economic growth.

Worker abuse createstensions

According to a report in the party newspaper Nhan Dan, 22 cases of worker abusewere reported in foreign-invested businesses in 1995, half of which involvedSouth Korean employers or firms. In March 970 workers went on strike at agarment factory over allegations that a South Korean woman had beaten some15 workers. Incidents such as this have led to calls for a more vigorous applic-ation of the labour code, which came into effect in 1994. In Dong Nai province,near Ho Chi Minh City, about one-quarter of the 23,000 workers in foreignenterprises are unionised. Foreign enterprises are supposed to hold workshopsfor their workers on the labour code, negotiate a collective labour agreementand sign contracts with individual workers, but less than half of the foreignenterprises in the province have complied with these rules. Average wages in thegarment and shoe enterprises in the province came to $35-55 per month, butwere reported to be $80-100 in businesses producing other consumer goods.

The minimum wage isto rise

The deputy minister of labour, war invalids and social welfare, Le Duy Dong,has announced that the monthly minimum wage in foreign enterprises will beraised by $10, effective July 1. This would increase the minimum from $35 to$45 in Hanoi and Ho Chi Minh City, from $30 to $40 in Haiphong, Vinh, Hue,Danang, Bien Hoa and Can Tho, and from $25 to $35 elsewhere. The mini-mum wage in domestic firms is currently D120,000 ($11).

The military industrialcomplex is expanding

The military remains actively involved in running businesses, particularly inthe fields of engineering, transport and construction. Army enterprises had acombined turnover in 1995 of D4trn ($360m), equivalent to about 2% of GDP.The profitable Southern Flight Service Corporation services the petroleum

22 Vietnam


industry. Other army enterprises are active in helicopter maintenance, ship-breaking, coal mining, rubber processing, and a wide variety of heavy and lightindustries. Army-controlled businesses were partners in 49 foreign-investedprojects by the end of 1995, with projects capitalised at $445m. The substantialarmy involvement in business may provide a peacetime outlet for the energiesof army officers, but it also creates another constituency against large-scaleprivatisation.

Agriculture

Rice exports are on trackafter a good harvest in the

south—

Rice exports are on target, having reached 580,000 tons in the first quarter ofthis year, close to the official quota for the period of 600,000 tons. After whatlooks like being another record winter-spring harvest in the Mekong Delta (offi-cially estimated at 6.7m tons, around 500,000 tons higher than last year), theMinistry of Agriculture wanted to raise the export quota to 800,000 tons for thesecond quarter, but the Ministry of Trade has kept the ceiling at 600,000 tons.International demand for rice is soft, and the export price for 5% brokens fobSaigon fell from $323/ton on March 21 to $305/ton on April 18. After coldweather hurt the crop in the north, producers in the Mekong Delta respondedby shipping rice to the north. About 100,000 tons have been transported fromthe south to the north so far this year. A fairly high proportion of these ship-ments consists of high-quality rice and an estimated 20-30% of the shipmentsappear to be destined for the Chinese market.

—as coffee prices holdsteady

The rise of the coffee industry continues. In 1995 Vietnam became the world’sfourth largest coffee exporter. Although the heady days of the second half of1994 (when coffee prices were soaring) have passed, coffee prices have heldfirm recently, reaching $1,800/ton fob Saigon at one point in mid-April. Theprice is expected to fall somewhat over the coming months as the crop isharvested in Indonesia and as Brazilian output recovers, and the EIU expectsthe average ICO robusta indicator price to fall by 29% this year.

Energy and mining

Gold rush in Bac Thai According to recent reports, a gold rush is under way in the district of Na Ri inBac Thai province, about four hours drive north from Hanoi, where thousandshave flocked to dig in open-pit mines. The area is closed to foreign journalists,but the trade union newspaper, Lao Dong, has claimed that children have beenforced to work in the mines for as little as $10 per month.

BHP stays in Dai Hungoilfield—

Broken Hill Proprietary (BHP) of Australia has backed off from its threat to closedown the Dai Hung oil field, but is continuing to negotiate changes in itsproduction-sharing contract. The problem arose when the oil field turned outto have reserves of about 100m barrels, far short of the 700m barrels which hadbeen estimated initially.

