Asia Economics

September 2006

Principal contributors
Peter Morgan
Chief Economist, Asia Pacific
+ 852 2822 4870
petermorgan@hsbc.com.hk

Dr. Morgan is HSBC’s Chief Economist for Asia-Pacific, based in Hong Kong, and is responsible for
macroeconomic and interest rate forecasting for the region. He also co-ordinates with other teams in
forecasting foreign exchange rates. He joined HSBC in 1996 and previously was covering the
Vietnam: Going for
the next level
Japanese economy based in Tokyo.

Robert Prior-Wandesforde
Senior Asian Economist
+ 65 62390840
robert.prior-wandesforde@hsbc.com.sg

Robert joined HSBC in 1994, having previously worked for another bank where he was a UK economist for 3 years.
Over the last 12 years he has covered various Continental European economies, becoming HSBC's chief eurozone
economist at the inception of the single currency in 1999. Robert has recently moved to cover India and
South East Asia for the Group and is now based in Singapore.

Dilip Shahani
Head of Global Research, Fixed Income, Asia-Pacific
+ 852 2822 4520
dilipshahani@hsbc.com.hk

Dilip is Head of Global Research, Asia-Pacific. He has worked for HSBC for 16 years and
since mid-2003 lead the Asian credit research team. His expertise lies in formulating overall
credit strategy as well analysis of Asian sovereigns and financial systems.

Perry Kojodjojo
Associate FX Strategist
+ 852 2996 6568
perrykojodjojo@hsbc.com.hk

Perry is an Associate FX Strategist based in Hong Kong. He has a M.Sc in Finance from the
Imperial College Business School in the UK.

Disclosures and Disclaimer. This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, that form part of it.
 Macro
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Summary
Vietnam’s growth over the past decade is impressive, but the
government has ambitions to follow in the footsteps of earlier “Asian
tigers.” Vietnam wants to graduate from “low income” status
(USD1,000+ per head) and in this report we assess the growth
prospects for labour, capital and productivity. We focus on the
impact the reform process will have on corporations, capital markets
and macro-economic policy. The overall conclusions are positive,
although many issues remain.

A new tiger
Attention is rapidly focusing on Vietnam as the latest Asian economic tiger. Its growth performance has
already been impressive, averaging 7.2% over the past decade. The share of the population below the
poverty level (USD1/day) has fallen from 51% in 1990 to only 8%. Moreover, the government has made
continued growth a high priority and aims to graduate from “low income” status by 2010, ie, achieving
per capita GDP of over USD1,000. Along with this, it also has ambitious targets for reducing poverty and
attaining other social goals.

In this report, we examine the development of the Vietnamese economy and its potential for future
growth. We give particular attention to the reform process and its implications not only for economic
growth, but also for the development of capital markets and Vietnam as an investment destination. The
bottom line is that there is plenty of potential for economic growth to maintain a high pace in the near
term, and it could accelerate further if the reform process deepens.

Ingredients for growth

The government has set a demanding target for growth of 7.5%-8% pa over the next five years, but we
believe the odds of achieving this are high. First, Vietnam’s demographic situation is broadly favourable,
and should provide a significant positive impetus to growth over the coming decade. The working-age
population will grow at 2.3% per year over the next five years, although the pace will slow thereafter.
Assuming a modest fall in the unemployment rate, total employment could grow 2.5% pa. The quality of
labour inputs should improve steadily as well. Education is making rapid strides at the primary and
secondary levels. However, progress is slower at the tertiary level, and the level of English language
ability remains a constraining factor.

Second, rising fixed asset investment will boost labour productivity, which accounts for two thirds of
economic growth. Fixed asset investment has grown rapidly over the past decade, contributing almost

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September 2006

half of overall GDP growth. As a result, the share of fixed asset investment in nominal GDP has risen
dramatically from 10% in 1985 to 33% in 2004. The potential downside to this is that rapid accumulation
of capital has led to excessive levels of investment and inefficient asset allocation.

Much of the increase in productivity will continue to come from the shift of employment out of
agriculture into industry and services. Agricultural output has grown steadily at about 4% pa, while
industry has achieved growth of 8% pa, chiefly on the back of strength in manufacturing, which has seen
double digit growth. Service sector output has grown about 7% pa over the past five years. It seems quite
possible that the industrial sector can achieve a growth rate of 10% pa, while services could grow about
8% pa in the near future.

Capital demands will be even greater going forward, estimated at a total of USD140bn over the next five
years, as the government expects that the ratio of investment to GDP will rise to over 40% by 2010.
Nonetheless, it seems likely that sufficient savings can be mobilised to finance this as long as the global
economy avoids any major shocks. Domestic savings in recent years have been stable at around 31-33%
of GDP, although there is some evidence that it has risen further recently. The remaining gap can
probably be filled by foreign direct and portfolio investments and foreign remittances from overseas
Vietnamese. Although the investment targets of the latest five-year socio-economic development plan are
ambitious, the assumptions about the availability of savings to finance look reasonable.

Corporate and capital market reform

Vietnam’s reform process (Doi Moi) has been operating for 20 years, but further steps are needed to
secure steady increases in economic efficiency and labour productivity. At the microeconomic level, the
government has a four-pronged reform approach to increase the market-orientation, efficiency and growth
potential of the economy: (i) privatisation of state-owned enterprises (SOEs); (ii) privatisation of state-
owned commercial banks (SOCBs) and their full adherence to Basel I; (iii) strengthening and reform of
the legal framework for capital markets; and (iv) anti-corruption measures. Recapitalisation of SOCBs
and restructuring non-performing loans remain major tasks, as they may need to reserve as much as 15%
of GDP in order to assure solvency. These developments should greatly increase the attractiveness of
Vietnam’s capital markets.

Accession to the World Trade Organisation should play an important role in this. As a result of various
reform measures, the export (of goods) share in GDP has more than doubled since 1998, exceeding 50%
of GDP last year. We expect that WTO accession will have fairly limited macro-economic effects in the
short term, but, by opening the country up to greater foreign competition, will yield dynamic benefits
over the longer term. This should result from the resulting expansion of market size and greater
competition.

Macroeconomic reforms
Management of monetary and fiscal policy has generally been cautious and has tended to support stable
growth with acceptable inflation, fiscal and current account balances, and debt ratios. Reforms of macro-
economic policy management should also contribute positively to the growth environment. The State
Bank of Vietnam is expected to gradually move away from its previous focus on guiding policy lending
towards a regime of focusing on the control of inflation and arms-length regulation of the banking sector.

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September 2006

Monetary policy is expected to ease modestly as inflation falls. Reform of fiscal policy will focus on
rationalising the budget process and making it more transparent.

Foreign exchange regime

The Vietnamese Dong is already convertible on the current account but many restrictions still apply to
capital transactions. However, these are gradually being liberalised, and the new Foreign Exchange Law
marked a further step in this direction. The currency regime remains a managed float, and gradual
depreciation against the US dollar is expected to continue.

Credit rating trend positive

HSBC assigns an initial foreign currency credit rating of BB/stable for the Vietnam sovereign based on a
reasonable external profile, robust economic activity, stable political environment and ongoing gradual
advancement of structural reform programme. Conversely, the three main international credit rating
agencies (Fitch, Moody’s and S&P) have the Vietnam sovereign rated one-notch lower at BB- at the
moment. Over the next six-nine month period, we expect the divergence in rating opinions will be
resolved in the favour of a Vietnam upgrade to BB/stable, with S&P and Fitch likely to be first to take
such a positive credit action.

Remaining issues
The outlook is positive, but numerous issues and potential obstacles remain. It remains to be seen how far
the operating and capital efficiency of SOEs and SOCBs will improve. WTO accession requires the co-
ordinated actions of numerous ministries and agencies, and progress could be disappointingly slow.
Corruption and non-transparency of bureaucratic decision making remain significant obstacles. It is
unclear how effective the government will be in allocating capital and nurturing chaebol-like industrial
groups. Capital investment plans are very ambitious, with 35% of capital assumed to be supplied from
overseas. If private capital cannot be sufficiently mobilised to support capital spending, a greater burden
will fall on the government to finance such spending, with significant implications for the fiscal balance.
Any moves by the central bank to support such spending could potentially push up the inflation rate.

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Contents

Forecast summary 5 Macroeconomic policy 43

A new tiger 6 Foreign exchange regime 48

Renovating a nation 10 Credit assessment 51

Labour supply 13 Appendix: Vietnamese Dong

(VND) 56
Investment and savings 16
HSBC Vietnam-related
Productivity and growth 22 capabilities 58

Sectoral success 26 References 61

Corporate and capital market Disclosure appendix 62

reform 34
Disclaimer 63
Trade and the WTO 38

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Forecast summary

2001 2002 2003 2004 2005 2006f 2007f

Production, demand and employment
GDP growth (% y-o-y) 6.9 7.1 7.3 7.8 8.4 7.6 7.3
Nominal GDP (USDbn) 32.5 35.1 39.6 45.5 52.9 61.1 70.4
GDP per capita (USD) 409 437 487 554 637 726 825
Private consumption (% y-o-y) 4.5 7.6 8.0 7.1 7.0 6.5 6.5
Government consumption (% y-o-y) 6.6 5.4 7.2 7.8 8.0 7.0 7.0
Investment (% y-o-y) 10.7 12.9 11.9 10.4 10.0 8.5 8.5
Industrial production (% y-o-y) 16.2 14.2 19.8 17.6 25.5 18.0 17.0
Gross domestic saving (% GDP) 33.2 32.0 30.5 33.5 36.6 36.3 36.5
Unemployment rate, end-year (%) 6.3 6.0 5.8 5.6 5.4 5.2 5.2
Prices & wages
CPI, average (% y-o-y) -0.3 4.1 3.1 7.8 8.3 7.5 6.6
CPI, end-year (% y-o-y) 0.8 4.0 2.9 9.7 8.8 7.1 6.0
PPI (% y-o-y) 2.3 -0.3 1.8 2.7 -1.9 3.0 2.0
Manufacturing wages, nominal (% y-o-y)
Money, FX & interest rates
Central bank money M0, average (% y-o-y)
Broad money supply M2, average (% y-o-y) 39.0 25.5 17.6 24.9 30.4 26.7 26.0
Real private sector credit growth (% y-o-y) 21.4 22.2 28.4 41.7 40.0 25.0 25.0
Prime lending rate, end-year (%) 8.68 9.48 9.52 10.30 11.33 11.00 10.50
5yr yield, end-year (%) -- -- 8.30 8.50 8.75 8.00 7.50
VND /USD, end-year 15,084 15,403 15,646 15,777 15,875 16,077 16,237
VND /USD, average 14,801 15,258 15,500 15,718 15,832 15,976 16,157
VND /EUR, end-year 13,450 15,736 19,268 21,157 18,836 20,900 22,732
VND /EUR, average 13,265 14,431 17,538 19,540 19,750 20,071 21,839
External sector
Merchandise exports (USDbn) 15.0 16.7 20.0 24.6 30.0 34.8 37.6
Merchandise imports (USDbn) 14.4 17.6 22.5 27.0 32.0 36.5 40.1
Trade balance (USDbn) 0.6 -0.9 -2.5 -2.5 -2.0 -1.7 -2.5
Current account balance (USDbn) 0.7 -0.4 -1.8 -1.9 -1.4 -1.1 -1.9
Current account balance (% GDP) 2.1 -1.2 -4.7 -4.3 -2.6 -1.8 -2.8
Net FDI (USDbn) 1.3 2.0 1.8 1.2 2.0 2.2 2.4
Net FDI (% GDP) 0.0 5.8 4.6 2.5 3.8 3.6 3.4
Current account balance plus FDI (% GDP) 2.1 4.6 0.0 -1.7 1.1 1.8 0.6
Exports (% y-o-y) 4.0 11.2 19.6 22.9 22.1 16.0 8.0
Imports (% y-o-y) 2.3 22.1 27.9 20.1 18.4 14.0 10.0
International FX reserves (USDbn) 3.4 3.7 5.6 6.3 7.7 9.5 11.6
Import cover (months) 2.8 2.5 3.0 2.8 2.9 3.1 3.5
Public and external solvency indicators
Gross external debt (USDbn) 12.3 12.2 13.3 15.5 16.9 19.3 21.6
Short term external debt (% of int'l reserves) 23.5 26.7 18.0 14.0 12.7 10.5 8.6
Private sector external debt (USDbn) 2.9 2.5 2.7 3.1 2.9 3.3 3.6
Consolidated government balance (% GDP) -5.0 -3.9 -4.9 -3.3 -2.6 -2.7 -2.9
Primary balance (% GDP) -4.1 -3.5 -6.1 -3.6 -3.0 -2.2 -2.2
Gross public domestic debt (VND trn) 31 57 83 96 118 143 174
Gross public domestic debt (% GDP) 6.4 10.6 13.5 13.4 14.1 14.6 15.3
Gross public external debt (USDbn) 9.4 9.7 10.6 12.4 14.0 16.0 18.0
Gross public external debt (% GDP) 28.9 27.6 26.8 27.2 26.5 26.2 25.6
Source: HSBC

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A new tiger
 The positive factors supporting continued growth greatly outweigh
the negative factors
 The combination of economic reforms, rapid growth of labour
inputs and high levels of capital investment should help keep
growth close to 8% in the near term
 WTO accession should provide significant benefits in terms of
longer-term growth prospects and productivity

You’ve come a long way, Doi 1. Heading for USD1,000 per head

Moi 10 1,000

8 800
Attention is rapidly focusing on Vietnam as the
latest Asian economic tiger. Its growth 6 600

performance has already been impressive, 4 400

averaging 7.2% over the past decade. The share of 2 200

the population below the poverty level 0 0
(USD1/day) has fallen from 51% in 1990 to only 2000 2001 2002 2003 2004 2005 2006f 2007f
8%. Moreover, the government has made Real GDP, % ch. (LHS) GDP/capita (US$, RHS)

continued growth a high priority and aims to
graduate from “low income” status by 2010, ie,
achieving per capita GDP of over USD1,000.
Along with this, it also has ambitious targets for
reducing poverty and attaining other social goals.
This process began 20 years ago with the Doi Moi
economic reforms, and has been symbolised more
recently by its long efforts to achieve accession to
the World Trade Organisation, which now looks
imminent. In this report, we examine the
development of the Vietnamese economy and its
potential for future growth. We give particular
attention to the reform process and its
Source: CEIC and HSBC
implications not only for economic growth, but
also for the development of capital markets and
Vietnam as an investment destination. The bottom
line is that there is plenty of potential for
economic growth to maintain a high pace in the
near term, and it could accelerate further if the
reform process deepens.
The advantages
Although per capita GDP in Vietnam is still low,
the country enjoys a number of advantages which
make continued high growth likely:

