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Foreigners Bullish on Vietnam, But Want Economic Reforms

FILE - Vendors sit outside a shop selling clothes in Hanoi, Oct. 3, 2014.

FILE - Vendors sit outside a shop selling clothes in Hanoi, Oct. 3, 2014.

Foreign investors are optimistic about Vietnam’s economy, along with others in Asia, but have asked the government to complete its promised overhaul of banks and state firms.

Investment is pouring into the country as everything from inflation to currency stabilizes, while strong trade is set for an even better outlook.

January 1 marked the early stages of free trade under the ASEAN Economic Community, which has mixed potential for Vietnam. Some worry Vietnamese firms won’t stand a chance against more efficient rivals like Malaysia and the Philippines.

But others argue Vietnam has an ace in its hands: its involvement in so many global free-trade talks, most notably the Trans Pacific Partnership with the United States and 10 others.

“Vietnam looks poised to benefit, actually,” said Edward Lee, head of Southeast Asia research at Standard Chartered bank. He said the country’s free-trade deals will draw foreigners who also want to expand into the rest of the Association of Southeast Asian Nations. In that way, Vietnam will help boost ASEAN’s integration with the world.

And having to vie against stronger neighbors could force Vietnamese companies to become more productive.

“In the long run, if you don’t open yourself up to competition, it’s worse,” Lee said.

Asia’s appeal to investors

The confidence in Vietnam is part of sentiment around ASEAN members and elsewhere in Asia. With plunging global commodities prices hitting Latin America, malaise and Ukraine hurting eastern Europe, and armed conflicts in the Middle East and Africa, investors are finding stability and diverse portfolios in this part of the world.

One Japanese diplomat said investors from her country are shifting from China to Southeast Asia because of the higher costs and because of the island disputes between Beijing and Tokyo. Foreign direct investment in ASEAN surpassed figures in China in 2013, according to Standard Chartered.

China’s aging population and rising costs have other foreign companies fleeing, too, but ASEAN is competing with much larger India to catch those companies as they land. Coming together under the economic community gives ASEAN strength in numbers, with about 600 million people against India’s 1.3 billion.

Currency wars?

But ASEAN members also are sparring with one another to bring in foreign dollars. Analysts wonder if central banks here will get caught up in the perceived currency wars that have already touched Europe, Japan, and Australia. With weakening currencies, nations have an easier time exporting because their goods look cheaper to buyers overseas.

Vietnam has said it won’t devalue the dong more than 2 percent this year. But the Singapore dollar had an unexpected drop this week, and the dong’s decline still hasn’t matched more dramatic plunges in other currencies from the Thai baht to the Indonesian rupiah. That means Vietnam may struggle to export as much rice as Thailand or as much coffee as Indonesia.

Stable economic numbers

But Andy Ho, chief investment officer at Vinacapital, said that surveys of brokerages found that they expect the Ho Chi Minh stock exchange to do well in 2015, rising 15 percent based on strong earnings. Standard Chartered said foreign investment is growing in Vietnam at one of the highest rates in ASEAN.

GDP expanded 5.98 percent in 2014, a number Vietnam’s government and observers expect to rise to at least 6 percent this year. That would reverse a trend of less than 6 percent growth in recent years. At the same time, inflation is stabilizing at around 3 percent, a stark contrast to the more than 18 percent that spooked investors in 2011.

Triple economic threat

To keep up the momentum, most agree Vietnam has to follow through on its promise to reform corrupt and bloated sectors, especially state-owned banks and other enterprises. Vietnam faces a triple threat from inefficient state companies, the property bubble fallout, and massive defaults on bank loans.

The triad of risks to Vietnam’s economy are correlated. State firms got cushy loans from banks, which they used to speculate on real estate. And when that market crashed, bad debt skyrocketed.

“If the government can make improvements in these areas, that will help the country achieve sustainable growth in the future,” Standard Chartered economist Betty Wang said.

Hanoi has shown signs of reform, by arresting and jailing bankers for fraud, and pushing state assets onto the private sector. The hope is that if investors buy stakes of corporations formerly held by the government, they’ll improve business practices, productivity, and transparency. State companies have consistently performed less efficiently than private counterparts and contributed less to the economy.

Similarly, there is hope that the growing influence of foreign firms will mean skills, technology, and quality standards will be transferred to companies here.

“There’s still a disconnect in Vietnam between the foreign direct investment sector and the local corporate sector,” said Nguyen Xuan Thanh, director of the Fulbright Economics Teaching Program in Ho Chi Minh City.