—but Westralian halts itsoperations

Another Australian company, Westralian Sands, has called for operations to besuspended at its mineral sands joint venture in Ha Tinh province after more

Vietnam 23


than a year of differences with its Vietnamese partners and provincial govern-ment officials. Westralian, which holds a 60% stake in the venture, does notwant operations to resume until the terms of the joint-venture contract havebeen renegotiated to allow the Australian company’s representatives to havecontrol over the project. At present any member of the joint venture’s boardmay veto decisions. Last year relations with the provincial government reachedrock bottom when Westralian accused government officials of confiscating$2.5m of equipment and two of Westralian’s managers were arrested(3rd quarter 1995, pages 14-15).

Ho Chi Minh City canexpect power shortages

The director of Power Company No. 2, which serves 18 southern provinces, haswarned of the likelihood of power cuts in his region at the beginning of the dryseason. Electricity demand in the region rose by more than 25% in 1995, whileoutput rose by about 15%. Electricity demand is expected to rise by a further19% in 1996. The shortage of electricity is particularly acute in the south. HoChi Minh City consumes one-quarter of the country’s total output, and whilethe North-South Transmission Line has avoided serious power cuts, it is alreadyunable to meet the increasing demand.

In the short term the problem will be alleviated with the addition of anothergenerator to the Ba Ria power plant, and two oil-fired generators in Can Tho.By next year the power shortages should be solved, at least temporarily, whenthe Phu My gas-fired plant comes on stream in February 1997.

Infrastructure

The road network beginsto get a facelift—

The much-needed upgrading of the road network is gathering momentum.Work on upgrading 430 km of Highway 1, on the Hanoi-Vinh and Ho Chi MinhCity-Can Tho sections, began at the end of 1995, with most of the financialsupport coming from the World Bank. The upgrading of the 435-km sectionbetween Ho Chi Minh City and Nha Trang, which also began last year, is beingfinanced by the Asian Development Bank. Highway 5, which links Hanoi withHaiphong, is being widened to four lanes, with funding from Japan and Taiwan,and will be completed by the end of 1999. Work has also begun on expandingHighway 51 between Bien Hoa and Vung Tau. A number of other projects,mainly to upgrade more sections of Highway 1, are currently being negotiated.

—but the My Thuanbridge is on hold—

The proposed bridge across the main effluent of the Mekong at My Thuan willprobably not be built for some time. The new government in Australia does notfavour the large and expensive project, and even a cursory cost-benefit analysissuggests that the bridge is not economically justified at this time. Meanwhile,Denmark is providing assistance to upgrade the ferries at My Thuan and CanTho, which will make road travel between the Mekong Delta and Ho Chi MinhCity both quicker and more reliable. It will not have much effect on the riceeconomy, however, since most of the rice is transported out of the regionby boat.

—and funding will behard to find for Son La

The gigantic Son La hydroelectric power plant in northern Vietnam is scheduledfor completion in 2007. A provincial planning official has said that the project

24 Vietnam


will require the relocation of 50,000 people. The proposed plant would be thelargest in the country, and one of the largest half-dozen in the world. Because ofthe serious environmental effects, it is probable that Vietnam will have difficultyfinding the financing for the project.

The phone networkcontinues to double every

two years

On March 1 the digit 8 was added to the front of all current telephone num-bers. This is a reflection of the rapid growth of the telephone network, whichhas increased by 53% per year, from 140,000 sets in 1991 to 770,000 in 1995.In addition to these landlines, sales of mobile phones amounted to about40,000 units in 1995, along with about 70,000 pagers. Vietnam now has onetelephone per 100 people, and is aiming to raise the total to 4-5 phones per 100people over the next five years. This is ambitious but plausible, and wouldrequire an annual rate of network expansion of 35%. In February Vietnamopened its first international optic fibre telecommunications link. This allowsup to 22,000 simultaneous phone calls. As recently as 1986 Vietnam had onlynine international telephone lines, all routed through Moscow.

Services

A proposed profits taxshocks law firms

Foreign lawyers were shocked when they received a copy of a draft document,dated November 1995, in which the Ministry of Finance proposed a profits tax,to be assessed at 20% of receipts, in addition to the usual turnover tax of 4%.On the surface the tax is being proposed as a presumptive profits tax, based onthe assumption that foreign law firms are receiving profits equivalent to 40%of the value of their billings, and that these profits should be taxed at about45%. The deeper purpose is, in the words of the proposal, to “not encourageforeign organisations’ operations in this field.” Some 14 international law firmswere granted licenses to open branches in February, and so are now subject tothe profits tax. The firms are not allowed to give advice on Vietnamese law, butthey may provide services on international law. Several international firms saythat the proposed tax would force them to scale back or close their estab-lishments in Vietnam, and to refer clients to their offices in other countries.