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September 2006
 A high degree of literacy and education, at
least at basic levels;
 A generous endowment of natural resources,
including oil; minerals and very productive
agricultural land;
 A high domestic savings rate, which can
provide the bulk of the savings needed for
investment rates geared to rapid growth;
 A healthy fiscal situation, with only moderate
fiscal deficits and a relatively low ratios of
public debt to GDP;
 A healthy balance of payments, which is
contributing to a steady accumulation of
foreign exchange reserves and a relatively
modest ratio of external debt to GDP;
 A dynamic and entrepreneurial private sector,
plus relative openness to foreign direct
investment;
 A relatively low level of environmental
degradation;
 A relatively sophisticated social security
system and social infrastructure, including
transfers from richer to poorer areas;
 Political stability; and
 A broad consensus in favour of economic
reforms to promote market development and
growth, both at the macro and the micro level.
Perhaps a less obvious advantage is that of being a
latecomer. Vietnam has had a long time to study
the successes and failures of other countries.
China and Singapore provide models that the
government clearly believes are very relevant to
Vietnam, while at the same time it has had the
luxury of avoiding some of the mistakes that were
made earlier.
abc
Some disadvantages
Despite the above-mentioned advantages,
numerous obstacles remain that could slow
growth:
 More limited advances in education at the
secondary and tertiary levels;
 High population density and already high
rates of land use;
 Persistence of anti-market and anti-reform
attitudes within the government and the
Communist Party of Vietnam (CPV);
 Poor management, inefficient investment and
weak profitability of state-owned enterprises
(SOEs), which still make up nearly 40% of
the economy;
 Lack of transparency and co-ordination in the
functioning of the bureaucracy;
 Infrastructure bottlenecks;
 A legal system that is still a work in progress;
and
 Corruption and inadequate corporate
governance.
On the whole, however, the reform process has
built up strong momentum, both within the
government and among the general public, and
shows little likelihood of being reversed. The very
successes achieved so far provide a strong
stimulus for further efforts in the same direction.
Organisation of the report
The following sections describe the structure and
the main findings of this report.
Renovating a nation
This section reviews the Doi Moi (renovation or
renewal) reforms, which began in the 1980s.
These reforms marked the beginning of Vietnam’s
transformation from a country with a strong
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 Macro
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September 2006
centrally planned mechanism to a market
economy. In recent years, they have been greatly
broadened and deepened, creating a base for high
growth.
Labour supply
This section examines the contribution of the
labour supply to growth, both in terms of quantity
and of quality. The demographic situation is
positive, and should allow total employment to
grow 2.5% pa over the next five years. Education
is making rapid strides at the primary and
secondary levels. However, progress is slower at
the tertiary level, and the level of English
language ability remains a constraining factor.
Investment and savings
Fixed asset investment has grown rapidly over the
past decade, contributing almost half of overall
GDP growth, and even greater demands for
capital are envisaged for the next five years. This
section examines both the demand for capital and
the potential supply from domestic and overseas
savings. It also examines problems related to
capital efficiency.
Productivity and growth
The key to Vietnam’s strong economic growth in
recent years has been high labour productivity
growth, which explains about two-thirds of
overall economic growth. To a great extent this
reflects the shift of employment out of agriculture,
where productivity is still relatively low, to
manufacturing and other sectors, where it is much
higher. This section analyses the sources of
productivity growth and the potential for
maintaining high growth rates going forward.
Improving the growth of industrial productivity is
shown to be a key issue.
Corporate and capital market reform
At the micro-economic level, the government has
a four-pronged reform approach to increase the
market-orientation, efficiency and growth
8
abc
potential of the economy: (i) privatisation of state-
owned enterprises (SOEs); (ii) privatisation of
state-owned commercial banks (SOCBs) and their
full adherence to Basel I; (iii) strengthening and
reform of the legal framework for capital markets;
and (iv) anti-corruption measures.
Recapitalisation of SOCBs and restructuring non-
performing loans remain major tasks. These
developments and their implications for
Vietnam’s capital markets are examined.
Sectoral success
Agricultural output has grown steadily at about
4% pa, while industry has achieved growth of 8%
pa, chiefly on the back of manufacturing strength,
which has seen double digit growth. Service
sector output has grown about 7% pa over the past
five years. It seems quite possible that the
industrial sector can achieve a growth rate of 10%
pa, while services could grow about 8% pa in the
near future.
Trade and the WTO
As a result of various reform measures, the export
(of goods) share in GDP has more than doubled
since 1998, exceeding 50% of GDP last year. We
expect that WTO accession will have fairly
limited macro-economic effects in the short-term,
but, by opening the country up to greater foreign
competition, will yield dynamic benefits over the
longer term. This should occur from the resulting
expansion of market size and greater competition.
Macroeconomic policy
Management of monetary and fiscal policy
generally has been cautious and has tended to
support stable growth with acceptable inflation,
fiscal and current account balances, and debt
ratios. Reforms of macro-economic policy
management should also contribute positively to
the growth environment. The State Bank of
Vietnam is expected gradually move away from
its previous focus on guiding policy lending
 Macro
Asian Economics
September 2006
toward a regime of focusing on the control of
inflation and arms-length regulation of the
banking sector. Reform of fiscal policy will focus
on rationalising the budget process and making it
more transparent
Credit conditions
HSBC assigns an initial foreign currency credit
rating of BB/stable for the Vietnam sovereign
based on reasonable external profile, robust
economic activity, stable political environment
and ongoing gradual advancement of its structural
reform programme. Conversely, the three main
international credit rating agencies (Fitch,
Moody’s and S&P) have the Vietnam sovereign
rated one-notch lower at BB- at the moment. Over
the next six-nine month period, we expect the
divergence in rating opinions will be resolved in
the favour of a Vietnam upgrade to BB/stable
with S&P and Fitch likely to be first to take such a
positive credit action.
Currency regime
The Vietnamese Dong operates under a managed
float system, although policy still appears to be
aimed at gradual depreciation against the US
dollar, and we expect this trend to continue. The
capital account remains heavily restricted, but
rules are being eased gradually for both foreign
and domestic investors.
Conclusions
We believe that the Vietnamese economy can
sustain growth of 7%-8% pa in coming years
without generating excessive inflationary
pressures or other macro-economic imbalances.
This reflects the outlook for strong employment
growth of about 2.5% per year, prospective
improvements in labour quality due to improving
education and training, and high labour
productivity growth resulting from the steady shift
of employment to higher-productivity sectors such
as manufacturing and high levels of capital
abc
investment. The continuation of the reform and
liberalisation process, including WTO accession,
steady privatisation of state-owned enterprises and
commercial banks, and strengthening of the legal
framework for financial markets, should promote
investment efficiency and labour productivity
growth.
The capital needed to sustain such growth is
substantial, given that the ratio of investment to
GDP is expected to rise to 40% by the year 2010.
However, it seems likely that the required
amounts can be mobilised, in view of the rising
trend of domestic savings, the relatively liberal
regime for foreign direct investment, and
continued high levels of inward remittances.
Ratios of government debt and external debt to
GDP are expected to remain well-behaved.
To be sure, numerous issues and potential
obstacles remain. It remains to be seen how far
the operating and capital efficiency of SOEs and
SOCBs will improve. WTO accession requires the
co-ordinated actions of numerous ministries and
agencies, and progress could be disappointingly
slow. Corruption and non-transparency of
bureaucratic decision making remain significant
obstacles. It is unclear how effective the
government will be in allocating capital and
nurturing chaebol-like industrial groups. If private
capital cannot be sufficiently mobilised to support
capital spending, a greater burden will fall on the
government to finance such spending, with
significant implications for the fiscal balance. Any
moves by the central bank to support such
spending could potentially push up the inflation
rate.
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 Macro
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September 2006
Renovating a nation
 Major economic problems led to “Doi Moi” in 1986
 Reforms dismantled a centrally-planned economy, creating a
market-based one based on socialist principles
 Initial reforms have been followed by further change, as Vietnam
has opened itself up to the world
The need for change
The Vietnamese economy struggled badly after its
post-war unification in 1975. A combination of
international isolation, adverse weather conditions
and Soviet-style planning had created a nation of
shortages, stagnation and increasing poverty. For
example:-
 Inflation was a persistent problem, exceeding
100% in the mid-1980s, before reforms
helped ease price pressures.
 The growth rate of the economy remained
consistently low and was even negative
during the late 1970s as the agricultural sector
performed badly and the government pushed
out private enterprises in the previously
independent South Vietnam.
 Western disapproval of socialist policy
translated into various trade barriers with
Vietnam, which bolstered Vietnam’s policy of
import substitution.
 A staggering two-thirds of the population
lived in poverty.
 Poor weather, the dual pricing policy and
other problems led to increased food
10
abc
shortages and diminished hopes for self-
sufficiency in food production.
For all the reasons mentioned above and more, it
became increasingly clear to the Vietnamese
government that, not only the economy, but also
the inherent philosophy of the nation needed
renovation. The so-called Doi Moi (meaning
renovation or renewal) reforms symbolised this
shift in thought.
The Doi Moi reforms…
In large part, the improvement in the underlying
growth and productivity performance of the
Vietnamese economy can be attributed to the Doi
Moi reforms of the 1980s. These reforms marked
the beginning of Vietnam’s transformation from a
country with a strong centrally planned
mechanism to a market economy.
The main aim of the Doi Moi policy was to move
Vietnam into an open, flourishing market
economy. The initial reforms can be categorised
into 2 major periods (see “UNDP Viet Nam: Past,
Present and Future” for more details):
1. 1986-1989: Early Doi Moi Reform Period
The official launch of the Doi Moi policy by the
6th General Congress of the Communist Party, in
 Macro
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September 2006
December 1986, provided a catalyst for the
transformation of Vietnam by:
 Implementing agricultural policies such as
Contract 10 (on April 1988) that gave farmers
long-term land use rights, freed up
agricultural prices and gave them more
freedom over production methods and crop
choices.
 Transferring land-use rights to nearly 80% of
the population through the 1987 Land Law,
hence shifting the management of land from
state-owned enterprises (SOEs) to farmers.
 Introducing the Law of Foreign Investment in
1987, which allowed foreign owned
enterprises to operate in Vietnam (guarded
from government expropriation), and granted
them low profit taxes as well as full
repatriation of their profits. This law was
considered one of the most open policies in
the region.
These reforms set the building blocks for
Vietnam’s transition.
2. 1989-1993: Acceleration of Reforms
This period saw the Doi Moi policy being
implemented on a more macro scale. The main
reforms included:-
 The liberalisation of virtually all prices,
following the freeing of agricultural prices.
 A complete transformation of monetary
policy. Banking was changed into a two-tier
system that separated the commercial banks
from the central bank. Moreover, there was a
major devaluation and unification of the
exchange rate, and positive real interest rates
were maintained. Monetary and credit growth
was reduced in order to combat high levels of
inflation.
abc
 Further agricultural reforms. An amendment
to the Land Law in 1993 ensured that farmers
had the ability to inherit and mortgage land,
and receive compensation for expropriation.
Additionally, major investment in irrigation
boosted agricultural production.
 Amendments to the Law of Foreign
Investment in 1990 and 1992, which further
encouraged FDI in Vietnam.
 The loosening up of trade bureaucracy. After
eliminating conditions on foreign trade
contracts in 1992, the government began to
minimise restrictions on trade activities and
licenses, hence moving from import-
substitution to export orientation.
 The reduction of SOEs though direct and
indirect measures. The system of budget
subsidies was removed gradually, hence
promoting the market mechanism. 1992
became the first year for SOE equitisation,
contributing to a sizeable expansion of the
private sector. These factors, including the
opening up of trade, greatly diminished the
public sector. For example, state farms only
accounted for 23% of total coffee output (a
main agricultural export) in 1993, compared
to 72% in 1980.
The promulgation of a new Vietnamese
constitution reaffirmed Doi Moi by introducing a
“multi-sector and multi-ownership market
economy along the socialist orientation.” Doi Moi
was now an intrinsic part of the nation’s
philosophy
…have been followed by more
With the major restructuring out of the way,
inflation under control and high growth rates,
Vietnam has started to focus on institutional,
regulatory and legal reforms that aim to improve
the functioning of the market, international
relations and human development.
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September 2006

Some recent and ongoing developments:-
 Vietnam has made great strides in
international trade relations, starting with
the end of the US embargo in 1994. In 1995,
Vietnam joined ASEAN and was granted
accession to APEC in 1998. The US-Vietnam
bilateral trade agreement, implemented in
2001, opened trade between the two
countries, and let to Vietnamese exports
rising from just USD800 million in 2001 to
USD6.5 billion in 2005. Vietnam’s accession
to the WTO is also imminent, as the nation
has already completed all 28 bilateral
agreements needed for membership, and is in
the process of reducing tariffs and eliminating
subsidies, in order to be consistent with WTO
regulations (see Trade & WTO section)
 The Public Administrative Reform (PAR)
programme, which was approved in
September 2001, was designed to increase
transparency and streamline the public
administrative system, with the hope of
reducing red tape and corruption. The
programme targets complete reform by 2010.
 With the amendment of the Law of State
Budget (2004), the new role of the state in
Vietnam was now reflected in public finance.
The amendment increased local budgets in
order to push up expenditure on education
and health sectors. It also gave local
authorities a bigger role in the budgetary
cycle, with the aim of delivering more
effective socio-economic development.
advancement, and see their privileges
virtually removed by 2010. The basic idea is
to provide a level playing field for all
companies operating in the country.
 In November 2005, the National Assembly
passed an Anti-Corruption Law as part of a
massive anti-graft campaign. The Prime
Minister has been leading a dynamic
campaign recently in which ministers,
teachers and even soccer players have been
jailed in the fight against corruption. The
comprehensive law enforces strict declaration
of assets, and promotes the co-ordination of
anti-corruption agencies.
 The “Higher Education Reform Agenda
2006-2010 (HERA)” will continue to build
on primary education successes by working
towards increasing tertiary enrolment by 10%
annually.
 A roadmap for further reforms in the banking
sector has also been released which aims to
transform the State Bank of Vietnam from an
ownership position in state-owned
commercial banks (SOCBs) to a more
modern, supervisory role. In addition, all
SOCBs will be equitised by 2010 in order to
support their commercialisation.
These on-going reforms highlight Vietnam’s
continual evolution towards the principles
outlined by Doi Moi. We will investigate their
effects in more detail in the sections below.

 The Enterprise and Investment Laws,

effective from July 1 2005, will work towards
perfecting Vietnam’s market mechanism.
Foreign-invested enterprises will be
encouraged in neglected fields, whereas those
in protected industries will face greater
competition from new entrants. Furthermore,
SOEs will be pushed to lead technological

12
 Macro
Asian Economics abc
September 2006

Labour supply
 Demographics are positive for growth, including rapid growth of
the working age population and a falling dependency ratio
 The quality of labour is improving through better education
 However, bottlenecks remain at the high end of education

Favourable demographics 2. Vietnam medium population projection

Population (m) 2005e 2010e 2015e 2020e
Vietnam’s demographic situation is broadly
Age 0-14 24.9 23.6 23.7 23.5
favourable and should provide a significant Age 15-59 53.0 59.3 63.0 65.8
Age 15-24 17.4 18.2 16.7 15.4
positive impetus to growth over the coming Age 25-59 35.5 41.1 46.3 50.4
decade. Although the total fertility rate has Age 60 and over 6.3 6.8 8.4 10.7
Total 84.2 89.7 95.0 99.9
dropped close to the replacement rate of about Share of population, %
2.05, and is forecast to fall further, the relatively Age 0-14 29.6 26.3 24.9 23.5
Age 15-59 62.9 66.1 66.3 65.8
large share of young people in the economy Age 15-24 20.7 20.3 17.6 15.4
Age 25-59 42.2 45.8 48.7 50.4
means that the overall working age population Age 60 and over 7.5 7.6 8.8 10.7
should grow steadily. Moreover, the ratio of Total 100.0 100.0 100.0 100.0
Growth, CAGR % 2001-05e 2006-10e 2011-15e 2016-20e
dependents to working age persons will remain Age 0-14 -1.0 -1.1 0.1 -0.2
Age 15-59 2.6 2.3 1.2 0.9
relatively low, contributing to a relatively high Age 15-24 1.9 0.9 -1.7 -1.7
savings rate and limited fiscal demands from the Age 25-59 3.0 2.9 2.4 1.7
Age 60 and over 1.4 1.5 4.2 5.0
social insurance system—mainly pensions and Total 1.4 1.3 1.2 1.0
health care. Vietnam’s demographics are Source: UN World Population Prospects (2004) and HSBC

considerably more positive than those of China,

where the population is ageing rapidly.
The table opposite shows the projected
development of the population by age group over
the next 15 years, according to the medium
scenario of the UN’s population projection. The
population currently is 84 million, and the growth
rate is expected to slow gradually from 1.4% over
that last five years to 1.0% after 2015.
The growth rate of the working age population
(aged 15-59) is much faster at 2.6% over the last
five years, although it will slow more rapidly to
1.2% over the same period. The strong growth of
this age group will provide a substantial boost to
potential output growth. As a result, the share of
the working age population is actually expected to
rise from 63% in 2005 to 66% in 2020. Within
this group, the growth rate of those aged 15-24
will slow rapidly, but that for those of aged 25-59
will remain quite high. In contrast, the numbers of
those aged 0-15 will actually fall during most of

13
 Macro
Asian Economics abc
September 2006

the period, while the number aged 60 and over and India in the next five years, but then will grow
will begin to rise rapidly after 2010. more slowly than in India thereafter. In both
Vietnam and China, the population age 15-24 will
As noted above, this mix of trends reflects the
drop relatively quickly. However, the population
sharp fall of the total fertility rate (the total
of those aged 25-59 will actually grow fastest in
number of children borne by the “average”
Vietnam during the whole period. Whether this
woman in the population). The chart below shows
will be positive or negative for growth will
that the total fertility rate (TFR) fell from a very
depend on the relative evolution of wage costs
high level of nearly 6 in 1980 to barely above 2 in
and productivity of this group.
2005, a much steeper fall than seen either in India
or China during the same period. 4. Growth of working age population--international comparison
% change, ann. rate 2006-10e 2011-15e 2016-20e
3. Vietnam’s total fertility rate fell dramatically
Age 15-59
Total fertility rate Vietnam 2.3 1.2 0.9
China 0.7 0.1 -0.1
6 6 India 1.9 1.6 1.3
5 5 Age 15-24
4 4 Vietnam 0.9 -1.7 -1.7
China 0.1 -2.1 -2.0
3 3 India 1.3 0.5 0.1
2 2 Age 25-59
1 1 Vietnam 3.0 2.9 2.4
China 0.9 0.7 0.3
0 0 India 2.2 2.1 1.7
1980 1990 2000 2010 2020 2030 Source: UN World Population Prospects (2004) and HSBC
Vietnam China India

The rapid drop of the dependency ratio in Vietnam

Source: UN World Population Prospects (2004)
The reasons for this sharp fall are not entirely
clear. Part of this reflected the typical pattern seen
in Asian and other countries, where rapidly rising
incomes lead parents to have less children and
increase the quantity and quality of expenditure on
each one. However, that still does not explain why
the rate fell so much faster in Vietnam than in
China or India, especially considering that rapid
economic growth began in China much earlier
than in Vietnam. Vietnam did have a policy
limiting the number of children to employees of
state-owned enterprises to two, but this seems
unlikely to be the whole explanation either.
through 2010 should help to boost the household
savings rate. This is because children and old
persons typically do not save, but do consume. The
fewer such persons in a household relative to
working persons, the easier it is for households to
save money. The chart overleaf shows that the
dependency ratio in Vietnam is expected to drop
more sharply than either in China or India.
5. Rapid drop of dependency ratio in Vietnam through 2010
Dependency ratio, %
50 50
45 45
40 40

35 35
As a result of these trends in birth rates, the
overall demographic pattern of Vietnam is 30 30
1980 1990 2000 2010 2020 2030 2040 2050
expected for the most part to track somewhat
Vietnam China India
between those of China and India. The table
below shows that the working age population in Source: UN World Population Prospects (2004) and HSBC

Vietnam will actually grow faster than in China

14
 Macro
Asian Economics abc
September 2006

Education 6. Levels of educational attainment

% 1993 1998 2002
The quality of the labour supply is improving
Adult literacy 91 92.1 92.5
steadily as well, reflecting higher levels of Net enrolment rates
educational attainment. Vietnam has enjoyed an Primary 86.7 91.4 90.1
Lower secondary 30.1 61.7 72.1
unusually high literacy rate for some time, but the Upper secondary 7.2 28.6 41.8
share of the population which has graduated from Source: World Bank (2003), IMF (2006)

secondary school has risen substantially, and still

has much further to go. The diffusion of higher
education is still limited, but the government has
targeted this area by opening it up to private
investment, including foreign investment. This is
key to the growth outlook, because studies of
potential growth have for a long time highlighted
the role of education in augmenting the effective
supply of labour.
Problems remain however. English language ability
remains a key bottleneck, especially for foreign
firms investing in Vietnam looking for management-
The picture is more limited at the college and
university level, however. There has been rapid
growth in the number of schools, teachers and
students since 1995, and this has been augmented
by the introduction of private schools. By 2004,
the total number of graduates reached nearly
200,000. However, this still represents only about
10% of the population in that age group. Also,
there are lingering questions about the quality of
education.
7. University and college education

level personnel. Anecdotal evidence indicates that 1995 2000 2002 2004

wages for such workers are rising much more Number of schools 109 178 202 230
Public 109 148 179 201
rapidly than those with lower skill levels. Non-public 0 30 23 29
Number of teachers ('000s) 22.8 32.4 38.7 47.6
Major efforts are being made to raise the level of Public 22.8 27.9 33.4 40.0
Non-public 0.0 4.5 5.3 7.6
primary schools nationwide. This includes Number of students ('000s) 297.9 899.5 1020.7 1319.8
Public 297.9 795.6 908.8 1182.0
adoption of Fundamental School Quality Levels Non-public 0.0 103.9 111.9 137.8
(FSQL), a comprehensive set of monitoring Number of graduates ('000s) 58.5 162.5 166.8 195.6
Public 58.5 149.8 152.6 180.8
indicators. As a result, the FSQL ratio rose from Non-public 0.0 12.6 14.2 14.8
62.1 in 2005 to 66.1 in 2005, out of a total Source: CEIC

possible score of 100. Importantly, greater gains

were made in poorer areas.
Substantial progress has been made in primary and
secondary education. The table below shows that,
by 2002, net enrolment rates had reached 72% for
the lower secondary level and 42% for the upper
secondary level. Progress has been concentrated in
urban areas, where these ratios have reached 81%
and 59%, respectively. In comparison, the adult
literacy rate has already been over 90% for over a
decade, somewhat higher than in peer countries in
East Asia, where the average is estimated at about
87%, and much higher for low-income countries in
general, where the ratio is only 63%.
The government is moving to address these
problems. It released its “Higher Education Reform
Agenda 2006-2020” (HERA), spelling out long-
term goals for the Ministry of Education and
Training. This includes a target of raising
enrolment in colleges and universities by 10%
annually, until it reaches a level of 200 students per
10,000 population in 2010. Also, private sector
entry is being allowed, and some public universities
will move toward more private management.
Finally, while the government will provide support
for R&D, there does not appear to be sufficient
government support for training PhDs overseas.

