Robust economic growth in Vietnam will continue

Viet Nam is the new powerhouse of Southeast Asia, according to Renee Chen, economic specialist from CitiGroup, who predicted the nation’s ecomomic growth would continue at a robust 8% or more for the next two years, following the 8.2% pace set in 2006.

The growth drivers included rising foreign investment, export expansion and increased consumer spending, Chen said, and Viet Nam’s WTO entry would further boost foreign investor confidence by ensuring a more stable regulatory environment and more level playing field between foreign and domestic enterprises.

The benefits of being a WTO member would also include fewer restrictions on exports to other member economies, including lower tariffs and the removal of quotas on textile and garment shipments to the US and EU, Chen said.

WTO accession would also help lock Viet Nam onto the path of continuous reform, particularly in the banking sector and the role of State-owned enterprises in the market.
The services sector, including banking and selected retail distribution services, would be opened up to foreign ownership and competition. Foreign banks, for example, would be allowed to establish 100-per-cent foreign-owned subsidiary banks in Viet Nam, effective next month.
To prepare domestic banks for the competition and ensure their solvency, the State Bank of Viet Nam has imposed higher chartered capital requirements on domestic joint stock banks. Regulations now stipulate that the minimum statutory capital of a joint stock bank must be VND1 trillion by 2008 and VND3 trillion by 2010.

According to Charly Madan, general manager of CitiGroup Viet Nam, Vietnamese banks have also been issuing shares to foreign strategic shareholders as an efficient way to expand operational networks and develop modern technology and management expertise.
A secure future

The year 2006 also witnessed exceptional growth in the securities market. The number of listed companies on both the HCM City Securities Trading Centre and Ha Noi Securities Trading Centre surged from 32 to 193, and stock prices rose sharply. Total market capitalisation rose twenty-fold year-on-year to reach 14 billion US$ (22.7% of GDP) at the end of 2006, far beyond the official target set in 2003 of 10-15% of GDP by 2010.

The State Securities Commission now foresees that stock market capitalisation could increase to 30-40% of GDP by 2010. Counting 5 billion US$ in bonds, securities market capitalisation already equalled about 30% of GDP as of the end of 2006.
"We expect the securities markets to grow robustly over the next two years amid strong capital demand for development (estimated to exceed 140 billion US$ over 2006-10).
The equitisation of State-owned enterprises and commercial banks will provide substantial new fodder for the stock market; and arge inflows of foreign indirect investment will continue," said Madan.

The strong appetite of foreign investors for 10-year Vietnamese dong-dominated Government bonds in November 2006 attested to the possibilities for financing a growing share of Viet Nam’s capital needs through the debt market.


The State Bank widened the inter-bank trading band for Vietnamese dong to +/-0.5% from +/-0.25% in early January. Substantial foreign direct investment and increasing portfolio inflows have boosted US dollar supplies and added to domestic liquidity in late 2006.
Foreign reserve accumulations are a precautionary move designed to maintain export competitiveness. At about 12 billion US$ at of end 2006, Viet Nam’s forex reserves were small compared to large reserves built-up elsewhere in Asia, limiting the scope for significant appreciation of the Vietnamese dong in the near future.

A wider trading band to cope with dong appreciation pressures could see the dong departing from its past behaviour of depreciation to remain increasingly steady against the US dollar. We expect to see increasing flexibility in currency movement via further band widening and/or easing of restrictions on capital flows, moves consistent with the official target to make the Vietnamese dong fully convertible by 2010.

Sharp increases in foreign reserves and substantial capital inflows could pose medium-term risks of non-performing loans. Prudent measures should be taken to manage money flows and minimise risks in the capital markets. New regulations to tighten stock market-related lending, for example, by banning commercial banks from granting loans to their affiliate securities companies for securities trading, and measures to stabilise the overheated stock market, including a decision to temporarily hold the ceiling on foreign ownership in listed companies at 49%, were desired moves, Madan said.

While authorities have planned to set up a watchdog agency to supervise the financial markets, more needed to be done in particular to improve corporate governance and public disclosure of listed companies, he added.

Source: VNS