Money and finance

SBV proposes to allowland-use rights as

collateral

The State Bank of Vietnam (the central bank) has circulated a draft law on landmortgages, which promises to be an important step towards the development ofa more active market for loans. Under the proposal, land-use rights could be putup as collateral. In case of a default, the mortgaged assets would be auctioned bya state body. The State Bank promises to release the proposal on July 1. Mean-while, the National Assembly’s Standing Committee introduced a series ofamendments to a previously issued ordinance, liberalising the rules on land-userights as set out last year under Decree No 18-CP (2nd quarter 1995, page 8). Theamendments define four rights of land users, including the right to use theland-use right as collateral for loans. This last change paves the way for the StateBank’s proposed regulations.

Vietnam 25


The exchange rateremains stable

The finance minister, Ho Te, has reiterated the government’s commitment tokeeping the dong stable. The dong stood at D11,013:$1 on May 3, a rate whichhas barely changed in the past two years. The combination of a stable nominalexchange rate relative to the dollar, the rise of the dollar relative to othercurrencies in recent months, and domestic inflation at a higher level thanworld inflation has squeezed the margins of some exporters. The dong has notneeded to depreciate because there have been large inflows of foreign aid,investment, and remittances, which have sufficed to finance the large current-account deficit. The EIU expects these flows to go on increasing in 1996, butnot as rapidly as the current-account deficit, creating pressure to allow thedong to depreciate to maintain external balance.

World Bank lendingcontinues at a high level

The World Bank is maintaining its high rate of lending to Vietnam. During avisit by the Bank’s president, James Wolfensohn, in May, it was announcedthat the World Bank would lend $1.5bn on concessional terms over the threeyears from 1997. Vietnam is already the second largest recipient of aid (afterIndia) from the International Development Association (IDA), the Bank’s soft-loan affiliate. All of the Bank’s loans to Vietnam have been concessional, withlong grace periods, low interest rates, and a 40-year repayment period. TheBank is expected to approve a $180m loan for a second power project, whichwill finance the first phase of the Phu My gas-fired power plant, and helpimprove the electricity distribution system. It is negotiating a $130m loan toprovide medium and long-term credit to the rural sector, including some assis-tance for the newly formed Bank for the Poor (BFTP). The BFTP will advancesmall loans to the very poorest households, along the lines of the programmesrun by Bank Rakyat Indonesia and the Grameen Bank in Bangladesh.

The World Bank has already approved nine loans to Vietnam. The first, worth$60m, was implemented in 1978. With Vietnam’s invasion of Cambodia, theBank ended its lending, and did not resume lending until November 1993.Since then it has approved about $1.3bn of loans, including $96m which wasawarded in 1994 to support livestock development and a $165m loan whichwas signed in 1995 and is to finance an increase in the capacity of the Ba Riapower station. Less than $200m of this amount has been disbursed. The WorldBank’s future lending will focus on basic infrastructure, health and education,rural development, and environmental conservation and management.

External debt has beenmounting quickly

Vietnam’s external debt in convertible currencies stood at about $6.7bn at theend of 1995, the equivalent of 43% of GDP. Because much of this debt has beencontracted on concessional terms, the servicing burden remains light, but thereis some concern that it could be rising too fast. Of the $2.3bn in aid pledged bydonors for 1996, $1.8bn consisted of (hard currency) loans; if disbursed, thiswould raise the foreign debt by almost as much as the anticipated increase inGDP (which is expected to grow by about $2.2bn). Vietnam also owesRb10.5bn to the former Eastern bloc, mainly to Russia. Negotiations aimed atarriving at terms for settling this debt are advancing slowly, stalled by a dis-agreement over the appropriate exchange rate to use in converting it to ahard-currency equivalent.

26 Vietnam


A settlement ofoutstanding commercial

debt may be in sight—

Although there have been no public announcements about the progress ofnegotiations over the rescheduling of Vietnam’s outstanding and overduecommercial debt, after nearly a year of negotiations an agreement may be insight. The deal would write off a percentage of the debt and turn the rest intobonds which in turn would be backed by US Treasury zero coupon bondsbought by Vietnam, along the lines of Brady-style bond deals arranged forother countries. Negotiations were due to resume on May 14. The debt, whichamounts to about $800m, is mainly owed to Japanese banks and arises fromloans contracted in the late 1970s. Only one-third of Vietnam’s debt circulateson secondary markets, where it now trades at about 80 US cents to the dollar.The eventual discount on the outstanding debt is expected to be in the range35-50%, and probably nearer the lower end of this range.