15
 Macro
Asian Economics abc
September 2006

Investment and savings

 Vietnam’s growth requires rapidly expanding capital inputs
 This partly reflects declining efficiency of capital, partly attributable
to inefficiencies in the state sector
 However, it seems reasonably likely that needed funds can be
procured to sustain high economic growth rates

Satisfying ambitious capital 8. Fixed asset investment growth

needs 8 40

6 30
Vietnam’s government has ambitious aims for
4 20
growth, 7.5-8% per year, and plans to achieve this
2 10
through high rates of capital accumulation, a well-
trodden path in Asia. This will require mobilising 0 0

large amounts of savings both domestically and -2 -10

from abroad. In this section, we review the 86 88 90 92 94 96 98 00 02 04

demand for capital and the potential for supplying Contr. to GDP, % (LHS) % change (RHS)

it. Overall, Vietnam seems likely to be able to Source: CEIC

obtain the needed amounts of capital, as long as
the global economy avoids any major shocks. As a result, the share of fixed asset investment in
nominal GDP has risen dramatically from 10% in
Fixed asset investment
1985 to 33% in 2004 (see chart 9 overleaf).
Fixed asset investment has grown rapidly over the Although the investment share in China remains
past decade, making an important contribution to higher at 42% in 2005, Vietnam has narrowed the
growth of GDP. The chart opposite shows that gap, and has achieved rates of capital formation
fixed asset investment growth was somewhat typical of high-growth countries.
volatile in the period 1986-1999, but since then
has settled down to a much steadier pace of about
10%-12% growth. This has contributed about 3-4
percentage points to growth of GDP during this
period, about half of overall growth.

16
 Macro
Asian Economics
September 2006
9. Rising share of fixed capital formation in GDP
Gross fix ed capital formation, share of GDP, %
50
40
30
20
10
0 0
85 87 89 91 93 95 97 99 01 03
Vietnam China
Source: CEIC
The potential downside is that rapid accumulation
of capital has led to excessive levels of investment
and inefficient asset allocation. The decline in
capital efficiency can be seen most clearly in
terms of the trend of what is called the
incremental capital-output ratio (ICOR), which
shows the ratio of investment to the increment in
output. The chart opposite shows that the ICOR in
Vietnam has risen from the range of 2-3 in the
early 1990s to 4-5 in recent years. In other words,
it now appears to take 40% more capital to
produce a unit of output now than it did in the
early 1990s. Since the rate of potential economic
growth depends both on the rate of growth of
capital and the change in efficiency of that capital,
a rising ICOR represents a significant drag on the
potential growth rate the economy can achieve.
On the other hand, this has been a familiar
phenomenon among Asia countries, e.g., China,
and so need not represent a barrier to achieving
high growth rates, as long as the necessary capital
can be mobilised.
abc
10. Signs of declining capital efficiency
7 2.5
50 6
2.0
40 5
4 1.5
30
3 1.0
20
2
10 0.5
1
0 0.0
05
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
ICOR (ratio) Capital-output ratio (RHS)
Source: CEIC and HSBC
Another way to measure capital efficiency is the
ratio of the capital stock to GDP. A rising capital-
output ratio indicates a decline in capital
efficiency. There is no official capital stock series,
but we have estimated one based on the data for
capital formation and an estimated depreciation
rate. The chart shows that the estimated capital-
output ratio has roughly doubled from 1.1 in 1990
to 2.3 in 2004, implying a halving of capital
efficiency over the period.
Not all capital is created equal
The root of capital inefficiency can be located in
the large state-owned sector, which still accounts
for almost 40% of GDP. Table 11 overleaf shows
the breakdown of nominal GDP and fixed asset
investment by major ownership category. The
state share of fixed asset investment has risen
substantially from 42% to 53.6% over the past
decade, while its share in state GDP has risen
from 33% to 53%. Despite this, the share of state-
owned output in GDP has actually declined
slightly. In contrast, the share of fixed asset
investment of the non-state domestic sector has
risen more moderately, while that of foreign-
invested enterprises (FIEs) has fallen by almost
half. Nonetheless, the share of FIEs in GDP has
more than doubled over the same period.
17
 Macro
Asian Economics abc
September 2006

11. GDP and fixed asset investment by ownership and one-third of total fixed asset investment.
Foreign- Electricity supply has grown, with all urban areas
VND trn Total State Non-state invested
and 88% of rural areas having access to power
GDP
1995 228.9 92.0 122.5 14.4 (World Bank 2006). Private producers can now
2000 441.6 170.1 212.9 58.6 supply power to the grid. The number of fixed and
2004 715.3 279.7 325.2 108.2
Share of total, % mobile phones per hundred persons has multiplied
1995 100.0 40.2 53.5 6.3
2000 100.0 38.5 48.2 13.3
nine-fold since 1995. The length of the road
2004 100.0 39.1 45.5 15.1 network has more than doubled. Access to
Fixed asset investment
1995 72.4 30.4 20.0 22.0 improved water supplies rose from 26% in 1993
2000 151.2 89.4 34.6 27.2 to 49% in 2002.
2004 275.0 147.5 84.9 42.6
Share of total, %
1995 100.0 42.0 27.6 30.4 However, many problems and bottlenecks remain.
2000 100.0 59.1 22.9 18.0
2004 100.0 53.6 30.9 15.5
The port in Ho Chi Minh City is crowded, and
Share of GDP, % needs further expansion. In the
1995 31.7 33.1 16.3 152.5
2000 34.2 52.6 16.3 46.3 telecommunications sector, interconnection is
2004 38.4 52.7 26.1 39.4 now allowed, but co-operation is spotty, e.g., the
ICOR (nominal)
1995 1.2 1.5 0.8 7.4 case of EVN. More road investment is needed.
2000 3.6 5.9 1.2 2.8
2004 2.7 3.7 2.1 2.2 Also, 40% of infrastructure investment was
Source: General Statistics Office and HSBC financed by foreign sources, but this share is
expected to decline over time, particularly as
This disparity is also reflected in the movement of income per head starts to exceed the thresholds
the ICOR shown in the bottom of the table. (The for various international donors.
ICOR estimates differ from those in Chart 10
because they are calculated using nominal rather
Savings
than real GDP.) In 2004, the ICOR for state- Savings can be mobilised either from domestic or
owned enterprises was 3.7 versus an overall foreign sources. The chart overleaf shows that the
average of 2.7 and just over 2 for non-state-owned gross domestic savings in recent years have been
enterprises and FIEs. The ICOR for non-state stable at around 31%-33% of GDP, while the
firms rose, but remains relatively low, while that share of domestic investment has been rising
for FIEs actually fell sharply during the period. steadily, and tending to outstrip savings.
This strongly suggests that more efficient capital However, the savings rate could easily rise
allocation could be obtained by shifting further, reflecting the favourable demographic
investment away from the state-owned sector to developments described in the previous section
the private sector. Alternatively, it shows the and the improving trend in the trade surplus.
importance of increasing the capital efficiency of Moreover, Doi Moi reforms have enabled foreign
the state-owned sector by promoting privatisation firms to make substantial direct investments in
and improved corporate governance. Vietnam. Finally, the overseas Vietnamese
(estimated at about three million) have also made
Infrastructure investment
substantial contributions via remittances.
Huge investments in infrastructure have already
been made, but a lot more is still needed. Total
infrastructure investment amounted to about 10%
of GDP over the past decade, between one-fourth

18
 Macro
Asian Economics abc
September 2006

12. Domestic savings and investment Foreign direct investment is typically

implemented via joint ventures between foreign
% of GDP
36 and local firms, the latter often state-owned firms.
34 In recent years, local firms provided between 5%
32 and 15% of total registered capital, so the actual
30 contribution of foreign capital is proportionately
28 lower.
26
Table 13 shows the composition of cumulative
2000 2001 2002 2003 2004
disbursements of FDI by industry between 1988
Sav ings Inv estment
and 2004. Manufacturing makes up by far the
Source: IMF largest share (44%), followed by mining and
quarrying (21%), hotels and restaurants (7%), real
Foreign direct investment estate and renting (7%) and agriculture and
As noted above, the activity of foreign-invested forestry (5.6%). The shares of manufacturing and
enterprises and foreign direct investment is mining and quarrying are roughly twice those of
playing a key role in the development of the those sectors in nominal GDP - 20.7% and 10.5%,
economy. Fixed asset investment attributable to respectively in 2005. It is not surprising that FDI
FIEs amounted to VND42.6 trillion, or about 6% is playing a disproportionate role in these sectors,
of GDP. Total registered capital for foreign direct given the attractions of Vietnam both as a source
investment in 2005 is estimated to have totalled of natural resources and of cheap labour. This
USD6.3 billion (about VND101 trillion), the suggests that these sectors are likely to benefit
highest level since 1996. Actual disbursements are disproportionately in terms of productivity
estimated to have been USD3.3bn, a record high increases, which should be positive for overall
level. In the first four months of 2006, FDI growth prospects.
commitments amounted to USD2.3bn, about 7.4%
Foreign remittances
higher than in the previous year.
Foreign remittances also play an important role in
financing capital investment, even though they

13. Foreign direct investment projects from 1988 to 2004

USDm Implementation Share of total, %
Total 30,007 100.0
Agriculture and forestry 1,679 5.6
Fishery 172 0.6
Mining and quarrying 6,252 20.8
Manufacturing 13,185 43.9
Electricity, gas and water supply 1,293 4.3
Construction 649 2.2
Wholesale and retail trade; Repair of motor vehicles, motor cycles and personal and household goods 176 0.6
Hotels and restaurants 2,086 7.0
Transport; storage and communications 1,284 4.3
Financial intermediation 592 2.0
Real estate, renting business activities 2,072 6.9
Education and training 33 0.1
Health and social work 126 0.4
Recreational, cultural and sporting activities 405 1.3
Community, social and personal service activities 4 0.0
Source: GSO

19
 Macro
Asian Economics abc
September 2006

receive less attention than foreign direct
investment. The population of overseas
Vietnamese (Viet Kieu) is estimated to amount to
about three million. Moreover, such transfers
avoid much of the paperwork involved in FDI.
The table below shows that private net transfers
have risen steadily in recent years, and have
reached USD2.2bn (over 4% of GDP), roughly
offsetting the deficit on the trade balance. In fact,
the actual amount is likely to be substantially
larger, given that not all inward transfers are
reported to the authorities. It seems quite likely
that many of these funds have found their way
into privately owned businesses, or else have
helped to finance the ongoing housing boom.
14. Balance of payments items
USDbn 2000 2002 2004
Current account 0.6 -0.4
Trade balance 0.4 -0.9
Services and income -1.2 -1.4
Net transfers 1.5 1.9
Private 1.3 1.8
Government 0.1 0.1
Capital account -0.5 0.9
FDI 1.1 2.0
Source: CEIC
Capital demands for growth
The Five-Year Socio-Economic Development
Plan for 2006-10 targets average real GDP growth
of 7.5%-8% over the period, with nominal GDP in
current prices expected to reach VND1,673-1,760
trillion. This is expected to allow GDP per capita
to double to around USD1,050-1,100. In order to
achieve this, the plan estimates that total social
investment of VND2,200 trillion (2005 prices),
about 40% of GDP, will be required. This
amounts to about USD138bn (2005 prices) or
about USD160bn in current prices. This implies a
further rise in the share of investment in GDP,
which was 33% in 2004, reaching 41%-42% by
2010.
In view of the rising trend of fixed asset
investment to GDP and the observed decline in
capital efficiency, it seems prudent to budget for a
needed further rise of the ratio of fixed investment
to GDP. Therefore, one of the key issues for the
outlook is the ability to mobilise and deploy
efficiently this large amount of capital.
The Plan estimates that the domestic savings rate
will rise from 29.8% in 2005 to 31%-32.5% by
2010. Assuming a mobilisation rate of 85%, this
implies that domestically funded investment could
reach about 27% of GDP by the end of the period,
or about 65% of the required investment level.
The increase in expected domestic savings is not
overly demanding either, in light of Vietnam’s
emerging trade surplus.
15. Expected foreign sources of investment funding
USDbn 2006-10 CAGR, %
Overseas development aid 10.9 6.2
-1.9 FDI disbursements 17.5-19.5 5.5-9.2
-2.5 Remittances 12.0 4.0
-1.8 Portfolio investment 9.0 n/a
2.3 Total 49.5-51.5 5.2-6.6
2.2
Source: MPI and HSBC
0.1
2.3
1.2
This leaves 35% of funds that will have to be
procured externally. The table above summarises
the expected sources of foreign funds, and their
estimated annual growth rates compared with
2005 levels. Roughly 40% is expected to come
from FDI, with roughly equal contributions each
from the other major sources. The overall annual
growth rate of such funds is estimated to be about
5%-7%, not overly demanding as long as there are
no hiccups in the global economy or the domestic
scene. The upper end of the estimated amount,
USD51.5bn, amounts to about 32% of the total
requirement of USD160bn, slightly below the
target of 35%. Although the reason for this
discrepancy is not explained, the difference is not
large, and could be made up relatively easily as
long as financing conditions remain favourable.
There will be incentives for foreign participation
in infrastructure projects. For example, the new
Investment Law allows new vehicles for foreign

20
 Macro
Asian Economics abc
September 2006

investment, including tax incentives and free land

access.

Based on these considerations, the targeted

growth rates seem feasible to achieve. Again, the
major caveat is global financing and economic
conditions. A global downturn or other major risk
event would raise doubts about the ability to
obtain this degree of financing.

Will the government make up the difference if

sufficient domestic private or foreign funds are
not obtained? If necessary, the government can
borrow directly or increase bank lending.
However, the budget deficit target is fairly strict at
3%-4% of GDP. The main off-budget financing
would be via the Development Bank of Vietnam.

21
 Macro
Asian Economics abc
September 2006

Productivity and growth

 Rising labour productivity explains about two-thirds of overall
economic growth
 The main source of labour productivity growth has been the shift
out of agriculture into industry and related sectors
 Growth of industrial productivity is a key determinant of overall
productivity growth going forward

Productivity around 2.5%, so all of the improvement came

from higher productivity growth (see chart 16).
The key to Vietnam’s strong economic growth in
recent years has been high labour productivity What drove this increase in productivity? To a
growth, i.e., growth of output per worker. In this great it extent reflects the shift of employment out
section, we analyse the factors driving of agriculture, where productivity is still relatively
productivity growth and their potential to support low, to manufacturing and other sectors, where it
further strong growth in coming years. is much higher. This transitional phase repeats the
experience of many other developing countries.
16. Contributions of employment and labour productivity to
GDP growth Table 17 overleaf shows real GDP per worker in
major sectors of the economy. Productivity per
% change
10 head in agriculture is only one-seventh as high as
8 in industry (mainly manufacturing) and only
6 between one-quarter and one-fifth of that of most
4 other sectors. (Productivity in the “others” sector
2 looks unusually high, and probably reflects
0 inconsistencies in coverage between the GDP and
01 02 03 04 05 employment data.)
Productiv ity Employ ment GDP
Interestingly, productivity growth per head in
Source: CEIC and HSBC recent years in industry has been much lower than
that in agriculture, averaging only 1.8% compared
During the period from 2000 through 2005, real with 3.8% for the latter. Productivity growth has
GDP growth accelerated from 6.8% to 8.4%, been fastest in hotels/restaurants and transport,
while growth of output per head is estimated to communications and storage. Productivity in
have accelerated from 4.3% to 5.8% over the construction fell during the period, although this
same period. Employment growth was steady at largely appears to have halted by 2004. However,

22
 Macro
Asian Economics abc
September 2006

17. Labour productivity by sector

1994 VNDbn/worker 2000 2001 2002 2003 2004 CAGR, %
Total 7.3 7.6 7.9 8.3 8.7 4.6
Agriculture, forestry 2.6 2.7 2.8 2.9 3.0 3.8
Industry 19.6 19.6 20.0 20.3 21.1 1.8
Construction 19.9 18.0 16.9 16.9 16.1 -5.0
Trade 11.5 11.8 12.0 12.1 12.4 2.0
Hotels, restaurant 12.9 13.5 14.2 14.4 15.2 4.2
Transport, storage and commun. 9.1 9.7 10.4 10.8 11.6 6.2
Culture, health, education 10.9 10.9 11.1 11.3 11.7 1.8
Other services 31.3 30.2 29.1 28.2 27.0 -3.6
Source: CEIC and HSBC

the key point is that the sector-weighted average
of productivity growth was only 3.5% in 2004.
Therefore, the remaining 1.7 percentage points
came from the shift toward higher productivity
sectors.
Table 18 shows the shifts in employment by
sector. Between 2000 and 2005, the share of
agriculture dropped by 6.3%, and this was offset
mainly by increases in industry (2.4%),
construction (1.9%) and trade (1.1%).
Table 19 overleaf shows the contribution to
growth of productivity by sector. This shows that
industry contributed nearly half of overall
productivity growth, despite the fact that it only
made up 13% of total employment in 2004. This
is followed by trade and construction, while the
contribution from agriculture is quite small.
Moreover, the acceleration of productivity growth
seen over the period was attributable almost
entirely to the increase in the contribution from
industry. In particular, this reflected an uptick in
productivity growth in 2004, although it is unclear
whether or not this was sustainable, or just a blip.
What was the role of the composition effect?
Table 20 overleaf shows the average contribution
to growth of overall productivity in the economy
by sector over the period 2001-04, and also gives
the split between the contribution of own-sector
productivity growth and the compositional effect
due to the change in employment shares in the
economy. For the period as a whole, 60% of total
growth came from sectoral productivity increases,

