VIETNAM: STRONG FOURTH QUARTER GROWTH BELIES FISCAL CHALLENGES, TRADE IMBALANCES AND THE DECLINE IN FOREIGN DIRECT INVESTMENT

Contemplating Risks ahead of $1 Billion 10 year Bond Issue


Current Rating: BB _ Negative (S&P Sept ’06); Ba3 _ Negative (Moody’s July ’05) and BB- _ Stable (Fitch June ’02)


10 yr CDS spread: 272.6 bps (Bloomberg Jan. 8, 2010); 5yr CDS spread: 228 bps (Bloomberg Jan. 8, 2010)


Vietnam Dong Official Rate 17, 942 (Ministry of Finance Jan. 8, 2010) Banks quote 18,500


GDP at 1994 Constant Prices: VND 515,909Bn ($ 23.75Bn)


• Economic Growth capped by inability to generate incremental electrical power
• High Government Expenditures on a variety of subsidies exacerbate fiscal imbalances. Financing gap is approximately 6.9%
• Actual Foreign Direct Investment has slowed despite higher incidence of Ministry of Planning and Investment approvals
• Trade Balance continues to deteriorate. High valued imports consistent with rapidly developing nation outstripped the value of oil exports. The second and third largest contributors to the export industry, textiles and footwear, have decline nearly 9%.


Recent Trends

The General Statistics Office of Vietnam (GSO) reported on January 5th that Vietnam’s GDP in the fourth quarter grew a remarkable 6.9% (y-o-y) leaving the country with an overall 2009 real growth rate of 5.32%. The GSO statistics show that the services industry lead the way growing at an annual rate of 6.63%, followed by industry and construction at 5.52% and agriculture, fisheries and forestry rounding out the data with a 1.83% addition. The latter half grow in 2009 can in part be attributed to the government’s intervention. The government enacted a series of economic stimulus measures, including an interest rate subsidy program for qualified capital outlays, and a general tax reduction policy through the postponement of corporate and personal taxes.

The growth figures when broken down quarter by quarter illustrate a progressive turnaround from one of the weakest quarterly results (3.14% y-o-y) occurring in the first quarter of 2009. In the 2nd quarter GDP grew by 4.46% followed by 6.04% in the third quarter. At the onset of the fourth quarter the State Bank of Vietnam devalued the national currency, the dong (VND) by 3.41% to VND 18,480 to the $. In addition, the SBV raised base interest rates by 100 basis points to 8%.


Addressing Electricity and power demands

The Ministry of Industry and Trade (www.moi.gov.vn) posted a rather “illuminating” statement on the website of Vietnam Electricity (www.evn.com.vn). According to the Ministry, demand is increasing by 10-20 per cent per year as a result of the nation’s drive for rapid economic growth. However traditional sources of energy like oil, gas and coal are quickly being exhausted, making an effective energy policy key to sustainable development. Vietnam Electricity (EVN) statistics show that 50 to 60 percent of Vietnamese enterprises are using obsolete or worn-out technologies despite having comparatively new equipment. The shortages coupled with the lack of efficiency will restrict economic development.

At the end of 2009, Vietnam Electricity is generating only 15,000MwH. With a population close to 87.5 million and an economy struggling to grow, Vietnam will have to serve the growing power needs of its people. At present Vietnam would rank in the lower power generation quartile per capita. The Vietnamese government has responded with a plan to raise total capacity by 48,000MwH (over three times current levels) by 2015. In 2010, EVN anticipates that it will add an additional 3,000MwH with new power plants coming on line. The ambitious math relies heavily on hydro generation (1/3), and coal (over ½). The balance will be provided by natural gas. The coal plants will likely rely on both domestic and imported coal stocks. A Harvard Kennedy School of Government and Fulbright case study of EVN (December 2008) asked two rather poignant questions: (1) what mix of electrical generating capacity will reliably supply the demand in Vietnam at the least cost; and (2) how can this be contracted for or constructed?
That is, what prices need to be charged under what terms?


Federal Budget Deficit

The Ministry of Finance reported that the government recorded a VND 35,810Bn deficit for the year to date (September 30th). The deficit amounts to 6.94% of 2009 GDP (constant prices). At 3rd quarter end the State Budget (planned versus actual) will overshoot by 3-5% assuming straight line analysis. The principal areas of potential differences are: social expenditures overshooting by 16.8% to VND 170.2Trn and social subsidies by 16.87% to VND 59Trn. The Ministry of Finance does not further breakdown these figures.