—as a deal is worked outwith one creditor

Meanwhile an arrangement has been made to settle the debt held byAbbotsford Investments (1st quarter 1996, page 26). Abbotsford had sued in aLondon court to seize the assets of the state-owned Vietcombank. It is under-stood that Vietcombank will buy out its own debt though an agent, DeutscheMorgan Grenfell. The settlement is said to be generous, which could temptother creditors to seek their own settlements rather than staying with theLondon Club negotiations.

Foreign aid disbursementsstill lag

There is a large gap between foreign aid pledges and actual disbursements.According to the planning and investment minister, Do Quoc Sam, accumu-lated pledges of aid have now reached $6bn, but of this only $4bn has beenofficially agreed and just over $2bn has actually been released. The lag indisbursements is not surprising, given that a substantial proportion of the aidis for infrastructure projects, which face long gestation periods.

State Bank resumesTreasury-bill auctions

The State Bank of Vietnam announced in April that it would resume itsTreasury-bill auctions on a strict fortnightly schedule. The IMF had been puttingpressure on the State Bank to start the auctions again (1st quarter 1996, page 18).The auctions began in mid-1995 but were discontinued after a few months.Earlier this year they resumed. The first auction was held in late February whenD50bn ($4.5m) of six-month bills were tendered. The interest rate, at an annual-ised 13.85%, was well below the rate of 17.2% which prevailed at the previousauction in August 1995. Another D50bn of six-month bills were auctioned onMarch 14 when the annual coupon rate fell further to 12.3%. The falling couponrate reflects investor confidence that the inflation rate will remain low, andsuggests that further cuts in bank deposit and lending rates may take place soon.On March 29 the Treasury sold D129.6bn of one-year bonds to private indivi-duals. The bonds were of small denomination (D100,000; about $9) and carriedan interest rate of 16%.

Foreign banks chalk upsome large loans

Foreign banks continue to become more venturesome in their lending(1st quarter 1996, page 25). In February ABN-AMRO lent $25m to Vietcombankto finance imports of capital goods, repayable in three to ten years. Then inMarch the UK-based merchant bank Singer & Friedlander managed a syndicateof eight banks which lent $60m to Vinacoal. The issue was oversubscribed. Thefinancing is tied to the corporation’s underlying coal reserves.

Vietnam 27


Foreign trade and payments

Exports grow strongly— Rapid export growth continues. In the first quarter exports grew by 24.8% indollar terms compared with the same period of 1995, to reach a total of$1.31bn. By comparison, in the whole of 1995 exports grew by 22.8% com-pared with 1994 (1st quarter 1996, page 28). Textiles exports rose by animpressive 45% to reach $145m during the first quarter of 1996.

—but imports surge evenfaster—

The growth of exports was eclipsed by an even more rapid growth in imports,which surged to $2.15bn during the first quarter, or 33.5% more than in theequivalent period of 1995. An estimated 14% of recorded imports consisted ofconsumer goods, which is in line with the experience of the last few years,although it must be remembered that large quantities of consumer goods aresmuggled in through China and Cambodia. Imports of cars and motorcyclesrose by over 80% compared with the first quarter of 1995. A further 37% ofimports ($800m) consisted of equipment and spare parts, reflecting the contin-ued strength of investment.

—increasing the tradedeficit

The consequence of the rapid rise in imports was an increase in the trade deficitto $840m in the first quarter of the year. This is large when set against thedeficit of $2.3bn for all of 1995. For the moment the trade deficit appears to besustainable, because it is financed by flows of foreign direct investment, aidand remittances. A substantial part of these inflows appear to go immediatelyto buy imports, particularly capital goods, rather than being transferred intodong and spent on local goods and services. This explains why the inflationrate has not surged again. If imports and exports continue to grow at theircurrent rates, the trade deficit will widen to $3.5bn in 1996, or the equivalentof about 15% of GDP. By international standards this would be a large gap.

Foreign exchange reservesare adequate

According to the IMF, foreign exchange reserves in 1994 provided cover for9.8 weeks of imports, which would imply total reserves of $1.1bn. A similarcalculation implies that reserves rose to $1.5bn in 1995, and the IMF envisagesa further rise in 1996. These reserves are adequate but not particularlygenerous, and could vanish very quickly if confidence in Vietnam’s economicprogress were to fade.