18. Employment by sector

'000s 2000 2001 2002 2003 2004
Total 37,610 38,563 39,508 40,574 41,586
Agriculture, forestry & fishery 24,481 24,468 24,456 24,443 24,431
Industry 3,889 4,260 4,558 4,982 5,294
Construction 1,040 1,292 1,526 1,688 1,923
Trade 3,897 4,063 4,281 4,532 4,767
Hotels, restaurant 685 700 715 740 755
Transport, storage and commun. 1,174 1,180 1,183 1,194 1,202
Culture, health, education 1,353 1,416 1,497 1,584 1,657
Other services 1,090 1,184 1,291 1,410 1,557
Share of total, %
Total 100.0 100.0 100.0 100.0 100.0
Agriculture, forestry 65.1 63.5 61.9 60.2 58.7
Industry 10.3 11.0 11.5 12.3 12.7
Construction 2.8 3.3 3.9 4.2 4.6
Trade 10.4 10.5 10.8 11.2 11.5
Hotels, restaurant 1.8 1.8 1.8 1.8 1.8
Transport, storage and commun. 3.1 3.1 3.0 2.9 2.9
Culture, health, education 3.6 3.7 3.8 3.9 4.0
Other services 2.9 3.1 3.3 3.5 3.7
Source: GSO

23
 Macro
Asian Economics abc
September 2006

nearly all of which came from agriculture, while sectors with the largest positive composition
the remaining 40% came from the composition effects.
effect. Almost half of the overall positive
21. Productivity and GDP growth estimates
composition impact came from industry.
2005-10
Average % change 2000-04 Base Alt 1 Alt 2
19. Contribution to labour productivity growth by sector
Employment 2.5 2.5 2.5 2.5
Percentage points 2001 2002 2003 2004 Avg.
Labour productivity-total 4.6 4.3 4.7 5.1
Total 4.3 4.5 4.5 5.2 4.6 Agriculture, forestry 3.8 3.8 3.8 3.8
Agriculture, forestry 0.1 0.4 0.2 0.4 0.3 Industry 1.8 1.8 2.8 2.8
Industry 2.0 1.9 2.2 2.4 2.1 Construction -5.0 -5.0 -5.0 0.0
Construction 0.8 0.6 0.6 0.5 0.6 Services 1.8 1.8 1.8 1.8
Trade 0.7 0.8 0.7 0.8 0.7 GDP 7.3 6.9 7.3 7.8
Hotels, restaurant 0.1 0.1 0.1 0.2 0.1 Source: CEIC and HSBC
Transport and commun. 0.2 0.2 0.1 0.2 0.2
Culture, health, education 0.1 0.3 0.3 0.3 0.2
Other services 0.3 0.3 0.4 0.4 0.3 The table above shows that, with sector-specific
Source: CEIC and HSBC
productivity growth rates unchanged from the
average pace of the past four years (the base
20. Contribution to labour productivity growth, 2001-04
case), overall productivity growth would be 4.3%.
Percentage points Own sector Composite Total
A one percentage point rise in industry
Total 2.8 1.8 4.6
Agriculture, forestry 2.3 -2.1 0.3
productivity would add 0.4 percentage point to
Industry 0.2 1.9 2.1 productivity growth (Alt 1), while a five
Construction -0.2 0.8 0.6
Trade 0.2 0.5 0.7 percentage point improvement in construction
Hotels, restaurant 0.1 0.1 0.1 productivity on top of this would add another 0.4
Transport and commun. 0.2 0.0 0.2
Culture, health, education 0.1 0.2 0.2 percentage point (Alt 2). The combination of
Other services -0.1 0.5 0.3
these two improvements would yield overall
Source: CEIC and HSBC
productivity growth of 5.1%, which, together with
employment growth of 2.5%, would generate real
This result suggests that productivity growth has
GDP growth of 7.8%.
plenty of room to continue at a high rate as the
share of industry and related sectors increases, These results show that industry productivity is
although whether or not it accelerates further one of the most important factors affecting the
depends crucially on sectoral productivity trends. overall trend growth rate. Therefore, the relatively
We have made some simple projections of overall low growth of productivity in this sector has to be
productivity growth, based on the assumption that seen as a significant constraint on growth. One
employment continues to shift away from point that has been raised is that Vietnam seems to
agriculture in line with the recent trend. lack a specific policy to obtain technology
(Specifically, overall employment is estimated to transfers from FIE’s, unlike China. There should
grow 2.5%, non-agricultural sectors are assumed be high returns from policies aimed at raising the
to grow at the same rate as in 2000-2004, and productivity growth rate of industry.
agricultural employment is derived as the
residual.) Using this, we have estimated the
Short-term growth outlook
impact on overall productivity growth of different In the short-term, we expect growth to slow
assumptions about the own-sector productivity marginally from the very high pace of 8.4% seen
growth of industry and construction, which are the in 2005, with GDP being forecast to rise 7.6% in
2006 and 7.3% in 2007. First, growth in the first

24
 Macro
Asian Economics abc
September 2006

half of this year averaged 7.4% versus 7.7% last

year. Moreover, growth in the second half of 2005
was extremely rapid, averaging 9.0%, as the
government pumped up spending in order to
achieve the overall growth target for the previous
five-year plan. This will make growth
comparisons in the second half of this year more
difficult, and the government has no similar
incentive, since the current five-year plan has just
started.

We expect slightly lower growth next year

because of our expectation that global growth will
slow, reflecting the impact of weaker housing in
the US and the attempts of the Chinese authorities
to cool down fixed asset investment there. Both of
these should have a negative impact on
Vietnamese export growth. Nonetheless, the
effects of this should be temporary, and growth is
likely to accelerate again thereafter.

25
 Macro
Asian Economics abc
September 2006

Sectoral success
 Growth omens in the different sectors generally remain
encouraging…
 …although corruption problems and educational failings need to
be addressed if Vietnam is to continue climbing the value chain
 We expect 4% agricultural growth, 10% in manufacturing and 8%
in services over the next five years

Shifting to industry 22. The industrial sector has been the star performer…

% Yr % Yr
Vietnam has followed a fairly conventional 12 12
process of economic development so far, with the 10 10
agricultural sector growing less rapidly than the 8 8
rest of the economy, while industry has taken up 6 6
the growth baton. 4 4
2 2
This is illustrated in the next three charts, which 0 0
show the quarterly growth rates of the three main 00 01 02 03 04 05 06
sectors since the late-1990s, a five-year moving Agriculture Industry Services

average of the sector growth rates (in order to Source: CEIC

smooth out some of the year to year volatility in

23. …with trend growth around 10%
output growth) and the share of total GDP
% Yr Growth (5 year moving average) % Yr
accounted for agriculture, industry and services.
14 14
The main points are: 12 12
10 10
 Agricultural output has grown at a very
8 8
steady rate over the last 20 years, expanding
6 6
by around 4% a year. 4 4
2 2
 Industry has experienced more of a roller-
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
coaster ride, although it has been unusual for Agriculture Industry Services
output growth to dip below 10%. In fact, Source: CEIC
since 1992, there have only been three years
where production didn’t grow at a double-
digit rate.

26
 Macro
Asian Economics abc
September 2006

24. Both industry and services represent about 40% of GDP developed than Vietnam, have very similar
% % service sector shares.
Share of GDP
45 45
40 40
Agriculture
35 35 Not so weather dependent
30 30
As noted above, agricultural output has been
25 25
20 20
remarkably steady for some time now. Indeed, the
15 15 standard deviation in the annual growth rate has
85 87 89 91 93 95 97 99 01 03 05 amounted to just 0.6% over the last ten years,
Agriculture Industry Services
which is a third of that for industrial production
Source: CEIC and a fifth of that for service sector output. Even
when allowing for the lower growth rate of the
 The service sector slowed through the second
sector, agriculture has been the least volatile of
half of the 1990s and into the new millennium the three.
but has shown a return to form more recently,
successfully weathering the SARS and the This suggests to us that the country’s agricultural
avian flu episodes. production is not that susceptible to the vagaries
of the weather. One reason for this is that
In table 25 we have compared Vietnam’s sector
significant investment has been made in irrigation
make-up with a range of other developing and
systems, which means that Vietnam doesn’t rely
developed countries.
on the monsoons for water. The country also
25. GDP breakdown by sector (% shares, 2004)* benefits from producing a fairly diversified set of
Agriculture Industry Services crops. It is now the world’s biggest exporter of
Malaysia 10 50 40 pepper, the second biggest for rice and coffee and
China 13 46 41 the third biggest for cashew nuts. Table 26 shows
Indonesia 15 44 41
Thailand 10 44 46 Vietnam’s major agricultural products.
South Korea 4 41 56
Brazil 10 40 50 26. Agricultural breakdown by product*
Vietnam 20 39 40
Argentina 10 36 54 2000 2004
Russian Fed. 5 35 60
Singapore 0 35 65 Cereals $3.89bn (61%) $4.04bn (60%)
Poland 3 33 64 of which rice $2.29bn (36%) $2.23bn (33%)
Philippines 14 32 54 Vegetables & beans $0.45bn (7%) $0.55bn (8%)
Hungary 3 31 66 Industrial crops $1.54bn (24%) $1.61bn (24%)
India 21 27 52 Fruit $0.43bn (7%) $0.47bn (7%)
OECD 2 26 72 Total $6.42bn (100%) $6.77bn (100%)
Hong Kong 0 11 89 Source: EIU. *US dollar billion, 1994 prices. Figures in brackets show % share of total
agricultural output
Source: World Bank. * Countries ranked according to the size of their industrial sector

This would indicate there is still plenty of scope Low productivity the main issue
for the agricultural share to shrink further, while The 4% growth rate achieved by agriculture over
the relative size of the industrial sector could the last 20 years is perfectly acceptable and
continue to rise. Increasingly, one might expect indeed the government’s latest five-year plan
the service sector to grow more quickly than (2006-10) actually envisages weaker growth of 3-
overall GDP, although it should be noted that 3.2% on average. It’s not made clear why this
Malaysia and China, which are much more should be the case and we wouldn’t be surprised if
the sector maintained its historic growth rate.

27
 Macro
Asian Economics abc
September 2006

But while output growth may be fine, the level of
productivity certainly isn’t and the target must be
to produce the same or more output with a lot less
people.
The table below shows the breakdown of GDP by
sector as well as the employment shares.
Agriculture accounts for roughly 57% of all jobs
but just 21% of output – the implication being that
agricultural productivity is only 20% of the non-
agricultural sectors. Admittedly, this is a better
relative performance than both India and China
have managed (where the figures are 17% and
12% respectively) but still leaves plenty of room
for improvement.
Vietnam actually has the smallest area of
cultivated land per head in the world, which in
turn suggests that more could be made available
by the government. Meanwhile, an abundant
supply of cheap workers means there is little
incentive to invest in agricultural machinery.
Ultimately, however, the real answer lies with a
better-educated workforce. Not only would this
lead people to seek more challenging work
outside of agriculture but it would also satisfy the
growing requirements of the industrial sector (see
below). Improving educational standards should,
therefore, be a top priority of the Vietnamese
government.

27. Agriculture accounts for 57% of jobs but 21% of GDP Industry
% 1995 2000 2005
Industry has been the star performer of the
GDP shares
Agriculture 27.2 24.5 20.9 Vietnamese economy over the last 15 years, with
Industry 28.8 36.7 41.0 the manufacturing and utility (electricity, gas &
Services 44.0 38.8 38.1
Labour shares water) sub-sectors showing particularly
Agriculture 71.1 68.2 56.8
Industry 11.4 12.1 17.9
impressive growth recently. This is illustrated in
Services 17.5 19.7 25.3 chart 28, while the relative importance of all four
Source: 5-year Socio-Economic Development Plan (2006-10)
sub-sectors in overall industrial production is
shown in table 29 overleaf for different time
Seeking solutions periods.
The government estimates that around 20% of
28. Double figure manufacturing growth
rural workers lack full-time jobs - equivalent to
% Yr % Yr
nearly five million people – and it is these people,
25 25
in particular, that the authorities must hope find
20 20
more productive employment in other sectors. 15 15
Apart from encouraging people to leave the 10 10
agricultural workforce, there is also a need to 5 5
boost the productivity of those remaining in the 0 0
-5 -5
sector.
92 93 94 95 96 97 98 99 00 01 02 03 04 05
Construction Mining & quarrying
The latter has suffered from insufficiencies of
Manufacturing Electricity
rural infrastructure and the lack of mechanisation
Source: CEIC
in the sector. This again is a common problem and
reflects a number of issues including the size of
the average land-holding as well as the relative
expense of capital vis-à-vis labour.

28
 Macro
Asian Economics abc
September 2006

29. Industry breakdown (% share) government is certainly optimistic, building in a

1985 1995 2005 forecast of about 10% average growth in its latest
Mining 3.6 17.7 14.3 five-year plan, suggesting that it will “mobilise all
Manufacturing 64.8 51.6 56.7
Construction 25.9 24.9 21.8 internal and external resources possible for
Electricity, gas & water 5.7 5.8 7.1 industrial development”.
Source: CEIC
31. A Korean precedent

The key developments for the sector are: % Yr % Yr

30 30
 Manufacturing accounts for just over half of 25 25
total production, with the output of food 20 20
related products the biggest component, 15 15
followed by metals, vehicles & transport 10 10
equipment and chemicals (table 30). Metals & 5 5
metal products and furniture have seen the 0 0
biggest increase in share over the last few 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05
Korean industrial production (5-year moving average)
years.
Source: CEIC
30. Manufacturing breakdown (% share)
2000 2004 Meanwhile the experience of some of Vietnam’s
Food, beverages & tobacco 41.8 38.3 neighbours also offers grounds for
Chemicals 11.1 9.7
Textiles & garments 10.0 8.5 encouragement. As shown in chart 31, Korean
Metals & metal products 11.7 13.2 industrial production growth since the mid-1970s.
Electrical machinery 8.0 8.8
Vehicles & transport equip 9.6 10.0 Growth remained at, or very close to, a double-
Wood & paper products 3.6 3.4
Furniture 3.9 5.2
digit rate for at least 20 years. China is another
Machinery & equipment 2.8 2.9 country where industry has managed at least 10%
Source: EIU
growth for years on end.

 The huge jump in the size of the mining If Vietnam is to replicate this kind of success,
sector since the mid-1980s largely reflects the however, the country will need to overcome a
discovery and production of crude oil, which number of problems. These are effectively
began in 1984. highlighted in the World Economic Forum’s
executive opinion survey, which asks companies
 As with agriculture, the diversity of the
about “the most problematic factors for doing
Vietnam’s industrial sector helps explain why
business in a country”. We have shown the results
growth has remained resilient in the face of
of the 2005 survey in table 32.
several exogenous shocks, including the
Asian crisis in 1997-98 and the global tech
recession in 2000-01. The weakest annual
average growth rate recorded by the sector
since the early 1990s has been 7.7%.

Sustaining double-digits
The key question for the industrial sector is: will it
continue to register double-digit growth? The

29
 Macro
Asian Economics abc
September 2006

32. The most problematic factors for doing business in Vietnam while those who can’t are seeing increases of 5%
% of respondents* or so.
Inefficient government bureaucracy 21
Corruption 20 33. Lacking labour?
Inadequate supply of infrastructure 15
Balance World economic survey Balance
Inadequately educated workforce 10
10 10
Poor work ethic in national labour force 9
Tax regulations 9 8 8
Access to financing 7
Tax rates 3 6 6
Inflation 2
4 4
Crime and theft 2
Foreign currency regulations 1 2 2
Policy instability 1
Restrictive labour regulations 1 0 0
Government instability/coups 1 99 00 01 02 03 04 05 06
Source: World Economic Forum, Executive Opinion Survey. * Respondents were asked to
Lack of skilled labour
select the five most problematic factors, from a list of 14, for doing business in their country Lack of confidence in government policy

Source: Thomson Financial Datastream

Topping the list is an “inefficient government

bureaucracy”, followed by “corruption” and an IFO’s World Economic Survey certainly supports
“inadequate supply of infrastructure”. It is also the view that companies are becoming more
worth noting that Vietnam ranked 97th out of 117 worried about the lack of skilled labour. This is
countries in terms of the “quality of its public illustrated by the black line in chart 33, while the
institutions” and 92nd on technology in the same other series in the chart suggests that firms are
survey. becoming more confident in government policy.

