At The Crossroads…Giữa Ngã Tư Đường…
Dr. Alan Phan outlines his views on Vietnam’s economic prospects for the next six months: The root of this economic malaise may be seen to have originated from two opposing forces: the liberal reformers, who were quick to listen to the IMF and other “experts” sent in from the American-European institutions (not to mention the “cheerleading” from foreign fund managers); and the conservatives, who thought whatever works in China would work equally well in Vietnam, just on a smaller scale.
What’s going to happen to the Vietnamese economy in the next six months? It was the subject of a monthly breakfast meeting at Four Seasons Hotel in Hong Kong for a small group of hedge fund managers. All eyes were on the author, the only guy in the group who could speak Vietnamese and who presumably knew a little about the Vietnamese economy. I opened with a question,” Do you know the difference between an ostrich and a Vietnam-based economist? Answer: the ostrich sometimes takes his head out of the sand.”
Financially, things are getting worse in Vietnam. Latest figures for the first six months of 2011 put the inflation rate at 16.2%; it is estimated that almost two-thirds of local banks have failed to bring their nonproduction loans (i.e. real estate, stocks and other speculative instruments) under 22% of their total portfolio (as required by the State Bank); the Vietnamese Dong is expected to be devalued by 12% in Q3 or Q4 of 2011; FDI fell by 32%; there are barely enough foreign currency reserves for 2.5 weeks of imports; offshore investors are betting the real estate bubble will burst in 2012; the Vietnamese stock market was one of Asia’s worst performing (only slightly better than Pakistan); local manufacturing companies are saddled with bank loans in excess of 22% interest. In the light of all this, my expat friends keep asking me when I think the proverbial sh@t is going to hit the fan?
I laughed hard, recalling Nixon’s repeated questioning of Kissinger after the 1972 Christmas bombing of Hanoi,” When do you think these guys are going to give up?” The Vietnamese capacity for pain absorption is legendary; and the people have proved, time and time again, that they will outlast all predictions. I told my friends that Vietnam does not have many big fans and sh@t is spread evenly throughout the country. Over time, it can actually become a pretty good fertilizer.
I pointed to the traffic flow on the streets of Saigon and Hanoi. It is one of the main attractions for tourists: millions of motorbikes weaving among cars and pedestrians in the narrow streets, seemingly never following any traffic laws and yet, moving with relatively few accidents. Of course, it is extremely slow, especially after a heavy rainstorm, but in the end everyone gets home, albeit wet and very late.
The Vietnamese economy is no different: messy, contradictory, complex and inefficient; but it moves forward slowly and steadily. In the end, everyone will get where they want to be in an ironic kind of way, beyond Western standards and comprehension.
The root of this economic malaise may be seen to have originated from two opposing forces: the liberal reformers, who were quick to listen to the IMF and other “experts” sent in from the American-European institutions (not to mention the “cheerleading” from foreign fund managers); and the conservatives, who thought whatever works in China would work equally well in Vietnam, just on a smaller scale.
The reality and characteristics of the local economy were routinely ignored in favor of any market-based principles and solution put forward by the Western advisors. They conveniently forgot that after 60 years of a centrally-planned tem of economic governance, the only market which existed in Vietnam was in the hands of the politicians and their cronies. Any changes in the laws or regulations to apply market economics were skillfully exploited for the benefit of the newly-created rich. The interest groups of the rich and the powerful have consolidated their grasp on the market at the expense of the more than 80 percent of the population who have not yet to reach middle-class status.
Furthermore, the experts tend to prescribe the same medicine that incidentally did not even succeed in curing the ailments of the massive US economy. Quantitative easing (QE I and II) only helped the banker friends of the Bush and Obama administrations and nobody else. The Vietnamese followed suit with their own version of QE, yet, without the power of the world currency (USD), the rescue package caused inflation and interest rates to spiral out of control.
Meanwhile, the old hands of centralized management, a la the Soviets, attempted to copy the success of the Chinese model. They sold land, environment, natural resources and cheap labor to foreign investors in the hope of turning Vietnam into an export-oriented engine to fast wealth. Not only were they 15 years too late to the game, they did not have the economies-of-scale, the infrastructure, the supply chain tem and the stability of the yuan to pull it off. Most importantly, they did not have the support of the Chinese enclaves in Hong Kong, Taiwan, Singapore… to obtain necessary marketing and more importantly, financial resources.
In a country where 64% of the population is still farmers (not counting the idle farmers who live in the cities), the agricultural segment of the economy is being sacrificed to advance the notion of industrialization and urbanization, symbolized by GDP growth rate. Perhaps the most instructive examples of failure are seen in the state investment in the automobile, ship-building and electronic industries. Without a strong local market, a highly-skilled workforce and an efficient supply chain, they simply could not compete globally.
The next six months will highlight all the basic weaknesses of the Vietnamese economic and financial structure. The quasi-liberalization of the old command tem will face the danger of imminent collapse. It could be a good thing, allowing political leaders to seize the moment and transform the economy and Vietnam’s future, to be more in tune with the Vietnamese brand of modernization. On the other hand, it could also be a catalyst for the conservatives to advocate the rolling back of all reforms, as is happening in China. Either way, the time for changes always brings a certain level of excitement. Indeed, we are living in interesting times.
Dr. Alan V Phan is the author of 6 books on the economics and management of emerging markets, most recently, “Hedge Funds and China’s Stock Market” and “42 Years of Doing Business in the US and China”. He is Chairman of Viasa Fund, a family office located in Hong Kong. Dr. Phan obtained his Ph.D, DBA, MBA and BS in the US and Australia. His Email is email@example.com.
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