Talks begin with the USAon a trade agreement—

The USA and Vietnam have begun talks on a comprehensive trade agreement.At a meeting in April the US side pushed for an agreement on the protection ofintellectual property. Such an agreement could serve as a prelude to the grant-ing of Most Favoured Nation (MFN) status to Vietnam, which would subjectVietnamese goods entering the USA to the tariff rates applied to most othercountries.

—as Vietnam seeksmembership of the WTO

Vietnam is preparing the measures required to join the World TradeOrganization (WTO). The most difficult changes cover the legal structure oflicensing, banking and the protection of intellectual property. Membership ofthe WTO automatically confers MFN status, and as a practical matter willrequire the support of the USA.

28 Vietnam


Appendix 1

Quarterly indicators of economic activity in Vietnam

1993 1994 1995 1996

4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Agricultural production Annual totals

Rice ’000 tons 21,900 ( 22,500a ) ( n/a ) n/a

Exports Qtrly totals

Rubber: net ’000 tons 24.0 12.0 11.0 17.0 19.0 13.0 11.0 18.0 14.0b n/a

Foreign trade Annual totals

Exports $ m 3,752 ( 4,706 ) ( n/a ) n/a

Imports “ 6,400 ( 8,607 ) ( n/a ) n/a

Exchange rate End-Qtr

Official rate D:$ 10,822 10,927 11,007 10,871 11,073 11,212 11,034 11,023 11,011 11,013

Note. Annual figures of most of the series shown above will be found in the Country Profile.a Estimate. b Total for October-November.

Appendix 2

French trade with Vietnam($ ’000)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec1990 1991 1992 1993 1994

Exports fobFood 22,564 16,405 30,437 24,373 20,101 of which: cereals & preparations 20,795 15,010 27,943 20,345 14,860Chemicals 37,385 39,397 49,445 68,310 85,273Metal manufactures 721 1,456 4,761 4,533 15,522Machinery incl electric 20,991 40,759 49,887 169,069 88,483Transport equipment 5,011 934 67,845 5,083 42,068Scientific instruments 3,173 3,640 6,373 11,371 9,612Total incl others 92,573 108,381 219,778 297,005 285,746

Imports cifFood 20,754 15,467 26,874 25,558 31,725Wood & cork & manufactures 1,791 1,025 2,313 3,054 5,346Mineral fuels 1,330 14,059 8,339 8,317 10,635Chemicals 1,644 588 655 275 960Non-metallic mineral manufactures 214 901 2,333 6,114 11,047Clothing 4,395 9,866 22,937 39,418 43,580Footwear 203 2,969 12,850 47,159 75,277Total incl others 32,087 48,175 90,243 185,983 231,090

Statistical appendices 29


Appendix 3

Japanese trade with Vietnam($ ’000)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec1990 1991 1992 1993 1994

Exports fobFood & live animals 2,149 2,539 7,328 14,895 7,449Chemicals 23,055 31,335 30,757 57,280 69,441 of which: chemical elements & compounds 8,323 14,401 9,073 15,400 16,188 plastic materials 4,066 5,281 9,137 12,879 30,389Rubber manufactures 5,815 4,390 3,342 3,221 3,213Paper, etc & manufactures 3,728 3,070 3,472 2,557 2,436Textile yarn, cloth & manufactures 10,726 15,928 30,252 45,222 65,385Iron & steel 12,174 16,274 18,186 45,611 48,304Non-ferrous metals 370 410 697 1,472 1,976Metal manufactures 1,013 1,451 1,641 4,121 9,435Machinery incl electric 84,364 85,416 198,879 174,967 201,307Transport equipment 55,552 34,068 108,317 221,740 124,489Total incl others 214,436 217,266 450,180 634,431 643,673

Imports cifFish & preparations 131,921 134,374 172,831 238,946 329,159Coffee, cocoa, tea & spices 1,887 3,532 6,199 9,636 24,910Wood & cork 10,907 18,646 13,455 12,259 16,470Metal ores & scrap 19,548 14,997 3,142 3,584 5,771Mineral fuels 393,224 425,479 540,150 551,253 575,579Clothing 12,048 33,666 90,089 176,598 258,710Total incl others 594,983 661,686 868,164 1,064,532 1,348,065

$ m Jan-Dec Jan-Dec

1994 1995

Japanese exports fob 644.7 919.0

Japanese imports cif 1,349.2 1,716.9

30 Statistical appendices


Documents

COUNTRY REPORTinterior Bui Thien Ngo justice Nguyen Dinh Loc labour, war invalids & social welfare Tran Dinh Hoan national defence General Doan Khue planning & investment Do Quoc Sam