A further issue that needs to be addressed One area where companies have fewer concerns is
concerns the increasing difficulty firms appear to the strictness of labour market regulations. Short-
be having in attracting sufficient numbers of term work contracts are widely used in the
appropriately qualified workers, making it country, while severance payments are not
difficult for them to move up the value chain. As particularly large and the trade unions are
the government itself has explained, “trained generally fairly docile.
labourers account for a really low percentage (of
Access to finance is apparently not a huge
employees) which makes the labour force
constraint either and should improve further over
unsatisfactory to the requirements of the country’s
the coming years with the development of the
industrialisation, modernisation and economic
equity and corporate bond markets. Both are still
structural transformation”.
very small but expanding rapidly.
Although it doesn’t really come through in the
Government guaranteed
WEF survey (table 32) there are certainly
numerous anecdotal stories of growing labour Overall, assuming that the authorities are
shortages in industry. And this in turn is being successful in their attempt to improve the quantity
reflected in stronger wage growth. Unfortunately, and quality of education, we can see little to stop
the quality of the statistics is not that good in this industry continuing to grow at around 10% for the
area, but one observation made by the IMF is that next few years at least. It would also be beneficial
English language abilities are in particularly if local companies acquired the technological
heavy demand, such that English speakers are know-how of many foreign firms. At present,
generally enjoying pay rises in the order of 20%, there is no explicit policy of transferring

30
 Macro
Asian Economics abc
September 2006

technology, while not that many Vietnamese are 34. Service sector growth rates and shares
being educated in foreign universities. Average annual % of total services
growth since 95 1995 2005
Within the industrial sector, the manufacturing Total services 6.3% 100% 100%
sector is likely to show the strongest growth, Activities of Party 9.2% 0.2% 0.3%
Financial intermed. 7.6% 4.6% 5.2%
although major infrastructure projects and Hotels & restaur’ts 7.2% 7.9% 8.5%
Science & tech 7.1% 1.4% 1.5%
growing residential and commercial property Recreation & sports 7.0% 1.3% 1.4%
requirements should keep construction output Personal services 7.0% 4.5% 4.8%
Trans & comms 6.9% 9.2% 9.7%
strong as well. The pace of mining activity will Wholesale & retail 6.7% 39.2% 40.4%
Education & training 6.5% 8.1% 8.3%
depend to some extent on whether new oil Health & social work 6.5% 3.5% 3.6%
discoveries are made. Not surprisingly, the HH’s with employees 4.7% 0.5% 0.4%
Real estate 4.3% 11.4% 9.4%
government is keen to attract sizeable foreign Public admin & def. 4.0% 8.2% 6.6%
investment in exploration – the aim being to Source: HSBC, CEIC

increase identified reserves by 30-35 million

tonnes by 2010 and extraction to more than 21 Of the bigger sub-sectors, financial intermediation
million tonnes (it was 20m tonnes in 2004). (banks, insurance companies etc) has shown the
Natural gas production is expected to reach strongest performance, no doubt benefiting from
13.2bn cubic metres by 2010. Refinery capacity is the rapid expansion of the economy and the
extremely limited at present but a new refinery is growing wealth of the private sector. The strength
being built and there are plans for two more. of hotels and restaurants probably reflects similar
factors as well as a buoyant tourist sector. Chart
Services 35 shows that the number of tourists arriving in
Growth recovering Vietnam has risen sevenfold since 1993.
The service sector has experienced fairly mixed 35. Tourist arrivals have soared
fortunes over recent years, with growth slowing to
mn mn
just 2.3% in 1999, but recovering progressively 2.5 2.5
since then to show 8.5% growth last year – the 2.0 2.0
strongest rise since 1996. Table 34 shows the
1.5 1.5
annual average growth rates of real value-added
1.0 1.0
since 1995 as well as the share of aggregate
service sector output accounted for by each sector. 0.5 0.5

The sub-sectors are ranked according to their 0.0 0.0

relative growth performance over the last ten 93 94 95 96 97 98 99 00 01 02 03 04 05
Number of tourists (millions)
years.
Source: CEIC

The wholesale/retail sector is by far the largest,

accounting for over 40% of total sales. The rapid
growth rate (6.7%) reflects the steady increase of
household income over the period. In nominal
terms, retail sales have been growing well over
10% annually in recent years. Especially rapid

31
 Macro
Asian Economics
September 2006
growth has been seen in areas such as electronic
goods, motorcycles and autos.
36. Retail sales growing steadily
% change
30
25
20
15
10
5 the following section for a description of this
0 process.
95 96 97 98 99 00 01
Retail sales
Source: CEIC
Real estate and public administration have been
the worst performers over the period. The former
may have suffered from regulatory changes,
which have meant that property firms are no
longer allowed to sell houses or apartments that
haven’t yet been built. In addition, the equity and
corporate bond markets are increasingly providing
an alternative to the property market as a source
of investment.
Plenty of potential
Although service sector activity will be
constrained by many of the factors mentioned
earlier in the section, we believe it still has plenty
of room to expand over the next few years.
Indeed, we wouldn’t be surprised if it registered
growth towards the top end of the government’s
7.7-8.2% target range for the next five years. This
would represent an improvement from the 7%
growth of the previous five-year period.
There are a number of reasons to be optimistic:
 As incomes increase, people tend to spend an
increasing proportion of their income on
services. They will also have more funds to
save and invest, benefiting the financial
sector. The government is keen to encourage
more people to make contributions into the
32
abc
social security fund, which should also
benefit the financial sector to the extent that
the money is invested there. At present, 7-8
million people pay into the system, but the
hope is that this rises to 30-40 million in the
future.
 Banking reforms should increase the
competitiveness of the financial sector. See
02 03 04
 Foreign companies are beginning to see the
potential of the Vietnamese retail market,
attracted by a comparative lack of restrictions
and a rapidly growing market of 84 million
people. Credit card usage is limited to around
100,000 people and should expand
significantly. Metro and Casino now have a
presence in the country and Wal-Mart is set to
join them fairly soon.
 Assuming no reoccurrence of bird-flu or
anything similar, the service sector should
continue to benefit from higher tourist
receipts. The growth in Chinese tourists
should be a particular positive and there are
plans to offer more “up-market” holidays as
well.
One area where the country performs a lot worse
that it should do is in the rapidly expanding
Business Process Outsourcing (BPO) and IT
services sector. According to A.T Kearney’s
offshore location attractiveness index for 2004,
Vietnam ranks 16th, well below other countries
with higher labour costs. We have shown the
breakdown of the results in table 37.
While Vietnam scores well in terms of its
financial structure (it is actually second to India
on this measure), it does very badly on business
environment (where only the Russian Federation
is below it) and people skills/availability (where it
comes last by some considerable distance).
 Macro
Asian Economics abc
September 2006

37. Vietnam apparently has few attractions as an offshore Conclusions

location for BPO
Financial Business People skills Total The previous table neatly summarises a number of
Structure environment & availability the points made throughout this section. While the
India 3.72 1.31 2.09 7.12 country clearly has strengths, the authorities need
China 3.32 0.93 1.36 5.61
Malaysia 3.09 1.77 0.73 5.59 to work hard to improve economic efficiency,
Czech Republic 2.64 2.02 0.92 5.58
Singapore 1.47 2.63 1.36 5.46
stamp out corruption and deliver a more highly
Philippines 3.59 0.92 0.94 5.45 trained workforce if Vietnam is to make decisive
Brazil 3.17 1.41 0.86 5.44
Poland 2.88 1.57 0.88 5.33 strides up the value chain. These steps are detailed
Hungary 2.71 1.68 0.90 5.29
Thailand 3.44 1.19 0.57 5.20
in the next section.
Mexico 3.12 1.26 0.74 5.12
Argentina 3.25 1.08 0.74 5.07 Nonetheless, we believe the prospects for growth
South Africa 2.83 1.21 0.94 4.98
Australia 1.11 2.13 1.58 4.82
are encouraging. The key point is that the country
Portugal 1.84 1.99 0.88 4.71 looks to have entered a virtuous circle of growth
Vietnam 3.65 0.70 0.35 4.70
Russian Fed 3.25 0.51 0.89 4.65 whereby higher incomes lead to higher spending
Spain 1.12 2.05 1.38 4.55 on goods and services, which in turn serves to
Ireland 0.62 2.48 1.39 4.49
Turkey 3.07 0.73 0.64 4.44 create more jobs in industry and services, which
Source: A.T Kearney. Making offshore decisions, 2004 then boosts incomes further. There seems little
reason to expect much, if any, slowdown in the
4% growth rate consistently achieved by the
agricultural sector, while industry should grow in
double figures (with some help from the
government if needed), and the service sector at
an 8% pace.

33
 Macro
Asian Economics abc
September 2006

Corporate and capital

market reform
 Privatisation of SOEs should accelerate as more large companies
auction their shares
 Privatisation of SOCBs will start as well, although contingent
liabilities related to NPLs remain an issue
 The new Securities Law should strengthen the capital market and
make it more attractive

A four-pronged approach table below shows the rise of the number of

equitisations. Moreover, the average size has
At the micro-economic level, the government has
increased steadily as well, although it still remains
a four-pronged reform approach to increase the
relatively small (average chartered capital of
market-orientation, efficiency and growth
VND17.3bn). Also, the share of closed
potential of the economy: privatisation of state-
equitisations with no sale of shares to outsiders
owned enterprises (SOEs); privatisation of state-
has fallen from 52% in 2003 to 26% in 2005.
owned commercial banks (SOCBs) and their full
adherence to Basel I; strengthening and reform of 38. Number of SOE transformations
the legal framework for capital markets; and anti- 2001 2002 2003 2004 2005
corruption measures. (See World Bank 2006) for Equitisations 198 213 358 643 709
Sales/assignments 59 39 48 44 71
a more detailed discussion of some of these Liquidation/bankrupt 21 24 29 41 40
issues.) Single member LLCs 0 2 8 34 0
Subtotal 278 278 443 762 820
Mergers 2 60 118 43 6
Privatisation of SOEs Total 280 338 561 805 826
Source: IMF (2006)
The government intends that privatisation
(beginning with equitisation) of SOEs should play
Also, a monitoring system has been established to
a key role in raising productivity and economic
evaluate performance of SOEs to determine
efficiency, and driving high rates of economic
candidates for restructuring and privatisation.
growth. The aim is to reorganise SOEs in line
Management quality is very variable, with 30-
with the new Enterprise and Investment Laws by
40% of SOEs estimated not to be profitable. The
the end of 2009.
Ministry of Finance has completed evaluations of
The number of SOEs going through the most SOEs. Enterprises classed as C (the lowest
privatisation process has steadily increased. The

34
 Macro
Asian Economics abc
September 2006

grade) for two years in a row are subject to it is not clear to what extent the goal of
reorganisation, including management change. developing these groups will be consistent with
the goals of market orientation and transparency.
39. Largest IPO candidates over the next two years
Company Industry As part of this effort, the State Capital Investment
Habeco Consumer goods Corporation (SCIC) was established by the Prime
Sabeco Consumer goods
Vien Tien Garment Corporation Consumer goods Minister in July 2005 to make key decisions on
PTSC Energy state capital allocation. In particular, the SCIC
Dau Tieng Rubber Company Materials
Phu My Nitrogenous Fertiliser Plant Materials will take over the rights to equitise SOEs and
BIDV Financial services
Vietcombank Financial services
SOCBs which previously resided in individual
Bao Viet Insurance Financial services ministries and provinces. This should eliminate
Mobilfone Company Telecommunications
Vinaphone Company Telecommunications conflicts of interest and “silo” problems, and
Viettel Company Telecommunications thereby make the capital allocation process more
Vietnam Shipping Company Transportation
Bin Thuan Hydro Power Plant Utility efficient. The SCIC has a mandate to be profit-
Da Nhim Hydro Power Plant Utility
Thac Mo Hydro Power Plant Utility oriented, to maximise the returns on state capital,
Source: Vietnam Holdings to keep its operations transparent and to embody
modern corporate governance principles.
Of particular interest is the policy of the
For SOEs not involved in the above-mentioned
government to create strategic economic groups
groups or otherwise considered to be operating in
with the potential of becoming “national
strategic sectors, the ultimate aim in most cases is
champions” by combining general corporations
100% privatisation.
(GCs) with other independent SOEs in a holding
company-type structure. The GC would become Reform of the banking sector
the holding (“mother”) company. Eight such
Reform of the banking sector parallels the effort
groups are envisioned, including Baoviet
to streamline the SOEs. As with SOEs,
(insurance), Vinacomin (minerals), VNPT
privatisation by 2010 is the goal, although the
(telecommunications), Vinashin (shipping),
government aims to maintain a substantial
Vinatex (garments and textiles), EVN
ownership in major banks. Historically,
(electricity), Vietnam Rubber Corporation and
Vietnamese banks essentially acted as an arm of
Petrovietnam (oil). The first five of these have
government policy, with little attention to
already received approvals for their
profitability, credit risk or the economic efficiency
transformation plans. The GCs involved must
of their lending activity. As a result, and similar to
have capital greater than VND 10 trillion
the experience of other countries that pursued
(USD650m) and their scope of operations must be
similar policies, large portfolios of non-
international. The holding company will be a
performing loans (NPLs) have been built up.
100% state-owned limited liability company, and
Therefore, the government must simultaneously
will operate under the Enterprise Law.
prod the banks toward more market-like
The government seems to be aiming to develop an behaviour while at the same time cleaning up their
industrial structure similar to Korea’s chaebol balance sheets.
groups, but with more direct state ownership.
The State Bank of Vietnam (SBV) has been
However, such groups typically have been
charged with drawing up reform plans both for
subordinate to government development aims, and
itself and for the banking sector. New laws

35
 Macro
Asian Economics
September 2006
governing these entities are expected to be passed
in 2008. All state-owned commercial banks
(SOCBs) are to be equitised by 2010. The first
two candidates are Vietcombank and the Mekong
Housing Bank. Initially, the state’s shareholdings
in these banks will be reduced to around 70%, and
then eventually to 51% by 2010. Share sales by
auction are expected to begin by late 2006 or early
2007. Limits for foreign shareholdings (currently
a maximum of 30% for all foreigners and 10% for
individual foreign institutions) will be raised as
well. Outside advisors will be used to help value
the banks and to help select outside strategic
investors.
As part of the process, banks will need to be
recapitalised in order to satisfy capital
requirements under Basel I. Also, SOCBs’ loan
classification scheme is to be consistent with
Basel II, and SOCBs will no longer be involved in
policy lending. Identifying the size of NPLs and
reserve requirements is a key task. The IMF
estimated that the amount could reach as much as
15% of GDP (see IMF 2004), and some private
estimates are as much as 20%. In a worst case
scenario, this entire amount would accrue to the
government as a contingent liability.
However, some observers believe that the actual
amount of liability would be substantially less,
assuming that Vietnamese banks will be able to
raise substantial amounts of capital from the
market, either from domestic or overseas
investors. SOCBs may also need to issue about
USD220m in bonds to meet Tier II requirements.
Also, the DATC (Debt and Asset Trading Corp.)
has been used to recycle impaired assets for
reorganisation of SOEs. In fact, Ministry of
Finance representatives denied that the
government would shoulder any contingent
liability from the banking sector, although this is
probably too optimistic.
36
abc
Capital market reform
Stock market: Currently, the Vietnam stock
market is still quite small due to the limited
number of large companies which have privatised.
Only 48 stocks are listed on the Ho Chi Minh
Trading Centre, with an estimated market
capitalisation of USD2.9bn and an average daily
turnover of USD5m. A much larger number of
stocks are traded in the over-the-counter market,
but almost no information is available about the
scale of this market. However, the size of the
market should expand substantially in the next
few years, reflecting increasing privatisations
described previously and moves to strengthen the
legal framework of the stock market. (For
HSBC’s view of the stock market, see
“Vietnamese Equities: Time to go in,” by Garry
Evans, Chief Asia-Pacific Equity Strategist.)
40. Vietnam stock market vital statistics
Ho Chi Minh Trading Centre
No. of stocks listed 48
Market cap (USDbn) 2.9
Average daily turnover (past 3 months, USDm) 5.0
Foreign ownership 28.6%
Price/earnings ratio (x) 16.1
Price/book ratio (x) 3.8
Dividend yield 2.1%
Index performance YTD +55.3%
Hanoi Trading Centre
No. of stocks listed 11
Market cap (USD bn) 0.7
Average daily turnover (USD mn) 0.3
Unlisted stocks
No. of stocks c3000
No. of stocks regularly traded c90
Average daily turnover (USD mn) c10.0
Source: HCMTC, Bloomberg and HSBC
A new Securities Law aimed at developing the
capital market is expected to take effect by
January 2007. Currently, rules governing the
securities market are only at the decree level
(Decree 144), which leads to a fair degree of
confusion and inconsistency. One of the biggest
problems is that over-the-counter (OTC) markets
are not regulated under the current decree, but this
will be rectified under the new law. The new law
will introduce the concept of a publicly-held
 Macro
Asian Economics
September 2006
company, including its rights, obligations and
reporting requirements. The law will provide the
State Securities Commission (SSC) with full
authority to regulate issuers, intermediaries and
investors in the case of a public offering. Brokers
and intermediaries dealing in such securities will
need to be licensed by the SSC.
The new law will also provide for converting the
Ho Chi Minh City Stock Trading Centre (SSC)
into a full-fledged stock exchange, owned
privately by its members. It will also regulate
futures transactions.
Other recent policy measures to support the stock
market include directing about 170 joint-stock
companies mainly held by the state to list on the
stock market, and 75 SOEs to auction their shares
on the securities trading centres. By March 2006,
24 of the SOEs had auctioned their shares,
although only one firm, Vinamilk, had done so
successfully. Second, the cap on total foreign
shareholdings in listed companies was raised from
30% to 49%. Currently, foreigners are estimated
to own around 25% of total shares.
Bond market: Vietnam’s bond market is also
small but growing. Roughly 100 bonds trade on
the HCMC and Hanoi trading centres. In July,
total trading value was VND3.25 trillion (about
USD203m). The chart below shows the trend of
government bond coupon rates. Rates had trended
up since early 2005 as the SBV tightened policy,
but they have stabilised since then.
abc
41. Vietnam government bond yields
%
11 11
10 10
9 9
8 8
7 7
03 04 05 06
2 yr 10 y r 15 y r
Source: Vietcombank Securities
Regulations will also be aimed at enhancing the
corporate bond market. Under the Enterprise Law
and Decree 52, local corporations (including
FIEs) allowed to issue VND bonds locally. EVN
has issued several times already. Decree 52 has
improved transparency for this market.
Anti-corruption measures
The current Prime Minister has emphasised the
need to reduce corruption in order to improve
economic performance. A Law on Corruption
Prevention and Control took effect last June. The
main elements include: increased public
disclosure and transparency in areas including
procurement, equitisation and management of
SOEs, auditing of the state budget, management
and use of land and personnel management;
provision of rights of individuals to request
information; increased responsibility of
organisational heads for corruption in their
organisations; simplified procedures; and
encouragement of whistle-blowing activities.
Also, state employees must declare their assets
and income, including those of close family
members.
37
 Macro
Asian Economics abc
September 2006

Trade and the WTO

 The last 15 years have seen Vietnam open itself up to the world,
lifting trade restrictions and slashing tariffs
 Exports are, however, still dominated by basic products
 WTO membership is likely to be fairly neutral in the short term but
should yield longer-term benefits

