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28.01.2016 | Communist Vietnam rides foreign investment wave

Vietnam has been experiencing record levels of foreign direct investment, defying the general downturn in emerging markets around the world. The country has one of the fastest growing economies in Southeast Asia, but the ruling Communist Party needs to press ahead with reforms if the pace of progress is to be maintained.

Vietnam is becoming the destination of choice for foreign investors.  Tech giants such as Samsung and Intel as well top fashion brands like Nike have set up shop in this thriving regional manufacturing hub.  One of the last remaining communist countries in the world, Vietnam last year saw a year-on- year 12.5 per cent increase in foreign direct investment, amounting to about $23 billion, with South Korea, Malaysia and Japan among the top investors.  Its growing reputation as an investment darling has helped to drive the annual growth rate to nearly 7 per cent, the envy of its regional rivals.

Investors have been attracted by several factors.  The country lies in the heart of East Asia with labour costs half of those of neighbouring China, while imports of Chinese raw materials and supplies are relatively inexpensive.  The reform-minded ruling Communist Party maintains stability and actively seeks to improve the investment environment by improving infrastructure and introducing investor-friendly measures, such as the removal of a cap on foreign ownership of many domestic companies, and signing up to a number of free-trade agreements, most notably the American-led Trans Pacific Partnership.

The country’s economic ascent can be traced back to the mid-1980s when efforts were made to develop a more market-orientated economy, in response to the demise of its main benefactor, the Soviet Union.  By the late 1990s, thousands of private businesses had been set up, exports represented a growing proportion of national income and huge strides had been made to eradicate poverty.  In the early 2000s, the authorities committed to increasing the role played by the private sector, which in 2003 accounted for more than 25 per cent of industrial output.

Membership of the World Trade Organisation in 2007 aimed to further boost exports and attract investments.  But while the authorities were opening up the economy, they retained control of some sectors, such as the banking system and state-owned enterprises, SOEs.  In the wake of the global financial downturn of 2008, growth slowed markedly.  The country was rocked by a property crash, a spate of corruption scandals at SOEs and a banking crisis mainly caused by bad loans to SOEs.  The Prime Minister Nguyen Tan Dung, who had been spearheading reforms, felt compelled to issue a public apology for mismanaging the economy.

The economy has since recovered, driven by surging foreign investment and export growth.  But the country still needs to make progress on a number of fronts to keep up its impressive rate of growth.  The government has sought to part-privatise its inefficient SOEs, but their high debt levels, poor management and the meagre stakes on offer have turned off investors.  It is also overhauling the banking sector, albeit slowly, by reducing the number of lenders, allowing foreign investors to have a bigger stake in them and buying up their bad debts.

There are additionally concerns that the property market may overheat again; questions about Vietnam’s ability to meet the TPP’s demanding labour standards, such as the requirement to allow workers to form independent unions; and a debate about whether the country can produce sufficient numbers of skilled workers to sustain its high-tech manufacturing drive.  Politicians also acknowledge that they need to step up their anti-corruption efforts by, for example, improving the handling of graft complaints and providing protection for whistle-blowers.

The government must address political risks too.  It could face unrest down the line if it doesn't tackle the widening wealth gap.  Although economic development has lifted millions out of poverty, urban dwellers have benefited more than rural communities.  Of more immediate concern are Vietnam's fraught ties with China, its biggest trading partner.  Hanoi knows that it needs to remain on good terms with Beijing but it has been angered by its neighbour’s growing assertiveness in disputed areas of the South China Sea.  Keeping relations on an even keel could prove to be tricky.

While it has achieved a great deal, Vietnam's Communist Party bosses know that they still have much to do to ensure the country remains on a growth trajectory.  This week, the party’s five-yearly congress has been drawing up a new  economic plan and electing a new set of leaders, with Dung, favoured by businessmen and investors, failing in his apparent bid to replace the more conservative Nguyen Phu Trong as party leader, the top job.  While Dung has driven reforms, he has been tainted by allegations of economic mismanagement and seen as being overly confrontational with China.  Some are concerned that this could slow the pace of reforms.  Still, the country’s economic agenda appears firmly on course.