The government needs also to address its ability to generate more revenue. At current rates government revenue will undershoot the planned budget by 2.5% with a projected VND 355Trn. VAT revenue is projected to run 6.7% below the budget. The projected VAT at year-end will likely be around VND 99.8Trn if trends were maintained. The estimate is vulnerable as the economy grew significantly during the fourth quarter of 2009.

Reliance on the Overseas Donor Community

Vietnam has been able to plug part of its budget deficit through assistance from the international donor community. The donor community had pledged over $ 8Bn to assist Vietnam through the global credit crisis. During the December 2009 Consultative Group Meetings held in Hanoi, the donors reviewed the general business climate and the further need to assist in macro-economic expansion. For the last five years Vietnam has benefited from annual international aid packages that rose from $3.7Bn in 2005 to over $6Bn in 2008. The clear support of this community is necessary to sustain Vietnam’s fiscal targets.


Foreign Direct Investment

For any economy that is seeking to grow the ability to diverse and attract investment from abroad is an imperative. This observation is particularly true if the economy is in early stages of growth where both capital and technology are scarce. When capital is scarce or there is a dominate source, the ability to grow may be truncated in the course of development. For these reasons, The Socialist Republic of Vietnam’s recent foreign direct investment (FDI) statistics are worrisome.

Vietnam (General Statistics Office - GSO) reported that realized FDI year to date as of November end was an estimated $9Bn, a 10.4% decline from 2008 (same period). The future pipeline of approved and licensed FDI is shockingly deteriorating. Again year to date figures from the GSO suggest that FDI approved projects declined by 72% to $ 19.7Bn over the same period as 2008.

The State has augmented the overall capital investment by appropriating VND 112,800Bn ($ 6.31Bn @ pre- devaluation VND 17,869) in the 2009 State Budget. As September 30th, the Ministry of Finance reported that VND 78,975Bn had been spent on investment development, 96% of which is new infrastructure construction. This amount is a 40.5% increase over the previous year. The State’s participation rate in total investment amounts to 42.8% of GDP. Total real GNP (1994 constant prices) is measured at $ 27.92Bn The GSO does not break down the beneficiaries let alone the efficacy of the infrastructure investment.

Trade Imbalances likely to pressure VND further

Rapidly growing nations are likely to run trade balance deficits. Imports of high valued machinery and refined petroleum products are an indication of anticipated growth requirements. Vietnam does not differ in this respect. The country’s imports of machinery and spare parts make up the most significant import category. Vietnam imported $12.369Bn of machinery and spare parts, representing nearly 18% of the value of all imports. Last year machinery and spare parts amounted to $13.712Bn. The GSO does not breakdown the type or quantity of the machinery.

Vietnam is expected to run a 2009 trade deficit of $12.246Bn, a figure close to total machinery and parts imports. In 2008 the trade deficit amounted to $17.5Bn with similar concentrations of high valued imports (machinery, refined petroleum and steel). As Vietnam continues to develop, the trade deficit will expand as Vietnam has little infrastructure capacity to substitute these imports.

The export side of the equation is problematic. Current year export revenues are projected to fall to $56.58Bn from $62.91Bn earned in 2008 (GSO). In 2008 Vietnam exported textiles with a value of $ 9.1Bn, competing with oil exports of $10.45Bn. In 2009, Vietnam’s second and third largest export industries textile and footwear fared poorly, declining by $1.328Bn to $ 13.8Bn from the previous year ($15.147Bn). Vietnam’s exports with the exception of oil are not high valued. Vietnam’s offshore oil industry exported $ 6.21Bn of product only to import refined petroleum valued at $6.159Bn. Clearly, exporting textiles, footwear and assembled electronics will not cover the value of advanced machinery, steel or automobiles.

Conclusions

Vietnam is undergoing a period of rapid development spurred on by strong credit growth (SBV) through loan subsidies. The economy is regaining some strength with 4th quarter GDP growth recorded at 6.9%. The GSO statistics aggregates broad categories of contributors to growth. One weakness of the GDP figures is that it is not possible to fully investigate the accuracy of these numbers. The first quarter of 2009 was one of the weakest on record. By the fourth quarter post-devaluation the economy was recording a 6.9% (y-o-y) rise.

Vietnam can be a dynamic economy if the proper infrastructure in put into place. Electricity demand currently outstrips supply impeding the ability to grow. The government will likely use the proceeds of any bond issue to address this. However, the government must also insure that the use of these funds will be closely supervised to prevent leakages.


John T. Sullivan
E-mail: jtpsullivan@gmail.com
January 10, 2009