Opening up to the world As a result, the share of exports (of goods) in

GDP has more than doubled since 1998,
Since the late 1980s, when only state-owned
exceeding 50% of GDP last year. The ratio is now
enterprises (SOEs) were allowed to conduct
similar to that of South Korea and not that much
international trade, there have been many
different from Taiwan.
milestones in Vietnam’s move to integrate more
closely with the global economy. We have 43. Export share of GDP has doubled in seven years
summarised the key developments below. % GDP % GDP
55 55
42. Key trade developments 50 50
1991 Imported inputs used to produce exports exempted from duty 45 45
Export duty on rice reduced from 10% to 1% 40 40
Private companies allowed to engage in international trade
35 35
1992 Trade agreement with the EU reached
30 30
1993 Licensing of export shipments relaxed
25 25
1994 Import permits eliminated for all but 15 products
20 20
Further reduction in licensing of export shipments
1998 1999 2000 2001 2002 2003 2004 2005
1995 Joins ASEAN and AFTA
Import subject to quotas reduced to 7 goods Vietnamese exports
1996 Maximum tariff cut to 80% Source: CEIC
Imports subject to quotas cut to 6 goods
1997 WTO accession process started
1998 All quotas replaced by tariffs
What is different, however, is the nature of the
Highest tariff cut to 60% products that are being exported, with Vietnam
Joins APEC
focused much more on basic goods. We have
1999 New tariff with smaller range and rates introduced
FX surrender requirement cut from 80% to 50% shown the breakdown of the country’s exports by
2000 Bilateral trade agreement with the US agreed commodity in table 44 overleaf as well as their
Import permits cut to 12 products
2003 Abolished FX surrender requirement
average annual growth rate since 2000. The share
2005 Tariffs on more than 6,000 goods cut to 5% in accordance with of exports accounted for by ‘electronic parts &
AFTA’s Common Effective Preferential Tariff program computers’ has actually fallen over the last few
2006 Import permits cut to 8 products
Vietnam’s accedes to the WTO? years, while, ‘textiles & garments’ have become
Source: HSBC, Institute of Economics, Hanoi more important. This supports the observation

38
 Macro
Asian Economics abc
September 2006

made earlier that the country is lagging badly 46. Persistent trade deficits not a big problem

behind in the technology stakes. % GDP % GDP

5 5
44. Basic products still make up the bulk of Vietnam’s exports
0 0
Average annual Share of total exports
growth since 00 2000 2004
-5 -5
Crude oil 12.8% 24.2% 21.4%
Textiles & garments 23.7% 13.1% 16.5%
-10 -10
Footwear 16.3% 10.2% 10.2%
Fishery Products 13.0% 10.2% 9.1%
Furniture 35.5% 2.0% 4.3% -15 -15
Electronics 7.7% 5.4% 4.1% 98 99 00 01 02 03 04 05
Rice 9.2% 4.6% 3.6% Trade balance Current account balance
Coffee 6.3% 3.5% 2.4%
Rubber 37.7% 1.2% 2.3% Source: CEIC
Source: CEIC, EIU

Overseas Development Aid (ODA), FDI inflows

Table 45 shows the breakdown of Vietnam’s
exports by country. Over the last ten years, the
share of exports accounted for by the US has leapt
from 3% to 18%, while the importance of Japan
and the newly industrialised economies has
halved. In large part, these huge shifts should be
seen as a normalisation of economic and political
relationships, such that the export shares now
more closely reflect the relative size of Vietnam’s
trading partners.
45. US has become a far more important trade partner
_________ % of total exports_________
1995
US 3.1%
EU 13.4%
ASEAN 18.7%
Japan 26.8%
China 6.6%
Oceania 1.0%
Newly Ind. Econs* 17.1%
OPEC 2.4%
Source: CEIC. *Taiwan, South Korea & Hong Kong
Vietnam’s exports of goods are generally smaller
than its imports, with the trade deficit reaching
13% of GDP in 2003. It has, however, improved
somewhat over the last couple of years, and the
data for the first seven months of 2006 point to a
further shrinkage in the deficit this year, and
possibly a shift to a surplus. In any case, the
current account deficit has been much smaller,
and there has been little difficulty in financing it.
and remittances usually more than cover the
deficit, leading to a rise in foreign exchange
reserves. These are now worth around USD9bn,
which is equivalent to 12-13 weeks of imports – a
fairly comfortable position. The level of external
debt is also manageable at 33% of GDP.
Joining the club
The latest chapter in Vietnam’s trade story
involves its prospective membership in the World
Trade Organisation, which could finally be agreed
at the WTO meeting on 10-11 October.
2005
It is important to note that the country needn’t
18.3%
17.0% have so-called ‘permanent normal trade relations’
16.8%
13.6%
with the US (otherwise known as ‘unconditional
9.1% most favoured nation status’) before joining the
7.2%
5.9% WTO. The US Congress has yet to pass this and
2.7% could delay the vote until after the mid-term
elections in November. Although WTO
agreements require unconditional MFN status,
when an existing WTO member determines that it
cannot agree to this it can “opt-out of its
obligations toward that member by invoking the
non-application provision”. By so doing the
member state is declaring that the WTO
obligations are not applicable in its trade with the
new member state.

39
 Macro
Asian Economics abc
September 2006

If Vietnam does accede later this year, this would
bring an end to more than ten years of
negotiations that have helped spur many of the
reforms we have mentioned in this report.
But while the negotiations may be coming to an
end that doesn’t mean the trade reforms will do
too. Vietnam’s membership of the WTO (as well
as its bilateral agreement with the US) obliges the
authorities to carry on reforming, and, among
others, the government has committed itself to the
following:
 Eliminate tariffs on IT products such as
computers, mobile phones and modems and
reduce them for 80% of chemical products.
 Eliminate tariffs on 91% of medical
equipment products within five years of
joining and 96% of scientific equipment
within three years.
 Tariffs pertaining to 90% of agricultural and
construction equipment must be cut to 5% or
less, while tariffs on all wood products should
be lowered to an average of 4%.
 Reduce export duties on ferrous and other
scrap metals by up to 51% of current levels
within five to seven years.
 Remove all prohibited subsidies that the state
provides to its industries. For most industries,
including clothing and textiles, this will apply
from the time of accession.
At the time of writing, the issue of intellectual
property rights had still to be resolved, but some
action will be required in this area as well.
According to the World Bank, the net result of all
these changes will be that Vietnam’s average
tariff rate comes in quite a lot lower than its 18%
level currently.
Estimating the impacts
Unfortunately, there has been little work done on
the impact of WTO membership on the
Vietnamese economy itself. But quantitative
studies have been conducted for other countries
and we have summarised a number of them in the
box overleaf, focusing on Russia and China.
Without exception, the impact is deemed to be
positive for these economies, although the
estimated addition to welfare/GDP varies
significantly between the different studies. In
China, for example, it ranges from a 1.5% boost
to GDP to a 10.8% addition.
Against this background, there seems little reason
to doubt that membership will benefit the
Vietnamese economy as a whole over the long
term. The magnitude of the gain will, however,
depend on several factors. In particular, it is very
important that the legal changes we described
earlier, including the corruption, investment and
enterprise laws, are implemented effectively.

 Reduce tariffs on about three-quarters of US

agricultural products to rates of 15% or less
from an average of 27% at present.

 Open up key service sectors, including

telecoms, distribution and financial services
to foreign participation.

40
 Macro
Asian Economics abc
September 2006

Country studies
The WTO, which now has 149 members, serves to encourage closer international economic integration, advocating reforms
that open up a nation to foreign trade. Although there are no studies quantifying the potential impact of membership on the
Vietnamese economy itself, there are numerous others. In this box we focus on Russia and China – both of which have
undergone a similar economic transition to Vietnam.

Russia will gain...

Russia, like Vietnam, is currently in the process of gaining WTO accession. The mayor of Moscow, Yury Luzkhov, has
stated that joining the WTO any time soon would be a mistake, as the country has not yet developed a fully-fledged
consumer market. However, a 2005 study done by Rutherford, Tarr and Shepotylo (World Bank and the Universities of
Colorado and Maryland), points to sizeable gains for the Russian economy, should accession be attained (see “The Impact
on Russia of WTO Accession and the Doha Agenda” for more details). Their main results are as follows:-

 Russian households will enjoy weighted average welfare gains equivalent to 7.3% of consumption (3.4% of GDP) as a
direct result of membership over the medium-run. Virtually all households would gain, but urban households would
typically benefit more than rural households. This is because skilled workers’ wages are likely to rise to a greater extent
than those of unskilled workers’ wages.

 70% of the welfare gains come as a result of the assumed liberalisation of FDI in services. Barriers here are high
relative to Russian barriers to imports of goods. The authors point out that as Russian exports are dominated by energy
products, where global tariffs are generally low, the impact from the liberalisation of goods under WTO is limited.

 Unemployment may increase during the transition period, as a decline in employment in certain industries will force
workers to relocate or retrain.

…as has China?

China joined the WTO in 2001 and although little work has been done on the impact of accession to date, similar studies to
the Russian one were conducted prior to membership. For example:-

 Walmsley and Hretel (2000) estimated the welfare gains at USD23.7bn-$25.6bn, with GDP rising by 8.7%-10.8%.

 Wang (1997) put the likely welfare gain at USD12.4bn-30.3bn, with Zhai and Li (2000) expecting a 1.5% boost to
GDP.

 Walmsley and others (2001) argued the welfare gain would be USD3.9bn-USD10.5bn

 Finally, Ianchochivina and Martin (2001) calculated a USD28.6bn addition to welfare and a GDP increase of 2.2%.

 Not surprisingly, the studies indicate that labour-intensive industries would expand because of China’s comparative
advantage in these areas, while protected industries and the agricultural sector would contract (see Lanchovichina and
Martin, 2001 and Lardy, 2002).

 Zhai and Li (2000) predict that 500,000 jobs in the auto industry and 11 million jobs in agriculture would disappear.
This transitional unemployment is expected to decrease over time, as eventual output gains would bolster the labour
market in the medium-term.

41
 Macro
Asian Economics abc
September 2006

In addition, there will be different effects on the Finally, Vietnam’s main export is crude oil – a
different sectors of the economy. As a commodity where import duties are already very
generalisation, one would expect the labour low across the world.
intensive sectors, such as textiles, garments and
Overall, we expect that WTO accession will have
footwear to be the main beneficiaries, while state-
fairly limited macro-economic effects in the short-
owned companies, which are dependent on
term, but, by opening the country up to greater
government protection, are likely to be the key
foreign competition, should yield dynamic
losers. It is estimated that even in today’s strong
benefits over the longer term via greater economic
growth environment 30-40% of SOEs are not
efficiency and higher productivity.
profitable.

Some impacts will be mixed. For example,

although the Vietnamese textile sector should gain
greater access to the US market, it will lose out as
a result of cuts in state subsidies currently paid to
the sector. Also, the current quota on Vietnamese
textile exports to the US is actually being filled at
present, so its lifting will not have an immediate
impact.

42
 Macro
Asian Economics abc
September 2006

Macroeconomic policy
 Monetary and fiscal policy management generally has been
prudent and contributed to high growth with acceptable inflation
 The main aim for monetary policy is to become more independent
and transparent
 The fiscal position remains clouded by off-budget spending,
contingent liabilities and pressure to support high growth

Policy in transition
Management of monetary and fiscal policy
generally has been cautious and has tended to
support stable growth with acceptable inflation,
fiscal and current account balances, and debt
ratios. Reforms of macroeconomic policy
management should also contribute positively to
the growth environment. The State Bank of
Vietnam is expected gradually move away from
its previous focus on guiding policy lending
toward a regime of focusing on the control of
inflation and arms-length regulation of the
banking sector. Reform of fiscal policy will focus
on rationalising the budget process and making it
more transparent
Monetary policy
Aiming at two targets
The State Bank of Vietnam (SBV) operates
monetary policy in the country, albeit with heavy
guidance from the government. Its main policy
instruments are the repo rate (where the SBV sets
an unpublished cap and uses open market
operations to influence the rate) and the reserve
requirements of commercial banks. These are then
used by the Bank to achieve its two key objectives
below:
 To keep inflation below the real GDP growth
rate; and
 Support economic growth
It is not entirely clear, however, what would
happen if inflation exceeded growth at a time
when the economy was weak. SBV officials
suggest that the first goal is the more important
but this yet to be properly tested. Headline
inflation earlier this year was above GDP growth
and the Bank has responded by tightening policy
(modestly). In fact, inflation came down a bit to
just in line with GDP growth. However, growth
has remained strong, so this move does not
provide strong evidence of giving priority to
lower inflation.

43
 Macro
Asian Economics abc
September 2006

47. Headline inflation about even with growth corporate bonds and equities, and a greater focus
Y-o-y % change
on loan quality due to stricter loan classification
10 10 standards.
8 8
6 6 49. Monetary growth (was) too strong for comfort
4 4
2 2 % Yr % Yr
0 0 70 70
-2 -2 60 60
-4 -4 50 50
00 01 02 03 04 05 06 40 40
Real GDP CPI 30 30
20 20
Source: CEIC
10 10
0 0
The table below shows that money market rates 98 99 00 01 02 03 04 05
this year have fallen somewhat this year so far, M2 Domestic credit
after having risen the last couple of years. Rates Source: CEIC

generally peaked in March, and have fallen

modestly since then. No more tightening?
48. Vietnam money market rates (%)
Against this background, the pressure to tighten
monetary policy further is likely to have eased,
Year O/N 1W 2W 1M 2M 3M 6M
although the Bank may be a little concerned by
2001 4.90 5.39 5.67 6.16 6.65 6.77 7.27
2002 4.97 5.52 6.09 6.70 7.08 7.44 7.90 the drift up in ex-food inflation (chart 49). An ex-
2003 3.98 4.56 4.99 5.62 6.10 6.52 7.45
2004 6.33 6.56 6.74 7.02 7.17 7.37 7.84 food series is not published but is easily
2005 6.43 6.79 7.18 7.57 7.79 7.97 8.26 calculated given that a ‘food & foodstuffs’
2006 6.11 6.50 6.86 7.43 7.69 7.95 8.21
component is available and we know that food
Source: Vietcombank Securities
represents 47% of the CPI basket. We estimate the
Money rules ex-food rate to be 6.4% in July, double the rate of
two years ago, although below the 7.4% GDP
The policy stance is also likely to depend on what
growth rate for 2006Q2.
is happening to monetary growth, as measured by
M2, as well as the growth in credit. The SBV Unfortunately, energy is not split out of the CPI
monitors both series as intermediate targets to its and so we don’t know precisely how much of the
ultimate objectives, and aims for growth in the rise in the ex-food rate is explained by this
range of 18%-20%. component. But it is likely to be important, even
though not all of the oil price increase has been
According to the latest publicly available data,
passed on. If the experience of the other countries
M2 was expanding at a 26% year-on-year rate in
in the region is any guide, it is probably adding
early 2005, while domestic credit growth
around 1.5-2 percentage points to headline
amounted to 40% at the end of last year, both well
inflation, implying that ex-food and energy
above the SBV’s target range, although SBV
inflation is currently about 4.5%.
officials have indicated that they have
subsequently slowed to within the target range. It
is suggested that this reflects the monetary
tightening measures to date, along with the
development of other funding channels, such as

44
 Macro
Asian Economics
September 2006
49. Ex-food inflation has been trending higher
% %
12 12
10 10
8 8
6 6
4 4
2 2
0 0
-2 -2
-4 -4
99 00 01 02 03 04 05 06
Headline inflation Inflation excl. food
Source: HSBC, CEIC
On balance, we doubt policy will be tightened
further this year and look for a modest easing of
the policy stance in 2007. This is based partly on
the view that GDP growth will slow a little next
year, on the back of a weaker US economy, while
headline inflation should drop by more—falling
below the GDP growth rate—assuming that oil
prices stabilise.
A very modern central bank?
As part of the government’s banking reform
agenda, the State Bank of Vietnam is to be
“transformed into a modern Central Bank”. The
new laws will not be submitted until 2008, but are
likely to involve the following:
 The SBV’s role will be to execute monetary
policy as well as supervising the banking
system. The supervision department of the
Bank will be beefed up considerably
(although this function may eventually be
transferred, in part or whole, to an
independent Financial Services Authority
style agency).
 It will no longer have ownership rights over
the SOCBs - a role which conflicts with its
role as a supervisor to the same banks
 Key functions of provincial offices of the
SBV will be transferred to regional ones,
abc
reducing the chances that local governments
will be able to interfere in lending decisions.
 The management and accountability
structures of the SBV will be transformed and
the plan is to give the Bank greater
independence from government. It is,
however, likely to be a long time before the
SBV is made completely independent.
Fiscal policy – a need for
transparency
Issues on fiscal policy mainly relate to
transparency. Superficially at least, there would
seem to be little to worry about - the budget
deficit has generally been around 2-3% of GDP
over the last 15 years and is typically corrected
quickly if it widens beyond 4% of GDP or so.
Meanwhile, the stock of government debt is also
fairly low and stable at just over 40% of GDP,
while total external debt has actually fallen to
about 32%. It is striking that government revenues
represent 24% of GDP, which is the same as
Korea and higher than in Thailand (21%),
Indonesia (19%), China (17%), the Philippines
(15%) and Taiwan (14%).
However, the government’s off-budget spending
has been substantial over the last few years. Table
52 shows estimates by the IMF, which suggest
that such expenditure amounted to 2.3% of GDP
in 2003 and just over 1% of GDP in the two
subsequent years. This largely relates to
infrastructure spending by the Development Bank
of Vietnam (formerly known as the Development
Assistance Fund) and the Bank for Social Policy.
Even including these off-budget items, however,
leaves the deficit at a manageable 3.8% of GDP
last year – a considerable improvement from the
7.2% ratio of 2003. Of this shortfall, nearly half of
it is explained by fuel subsidies (which are
estimated to be worth 1.5% of GDP).
45
 Macro
Asian Economics abc
September 2006

50. Government spending exceeds revenues… requires roughly 10% of GDP of infrastructure
% GDP % GDP spending. It is hoped that the use of tax and other
30 30
28 28
incentives will have a significant impact in
26 26 bringing forth private investment in this area, but
24 24
22 22 there is a risk that private spending will not be
20 20
18 18 sufficient. The authorities have hinted that they
16 16 would be prepared to make up quite a lot of the
14 14
12 12 shortfall, but this would have a negative impact on
1990 1992 1994 1996 1998 2000 2002 2004
State government revenue
the fiscal balance.
Government expenditure
2. Banking liabilities: As mentioned earlier, there
Source: CEIC
is plenty of disagreement as to the size of the non-
51. …but the deficit is not large… performing loans held by the state owned
commercial banks (SOCBs). While the banks
0 0 themselves suggest NPLs represent 10% of total
-1 -1
loans, this can be roughly doubled according to
-2 -2
-3 -3 the Economist Intelligence Unit if international
-4 -4 accounting standards are applied. Also, the NPLs
-5 -5
have been measured at a time when the economy
-6 -6
-7 -7 is booming, and would be certain to become a lot
-8 -8 bigger as and when the economy slows. One
1990 1992 1994 1996 1998 2000 2002 2004
Budget deficit (%GDP) positive development, however, is that the SOCBs
have proved surprisingly successful in raising
Source: CEIC
capital from the market. And, as a result, the
government’s eventual liability could turn out to
52. …although including off-budget items makes it bigger
be quite a lot smaller than the NPL numbers
Fiscal balance (% GDP)
Excluding off- Including off- Non-oil balance would suggest. There are other potential
budget items budget items incl. off-budget
contingent liabilities from regional governments.
2000 -5.0 -5.0 -11.4
2001 -5.0 -5.0 -12.4 3. Oil revenues: The non-oil budget deficit,
2002 -3.8 -4.5 -11.3
2003 -4.9 -7.2 -13.6 shown in table 55, rose to 11.4% of GDP last
2004 -3.3 -4.5 -10.9
2005* -2.6 -3.8 -11.4 year, implying that oil revenues added 7.6% of
Source: IMF. * IMF Staff estimates GDP to the government’s coffers. This was up
from 6.4% in 2004 and largely reflected the
Contingent concerns? impact of higher prices. On the basis of current
But while there doesn’t seem to be a significant production, we estimate that each $10 rise in the
fiscal problem at the moment, the question is oil price brings in revenues worth about 0.7% of
whether the government will be able to maintain GDP, which in turn suggests that oil could boost
the deficit and debt ratios around current levels in government revenues to the tune of nearly 9% of
the future. There are a number of concerns: GDP in 2006.

1. Infrastructure requirements: As described This is a significant amount of money, but the

earlier, the government estimates that if GDP is to authorities cannot rely on these funds forever. If,
meet its 7.5-8% growth target, then the economy for example, the oil price were to fall to its level

46
 Macro
Asian Economics abc
September 2006

of early 2005 (USD40/barrel) this would add

2.5% points to the budget deficit/GDP ratio. Oil
production is probably also close to peaking.

The need for revenue

Against this background, it seems clear that the
government will need to find quite a lot more
money if it is going to keep the deficit and debt
position in check. With this in mind, the
authorities will need to be careful in balancing the
requirement for more funds with the danger of
discouraging inward foreign investment via
uncompetitive tax rates.

Conclusions
The government’s interest rate, currency and
fiscal policy regimes have all worked reasonably
well over the last few years, contributing to steady
economic growth, an acceptable inflation rate
(particularly once the impact of higher energy
prices are stripped out), and no obvious worsening
of fiscal or current account balances. The ratios of
government debt and total external debt to GDP
have also been relatively stable at comfortable
levels. We expect this to continue.

Nevertheless, there is still plenty of room for

improvement. In particular, the transparency of
monetary policy and the independence of the SBV
leave a lot to be desired, while there are a number
of risks surrounding the fiscal outlook.

47
 Macro
Asian Economics abc
September 2006

Foreign exchange regime

 The Vietnamese Dong is fully convertible on the current account
 Restrictions still apply to capital account transactions, but they are
gradually being eased
 The current policy of gradual depreciation is likely to continue

Still highly managed
The VND’s non-convertible and non-deliverable
status has meant the currency has been largely
immune from the volatility seen in Vietnam asset
markets in recent times. The VND is highly
regulated and monitored by the State Bank of
Vietnam (SBV).
Framework
The VND is fully convertible on the current
account, provided appropriate documentation is in
place. On the capital account, in the case of
foreign investors, the government allows foreign
investors to repatriate funds as long as they open a
“special use capital account”, tax obligations are
finalised and supporting documents are in place.
The new Foreign Exchange Law, in effect from 1
June, eased rules further. For example, capital
inflows will no longer have to remain in the
country for a year
For residents, however, the requirements are
much more stringent. Residents must seek SBV
approval before they can set up an offshore
account. However, rules were eased under the
new Foreign Exchange Law. For example,
domestic investors will be able to transfer money
overseas and the private sector will be allowed to
borrow from abroad. Limits will, however, still
apply and will be based on a formula depending
on the level of external debt and reserves. For
more information on the regulatory regime, refer
to the appendix.
The balance of these flows has very clearly been

53. Balance of payments 54. Reserves and import cover

6,000 USDmn 4.0 Months USDbn 80.0

4,000
3.0 60.0
2,000
0 2.0 40.0

-2,000
1.0 20.0
-4,000
0.0 0.0
-6,000
2001 2002 2003 2004 2005 2006f 2007f
2000 2001 2002 2003 2004 2005 (f)
Curr Acc Cap Acc Reserv es Error Import cov er (months) Reserv es

Source: IMF Source: IMF and HSBC

48
 Macro
Asian Economics
September 2006
55. Real USD/VND
23,000
22,000
21,000
20,000
19,000
18,000
17,000
Jan-99 Jan-01 Jan-03 Jan-05
Real USD/VND
Source: HSBC
positive in recent years, with the capital account
surplus increasing significantly from 2003.
Vietnam is also in the process of acceding to the
World Trade Organisation later this year,
following the signing of a bilateral trade
agreement with the US in May. This is likely to
generate new momentum and opportunities,
benefiting national renewal and economic
development by accelerating the restructuring of
the national economy. Furthermore, this will
enable Vietnamese goods and services to access
the global market on a wider scale and increasing
the flow of foreign direct investment to the
country. Given the underlying fundamentals, and
with the economy’s openness only likely to
increase, this flow imbalance is likely to persist.
Exchange rate policy
The VND began a managed float in March 1989
after the unification of the official and market
exchange rates. Serious inflation resulted in a
significant depreciation trend for some years.
From 1991 to 1999 the currency was subject to
large, one-off devaluations annually. From 1999 a
“creeping depreciation” policy for foreign
exchange was put in place to coincide with a
narrowing of the trading band over the official
SBV rate. Now, the exchange regime might be
best described as a managed float.
abc
56. History and forecast (Year-end)
16,500
16,000
15,500
15,000
14,500
14,000
13,500
2000 2001 2002 2003 2004 2005 2006 2007
USD/VND
Source: HSBC
The rate of depreciation has progressively slowed
in recent years. In 2005 depreciation was limited
to 1% per annum, in 2000 and 2001 it was 3-4%
and in 1997 and 1998 it was 10-13%. While no
appreciation/depreciation target has been
announced in 2006, it appears that a 1% per
annum depreciation target has been maintained.
Since 2003 Vietnam has run a balance of
payments surplus. While the current account has
swung into significant deficit, this has been more
than offset by a significant capital account
surplus. The depreciation trend since 2003 has,
therefore, reflected a deliberate policy to maintain
a weak nominal currency, and boost foreign
exchange reserves. (It must be said, however, that
in real terms, the VND has been appreciating
since 2003, as the rate of depreciation in the
nominal exchange rate has been lower than the
inflation differential with the US.)
Forecast
The imbalance in the balance of payments is
likely to persist for the foreseeable future. The
capital account will likely remain in sizeable
surplus. Certainly it is difficult to see the inflow
of capital slowing anytime soon. If anything, the
inflow is being constrained by a lack of
investment options, suggesting a pent up demand
for VND assets which will be satiated as the
economy is liberalised and markets are
49
 Macro
Asian Economics abc
September 2006

increasingly opened. And while reserve

accumulation has progressed handsomely in
recent years, reserve adequacy, based on import
cover, is increasingly only slowly, and from very
low levels, as it struggles to overwhelm the rapid
rise in imports in recent years. We expect the
policy of continued reserve accumulation,
therefore, to remain in place. We project the 1%
annual deprecation policy to remain for the
forecast period.

50
 Macro
Asian Economics abc
September 2006

Credit assessment
 HSBC’s initial credit rating for Vietnam sovereign debt is
BB/stable, higher than that of the major rating agencies
 WTO accession could be the trigger for upgrades
 However, a number factors, including contingent liabilities, will
tend to constrain the potential for further upgrades

Room for upgrading  Contingent liabilities given high level of

HSBC assigns an initial foreign currency credit
rating of BB/stable for the Vietnam sovereign
based on reasonable external profile, robust
economic activity, stable political environment
and ongoing gradual advancement of structural
reform programme. Conversely, the three main
international credit rating agencies (Fitch,
Moody’s and S&P) have the Vietnam sovereign
rated one-notch lower at BB- at the moment. Over
the next six-nine month period, we expect the
divergence in rating opinions will be resolved in
the favour of a Vietnam upgrade to BB/stable,
with S&P and Fitch likely to be first to take such a
positive credit action. Vietnam’s joining the
World Trade Organisation (WTO) by end-2006
could be the catalyst for the sovereign upgrade
since it would ensure trade and investment
liberalisation as well as strengthen the legal
infrastructure for foreign participation in the local
economy.
Having said that, factors constraining further
upgrades include:
 Still large public sector ownership of the
economy (36.6% end 2004, up from 35.8% in
2000);
policy lending;
 Weak regulatory oversight and
underdeveloped legal system;
 Risk of asset quality deterioration within the
banking system given weak credit risk
management techniques; and,
 Improvement in quality and timeliness of key
economic data
Politics
Vietnam’s political framework is based on a
single-party socialist republic. A new state
constitution was approved in April 1992,
reaffirming the central role of the Communist
Party of Vietnam in politics and society. Apart
from the Communist Party, the most important
offices are those of the President and the Prime
Minister. In April of this year, Nguyen Minh Triet
was made President by the National Assembly as
well becoming the commander of the armed
forces and chairman of the Council on National
Defence and Security. Meanwhile, Nguyen Tan
Dung was selected as prime minister.

51
 Macro
Asian Economics
September 2006
60. Vietnam: Sovereign risk profile by ratings radar
Long Term Foreign Currency Rating:
Moody ’s Ba3/ (stable)
S&P BB-/ (positiv e)
Fitch BB-/ (stable)
BB+
Contingent Liabilities
BB HSBC rating score:
BB/ (stable)
BB-
Vietnam
Source: HSBC
Both men are relatively young compared with
their predecessors. They have won their positions
based in part on being advocates of economic
reform as well as improving the accountability
and creditability of the institutions of government
following recent high-profile scandals involving
senior government officials. Most importantly, the
political leadership is keen on replicating China’s
success in elevating economic output by exposing
the country to market-driven forces while still
maintaining the dominance of a single-party rule.
Put another way, we believe both men will be
instrumental in pushing forward structural reform
by building consensus in a highly centralised
political structure. Strong support by the political
apparatus for the country to become part of the
WTO, hopefully by end 2006, highlights the
current willingness to deepen and broaden
existing policies to open the economy to market
forces and attract much needed foreign capital to
bolster economic activity. To gain accession to
the WTO, the Vietnam government accepted
implementing IMF Article VIII with regards to
foreign exchange regime liberalisation measures
for current transactions.
52
abc
Politics
Macroeconomics
Debt and external liquidity
BBB+ B+
Having said that, the policymakers still have
significant work to do in improving the checks
and balances to reduce corruption and fraud as
well as strengthening the undeveloped legal
system. According to Transparency International,
Vietnam ranks a lowly 107 in its latest survey of
158 countries in respect of level of corruption
perceived by business people and country
analysts.
External profile and economics
Vietnam’s economic performance has been quite
remarkable with real GDP growth averaging 7.5%
during 2001 to 2005. For this year and next, we
expect economic activity to remain above 7% on
the back of strong external demand with
additional positive stimulus coming from
Vietnam’s accession to WTO later this year.
Domestic economic drivers will also contribute
favourably to overall growth with private
consumption and investment expected to grow by
an average of 6.5% and 8.5% respectively this
year and in 2007. Given the strong economic
activity, we are expecting the current account
deficit at 1.8% of GDP for this year, down from a
peak of 4.7% of GDP in 2003, on the back of a
smaller merchandise trade deficit and widening
invisible surplus.
 Macro
Asian Economics
September 2006
Financing of the current account deficits for 2006
and 2007 should not be a problem with net foreign
direct investment alone expected to average 3.5%
of GDP for the two years. In addition, Vietnam
will continue to benefit from cheap long-term
financing from bilateral sources and multilateral
agencies over the next few years. If anything
external financing will more than exceed the
current account deficit, and hence, we expect a
further build-up of foreign exchange reserves to
strengthen Vietnam’s already improving external
profile. By end 2007, foreign exchange reserves
are projected at USD11.6bn, up from just
USD3.4bn in 2001 or equivalent to import
coverage worth 3.3 months.
61. Vietnam vs. rating peers: External debt to GDP
100
80
60
%
40
20
0 Apart from monetary conditions being loose, the
2001 2002 2003 2004 2005
Brazil Turkey
Source: Moody’s, HSBC
Total external debt is projected at USD21.6bn by
end 2007, which includes USD1bn in short-term
debt, up from an estimated USD16.9bn at end
2005. Public sector external liabilities are
expected to account for the 83.3% of total external
debt. Vietnam’s ratio of external debt to GDP
should continue on its favourable declining
pathway, falling to 30.6% by end 2007 from
38.5% at end 2000. This ratio compares
favourably with the median projection of 31.8%
for countries in the Ba1 to Ba3 credit rating
bucket by Moody’s. What is more, Vietnam’s
external debt/current account receipts at a
projected 43.2% for 2007 compare favourably
abc
against the median of 86.9% for countries in the
similar credit rating bucket assigned by Moody’s.
Unfortunately, economic activity is running above
trend growth, hence demand side pressures on
inflation will remain a dominant feature of this
current business cycle. Currently, inflation is
running around 7.5% and is only likely to drift
down to 7.1% by end year and still average 6.5%
next year, in our opinion. While policymakers are
keen to avoid boom and bust cycles triggered by a
need to contain inflation, the focus remains
squarely on maintaining a high level of growth to
reduce poverty and bolster the country’s per
capita income as quickly as possible. Put another
way, the State Bank of Vietnam (SBV) is unlikely
to adopt an aggressive monetary position to bring
about price stability in the near-term. This view is
underpinned by the government’s stated goal of
targeting inflation just below real GDP growth for
2006 and the SBV’s lack of independence plus
conflicting mandates.
2006F 2007F government’s fiscal policy is far from restrictive
Vietnam at the moment. The budget deficit is expected to
average 2.8% of GDP for this year and next and
this figure jumps up to an average of 3.8% of
GDP for the period in question, if off-budget
expenditures are included. Despite the fact that
fiscal policy should be countercyclical right now,
from a credit rating perspective we attach more
importance to the government’s efforts to boost
revenue as a share of GDP to 24.5% by end 2005
from just over 20% in 2000. This favourable trend
is expected to continue with total revenues likely
to rise another 2.5ppt of GDP to 27% by end
2007.
Furthermore, policymakers have managed the
spending side fairly prudently by only allowing
total expenditure and net lending to rise by less
than 2ppt to 27.1% of GDP by end 2005 from
25.5% of GDP in 2000. Going forward, however,
53
 Macro
Asian Economics
September 2006
greater attention will have to be paid to the
expenditure side if the government wants to arrest
the rising trend of public sector debt. By end
2007, we project public sector debt to GDP at
42.3%, up from 37% of GDP in 2001.
In respect of comparison with peer group,
Vietnam’s fiscal ratios are satisfactory with other
sovereigns sitting in the BB- to BB+ credit rating
bucket. While Vietnam has a low general
government debt to GDP ratio, other fiscal
indicators are slightly weak or just on par with
other sovereigns in the same credit rating bucket.
62. Vietnam vs. rating peers: Government debt to GDP
120
100
80
60
%
40
20
0 Put another way, the public sector debt could be
2001 2002 2003 2004
Brazil Turkey
Source: : Moody’s, HSBC
Relatively high contingent liabilities
We are worried about the high level of policy
lending and that the government puts it as an off-
budget item. The state-owned Development
Assistance Fund (DAF) is instrumental in
executing off budget expenditure plus net lending
worth about 2-3% of GDP per year since the
government formally abolished policy lending
through the state-owned commercial banks. Latest
data (2004) shows that the DAF would rank
second in both chartered capital and outstanding
loans when compared with the four largest state-
owned commercial banks. More significant, the
DAF source of capital was equivalent to 11% of
GDP in 2004, up from 7.3% in 2000.
Given the DAF’s important role in disbursement
of long-term financing for investment projects, we
feel regulatory oversight should be improved.
54
abc
Likewise, the DAF’s internal credit approval plus
risk management techniques need to be
strengthened to minimise non-performing loans
and misallocation of limited capital resources.
Simply put, the DAF’s lending poses a material
contingent liability risk for the government as
well as making it harder to asses the public
sector’s debt sustainability.
Besides the DAF, we are also worried that state-
owned banks are still being pressured by local
authorities to conduct indirect policy lending. This
type of lending only further weakens an already
undercapitalised banking system to withstand
substantial credit write off in the event of a sharp
economic downturn in the future. We should
highlight that Vietnam’s banking system ranks at
the bottom of S&P’s 1 to 10 scale that compares
countries financial systems.
2005 2006F 2007F considerable higher if the government is forced to
Vietnam intervene and stabilise the financial sector in the
future. According to IMF simulation work done
under different banking reform scenarios, the
public sector debt could be as low as 47.9% of
GDP to as high as 63.2% of GDP by 2007 from
41.2% by end 20051 (see IMF 2006)). Note that
S&P estimates it will cost the Vietnam
government anywhere between 30 to 46% of GDP
to recapitalise the financial system.
The risks associated with still high level of policy
lending suggest to us that there must be greater
1
Scenario 1 estimates an immediate banking problem resulting
in shortfall amounts to 20% of GDP. It is assumed to be filled
by a capital injection by the government, in the form of a
transfer of government bonds to SOCBs, spread over two years
(2006-2007), and would bring the banks to solvency (i.e. the
CAR is set at zero). Scenario 2 is based on orderly
provisioning with CAR set at 8% of assets. The resulting
shortfall amounts to 8% of GDP and is resolved by the
government over a five year period starting from 2006 and
ending at 2010.
 Macro
Asian Economics abc
September 2006

restraint on current government expenditures as

well improved tax collections. It would thus be
preferable if the government moved quicker to
turn the primary balance as a percentage of GDP
into a surplus from a deficit to provide greater
flexibility to finance an unexpected banking
sector crisis. By end 2005, the primary deficit
stood at 1.4% of GDP, down sharply from the
4.2% shortfall in 2000. However this figure is
expected to rise to 2% of GDP by end 2007,
according to HSBC Economics. Furthermore, we
would like to see greater regulatory supervision as
well as faster privatisation to boost accountability,
transparency and improve credit risk management
techniques in the banking system.

55
 Macro
Asian Economics
September 2006
Appendix: Vietnamese
Dong (VND)
Exchange rate mechanism
 The SBV announces a daily USD/VND
official exchange rate, which is partly based
on the average rate of interbank transactions
the previous day.
 The SBV regulations set a trading band for
USD/VND transactions in the spot market at
+/-0.25% to the official rate. Similar
maximum rates are applicable on forward
USD/VND foreign exchange transactions.
 Regulatory ceiling rates apply to USD/VND
transactions. It is not uncommon for interbank
trades to be conducted through an alternative
non-USD currency against the VND (e.g.
HKD/VND, GBP/VND) to better reflect the
real market rate.
Background
 The VND is not a freely convertible currency.
 The State Bank of Vietnam (SBV) functions
as the central bank, supervising monetary
policy, setting interest rates and managing the
exchange rate.
 After the unification of the official and
market exchange rates in March 1989, the
SBV maintained a “managed float” but
sharply depreciated the VND in 1991 as a
result of inflationary expectations.
 The currency was subject to large, one-off
devaluations annually up to late 1999, when a
56
abc
“creeping depreciation” policy for foreign
exchange was put in place to coincide with a
narrowing of the trading band over the
official SBV rate.
 The SBV still prefers slow adjustments of the
VND to minimise disruption to business. This
has improved the business community’s
confidence in the currency, and contributed to
higher growth rates since 2000.
Regulations
 The VND is a restricted, non-deliverable
currency. Only the SBV, state-owned banks,
joint-stock banks, joint-venture banks and
branches of foreign banks may participate
directly in the foreign exchange market.
 When foreign currency is purchased against
the VND, supporting documents stating legal
purposes are required.
 All payments made in Vietnam must be in
VND except for a limited number of
transactions specified in Circular 01, the main
regulatory guidelines governing foreign
exchange transactions in Vietnam.
 The foreign exchange regulations strictly
control the use of foreign currency in cash.
 Resident organisations must seek the SBV’s
approval before opening offshore accounts
 Macro
Asian Economics
September 2006
 Foreign-invested enterprises are required to
open a “special use capital account” at a bank.
This account is to be used exclusively for the
receipt of equity contributed by the foreign
party, the receipt of loan proceeds from
offshore creditors, and the receipt of funds
that will be used to repay offshore loans,
repatriate dividends or divestment proceeds.
 The SBV regulates the interest rates for USD
deposits of corporate depositors by setting
maximum deposit rates that a bank may offer
as follows: 0.5% p.a. for demand deposits;
1.20 pct p.a. for term deposits of up to 6
month tenors and 1.50 pct p.a. for term
deposits over 6 months tenors.
 From May 2003, resident companies with
vang lai, or overseas income, were no longer
required to immediately convert a portion of
their foreign currency income into VND.
 The forward market is accessible to residents
and non-residents with a genuine need. The
SBV restricts the tenors of forward contracts
between VND and FCY to a minimum of
three days and a maximum of 365 days, and
no other forward tenors are allowed. The
tenor of forward and swap transactions
between FCY will be decided by banks and
their customers.
 The SBV sets the ceiling rates for USD/VND
foreign exchange forward tenors. The
maximum rate for forwards are set by the
SBV using interest rate differentials based on
the US Fed Funds Rate and the SBV’s Base
Rate. The forward premium is then added to
the USD/VND spot ceiling rate to obtain the
forward ceiling rate. Currently, same-day
transactions are the most popular, but next-
day and two-day spot transactions are also
possible.
abc
 Individuals and non-residents are allowed to
transact forward and option foreign exchange.
 The SBV introduced overdrafts in 2002. In
2005, it has allowed some banks to offer
VND currency options, cross currency swaps,
structured deposits and interest rate options
on a trial basis. The central bank has also
issued regulations allowing certain qualified
banks to deal in interest rate swaps and G3
currency foreign exchange options.
 Non-resident offshore companies are allowed
to open foreign currency accounts, but not
VND accounts.
Repatriation
 Foreign investors may remit in foreign
currency and convert into VND for payment
to a local third party at the day's conversion
rate.
 Foreign investors are entitled to repatriate
their investment funds and profits when tax
obligations are finalised and supporting
documents are in place.
 Through the Securities Trading Centre,
foreign investors are required to buy VND or
use legitimate VND funds to buy securities.
They are also required to sell VND to
repatriate sale proceeds and income if taxes
have been paid according to the SBV’s
regulations on securities-related transactions,
and subject to the amended tax regulations
issued by the Finance Ministry. Foreign
investors are required to open securities cash
accounts to buy-listed companies’ securities
and capital contribution and share purchase
accounts to buy non-listed companies’
securities. All inward and outward securities
transactions by foreign investors must be
conducted via this type of account.
57
 Macro
Asian Economics
September 2006
HSBC Vietnam-related
capabilities
Global Markets Vietnam
HSBC operates one of the largest and most well
established dealing rooms of foreign banks
operating in Vietnam, employing dedicated staff
for risk management advisory, fixed income and
foreign exchange trading. We are a market leader
in developing the local currency derivatives
market with the creation of the floating VND
interest rate benchmark VNIBOR1. We are also
one of the largest market makers in the
USD/VND interbank foreign exchange market.
HSBC is the leading derivatives bank in Vietnam.
We are the first and only bank in Vietnam to
conduct a cross currency swap involving the local
currency VND, laying the foundation for further
development of the local currency derivatives
markets. This is also the first ever VND derivative
deals done in Vietnam. In 2003, HSBC was one of
the first foreign banks licensed by the State Bank
of Vietnam to conduct foreign exchange options.
At present, we are the biggest forex option bank
in the country. HSBC is the first bank to conduct a
structured interest rate swap, helping a customer
to achieve a measured hedge without having to
incur any immediate negative carry. We are also
the biggest structured deposit provider in
Vietnam.
HSBC is the leading foreign bank in onshore debt
financing. We acted as Credit Rating Adviser,
Joint Arranger and Book Runner for the Bank for
Investment and Development of Vietnam on its
58
abc
debut VND 2.2 Trillion (USD138 million
equivalent) Tier 2 bond offering in VND in May
2006. This is the first ever VND bond to use
Eurobond templates as a base and to incorporate
many international best practices.
HSBC produces “Daily Market Update” and
“Weekly Market Update” with market movement
and outlook in Vietnam. Our “Weekly Market
Update” (both in English and Vietnamese) is also
published in the “Money Watch” column of the
Saigon Times Daily/Weekly, a leading local
business newspaper. HSBC is the only bank that
publishes foreign exchange market commentaries
in a newspaper.
Product Range:
Foreign Exchange: Spot, Foreign exchange
Forward, Foreign exchange Swap
Money markets:
 Term deposits, USD Certificate of deposits.
 Structured deposits for yield enhancement
(linked to interest rates, foreign exchange,
equity and credit).
Capital markets:
 VND and Foreign Currency Bond issuance
Advisory and Arranging
 VND and Foreign Currency Government and
Corporate Bond sales
 Macro
Asian Economics
September 2006
Derivatives:
 Foreign Exchange Options: vanilla and
various zero-cost structures (VND Forex
Option can be considered on a case-by-case
basis)
 Interest rate Options (for G3 currencies)
 Cross currency Swap (including VND)
 Interest rate Swaps (including VND)
 Government of Viet Nam International Bond
Credit Return Investment
 Foreign Currency Enhanced Credit Return
Investment
HSBC Global Markets contact list :
In Ho Chi Minh City:
Treasurer - Pham Hong Hai - Tel : (84) 8 8
234447 (direct). E-mail – haipham@vn.hsbc.com
Sales Manager - Le Anh Ngoc – Tel : (84) 8 8
234447 (direct). E-mail – ngocle@vn.hsbc.com
In Ha Noi :
Sales Manager - Nguyen T H Phuc –Tel : (84) 4 8
9333173 (direct). E-mail -
phucnguyen@vn.hsbc.com
Global Markets Hong Kong
On top of the strong product platform in onshore
Vietnam, Global Markets Hong Kong provides
the following Vietnam access products to offshore
clients :
 VND Government or Corporate Bond Cash
Access
 Government of Viet Nam International Bond
Cash Access
 Sovereign of Vietnam Credit Default Swap
 Total Return Swap on VND Government or
Semi-Government Bond
abc
For Equities, HSBC aims to provide cash and
synthetic access to the following:
 Ho Chi Minh City Securities Trading Center
(HCMSTC) – Big Board
 Hanoi Securities Trading Center (HASTC) –
Small Board
 Over The Counter (OTC)
HSBC Global Markets Hong Kong contact list:
Director, Hedge Fund and Central Bank Sales -
Chris Man +852 2822 1933. Email -
chrisman@hsbc.com.hk
Director, Hedge Fund and Central Bank Sales -
Anthony John Shaw + 852 2822 1933. Email -
anthonyshaw@hsbc.com.hk
HSBC – Equities Sales and Trading Desk contact
list:
Head of Equity Sales – Rakesh Patel +852 2996
6667. E-mail – rakeshpatel@hsbc.com.hk
Head of Sales Trading – Joe Hancock - +852 2996
6680. E-mail – jonathanhancock@hsbc.com.hk
Head of Execution Trading - Lee Wallace +852
2996 6668. E-mail – leewallace@hsbc.com.hk
Securities Services in Vietnam
HSBC was the first custodian to be licensed by
the State Securities Commission (SSC) to operate
in the Vietnam securities market in 2000. We are
the biggest foreign custodian bank in the market
providing full sub-custody and securities clearing
services to global custodians and institutional
investors.
In Vietnam, HSBC is the only custodian being
mentioned in the Global Custodian Emerging
Market Agent Bank review since 2000. In the
2005 review, we have secured our first No.1 and
first commended rating. In addition to our custody
and clearing services in Vietnam, we also provide
59
 Macro
Asian Economics abc
September 2006

fund administration and accounting, custody,

transfer agency and registrar services to local
funds operating in the market.

Brief overview of our securities

services
 Provide assistance to clients in setting up their
Securities Trading Code (STC) with the
Vietnam Securities Depository (VSD).

 Settlement of purchase and sale trades

executed on the Securities Trading Centres
(STC) and this would cover both securities
and cash settlement directly with the (VSD).

 We can also support settlement of unlisted

securities and assist in the IPO process.

 We can provide portfolio statement on a

weekly/monthly basis via SWIFT for all the
securities ‘available’ in your account using
the closing market prices for listed securities.

 In addition, we can also support reporting of

all trades/securities holding/cash movements
through customised reports.

 We can also provide cash management

solutions which can take care of the excess
funds lying in your cash accounts.

 We can also provide you with access to our

broadcast services which would provide up-
to-date information on the changes in the
securities market and its impact.

HSBC Securities Services contact list :

Head of HSS - Rajesh Rajagopalan –Tel : (84) 8

8292 2288 ext 202. E-mail -
hssvietnam@vn.hsbc.com

60
 Macro
Asian Economics
September 2006
References
Asian Development Bank, “Country Strategy and
Program Update, 2006-2008: Vietnam,” August
2005.
HSBC Pan-Asia Equity Strategy, “Vietnamese
Equities: Time to go in,” 5 September 2006.
International Monetary Fund, “Vietnam: 2004
Article IV Consultation– Staff Report,” IMF
Country Report No. 05/148,” May 2005
(http://www.imf.org/external/pubs/ft/scr/2005/cr0
5148.pdf).
International Monetary Fund, “Vietnam: 2005
Article IV Consultation – Staff Report,” IMF
Country Report No. 06/22, January 2006
(http://www.imf.org/external/pubs/ft/scr/2006/cr0
622.pdf).
Joint Donor Report to the Vietnam Consultative
Group Meeting, “Vietnam Development Report
2006: Business,” Hanoi, 6-7 December, 2005.
abc
Ministry of Planning and Investment, “The Five-
Year Socio-Economic Development Plan, 2006-
10” Hanoi, March 2006.
United Nations, “World Population Prospects:
The 2004 Revision,” New York, 2005.
World Bank, “Vietnam Development Report
2004: Poverty,” Joint donor report to the Vietnam
Consultative Group Meeting, Hanoi, 2-3
December, 2003.
World Bank, “Taking stock: An update on
Vietnam’s development and reforms,” prepared
for Mid-year Consultative Group Meeting for
Vietnam, Nha Trang, 9-10 June, 2006.
World Bank, “Vietnam’s Infrastructure
Challenges: Infrastructure Strategy – Cross-
sectional Challenges,” 2006.
61
 Macro
Asian Economics abc
September 2006

Disclosure appendix
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's
decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other
considerations.

Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company other than the primary subject(s) of this research, please see the most recently
published report on that company available at www.hsbcnet.com/research.

The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the views expressed herein
accurately reflect their personal view(s) about the subject security(ies) and issuer(s) and that no part of their compensation was,
is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Peter
Morgan, Robert Prior-Wandesforde, Dilip Kishinchand Shahani and Perry Kojodjojo

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 This report is dated as at 1 September 2006.
2 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.

62
 Macro
Asian Economics abc
September 2006

Disclaimer
*in this publication, HSBC Group offices are indicated by the following codes: Issuer of report
‘AU’ HSBC Bank plc – Sydney Branch and HSBC Bank Australia Limited; ‘UK’ HSBC Bank plc The Hongkong and Shanghai
in London in the United Kingdom; ‘DE’ HSBC Trinkaus & Burkhardt AG in Dusseldorf, Banking Corporation Limited
Germany; 'FR' HSBC Securities (France), Paris; ‘HK’ The Hongkong and Shanghai Banking
Corporation Limited, in Hong Kong SAR in China; ‘JP’ HSBC Securities (Japan) Limited in Level 19, 1 Queen's Road Central
Tokyo, Japan; ‘US’ HSBC Securities (USA) Inc., in New York, USA; 'CA' HSBC Bank Canada. Hong Kong SAR
(23 November 2005) Telephone: +852 2843 9111
Telex: 75100 CAPEL HX
Fax: +852 2801 4138
Website: www.hsbcnet.com/research
The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai
Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by
HSBC Bank plc, and in Australia by HSBC Bank plc – Sydney Branch (ABN 98 067 329 015) and HSBC Bank Australia Limited (ABN 48
006 434 162) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). It makes no representations
that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular
person or appropriate in accordance with local laws. This material is distributed in Japan by HSBC Securities (Japan) Limited. This material
may be distributed in the United States solely to "major US institutional investors" (as defined in Rule 15a-6 of the US Securities Exchange
Act of 1934); such recipients should note that any transactions effected on their behalf will be undertaken through HSBC Securities (USA)
Inc. in the United States. Note, however, that HSBC Securities (USA) Inc. is not distributing this report, has not contributed to or participated
in its preparation, and does not take responsibility for its contents. In Singapore, this publication is distributed by The Hongkong and
Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in
Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with
the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further
distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by
the Monetary Authority of Singapore. In the UK this material may only be distributed to institutional and professional customers and is not
intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. Any recommendations
contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer
to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from
sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and
accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to
change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or
their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and
may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have
assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell
them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or
relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given
to the particular investment objectives, financial situation or particular needs of any recipient. (070905)
© Copyright. The Hongkong and Shanghai Banking Corporation Limited 2006, ALL RIGHTS RESERVED. No part of this publication may
be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 137/08/2006

203513

63
 abc

Global Economics Research Team

Global Global Emerging Markets
Stephen King Philip Poole
+44 20 7991 6700 stephen.king@hsbcib.com +44 20 7991 5237 philip.poole@hsbcib.com

Janet Henry Asia

+44 20 7991 6711 janet.henry@hsbcib.com Peter Morgan
+81 3 5203 3802 peter.morgan@hsbc.co.jp
Europe
John Butler Qu Hongbin
+44 20 7991 6718 john.butler@hsbcib.com +852 2822 2025 hongbinqu@hsbc.com.hk
Germany Robert Prior-Wandesforde
Lothar Hessler +65 6239 0840 robert.prior-wandesforde@hsbc.com.sg
+49 211 910 2906 lothar.hessler@trinkaus.de
Emerging Europe, Middle East & Africa
North America Juliet Sampson
Ian Morris +44 20 7991 5651 juliet.sampson@hsbcib.com
+1 212 525 3115 ian.morris@us.hsbc.com
Alexander Morozov
Ryan Wang +7095 721 1577 alexander.morozov@hsbc.com
+1 212 525 3181 ryan.wang@us.hsbc.com
Murat Ulgen
+90 212 3661625 muratulgen@hsbc.com.tr
Esra Erisir
+90 212 3661615 esraerisir@hsbc.com.tr
Latin America
Benito Berber
+1 212 525 3124 benito.berber@us.hsbc.com
Marjorie Hernandez
+1 212 525 4109 marjorie.hernandez@us.hsbc.com
Virgil Esguerra
+1 212 525 1665 virgil.esguerra@us.hsbc.com
Javier Finkman
+54 11 4344 8144 javier.finkman@hsbc.com.ar
Hernan M Yellati
+54 11 4348 5759 hernan.m.yellati@hsbc.com.ar
Jonathan Heath
+52 55 5721 2175 jonathan.heath@hsbc.com.mx
Adrian Rizo
+52 55 5721 2164 adrian.rizo@hsbc.com.mx
 Asia Economics
September 2006

Principal contributors
Peter Morgan
Chief Economist, Asia Pacific
+ 852 2822 4870
petermorgan@hsbc.com.hk

Dr. Morgan is HSBC’s Chief Economist for Asia-Pacific, based in Hong Kong, and is responsible for
macroeconomic and interest rate forecasting for the region. He also co-ordinates with other teams in
forecasting foreign exchange rates. He joined HSBC in 1996 and previously was covering the
Vietnam: Going for
the next level
Japanese economy based in Tokyo.

Robert Prior-Wandesforde
Senior Asian Economist
+ 65 62390840
robert.prior-wandesforde@hsbc.com.sg

Robert joined HSBC in 1994, having previously worked for another bank where he was a UK economist for 3 years.
Over the last 12 years he has covered various Continental European economies, becoming HSBC's chief eurozone
economist at the inception of the single currency in 1999. Robert has recently moved to cover India and
South East Asia for the Group and is now based in Singapore.

Dilip Shahani
Head of Global Research, Fixed Income, Asia-Pacific
+ 852 2822 4520
dilipshahani@hsbc.com.hk

Dilip is Head of Global Research, Asia-Pacific. He has worked for HSBC for 16 years and
since mid-2003 lead the Asian credit research team. His expertise lies in formulating overall
credit strategy as well analysis of Asian sovereigns and financial systems.

Perry Kojodjojo
Associate FX Strategist
+ 852 2996 6568
perrykojodjojo@hsbc.com.hk

Perry is an Associate FX Strategist based in Hong Kong. He has a M.Sc in Finance from the
Imperial College Business School in the UK.

Disclosures and Disclaimer. This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, that form part of it.