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 / Winter 2008 /Issue 53(originally published by Booz & Company)


Growing Pains in Vietnam

Vietnam’s situation is likely to be less severe than the 1997 crisis. Unlike the other former Asian tigers, Vietnam has very little short-term foreign debt. This means Vietnam will have substantial resources to at least stave off the worst effects of currency flight, stock market collapses, corporate bankruptcy, and other random shocks. Also, much of its trade deficit follows naturally from the massive inflows of FDI in the past two years, which will strengthen the country’s long-term economic health. Capital outflows are relatively restricted, because the dong is not convertible; also, the Vietnamese currency is not floating as Thailand’s baht was before it plunged. Moreover, despite the de­cline in Vietnamese stocks this year, foreign investors have been net buyers of local shares.

Perhaps the greatest reason for optimism is the Vietnamese gov­ernment’s efforts to put the country on the fast track to asset price correction. Without an international bailout, but learning from the experience of countries that survived the 1997 debacle, Vietnamese authorities have raised interest rates three times this year to tame inflation; projects funded by government bonds, state-owned enterprise activities, and government overhead have all been reduced; and the State Bank has provided more U.S. dollars to local banks to stabilize illicit ex­change rates, a move that has lowered black-market dong–dollar ex­change rates from their June 2008 peak of 20,500 to 16,800 in September. With the rise in interest rates and the consequent decrease in liquidity, consumer spending and property prices have begun to fall significantly. Hence, it is believed that inflation has already begun to cool down.

Manufacturers producing for the local market and dependent on imported components will suffer the most now. As the dong weakens, these companies’ profits will fall because of both the increasing costs of materials and the decreasing purchasing power of their revenues. In the short term, multinationals should instead focus on exporting higher-value-added products from Vietnam and developing a skilled labor pool that will eventually be able to manufacture products for local as well as foreign markets. Talent is a scarce resource in Vietnam, and without it a company will be unable to take advantage of the country’s imminent future eco­nomic growth.

Service industries that are de­pendent on local market de­mand or that have relatively high exposure to the real estate sector will also pay a steep price during this down­turn. Architecture and engineering firms, advertising agencies that special­ize in financial services and real estate, and the real estate and financial-services industries themselves will be the hardest hit. By contrast, companies that can export their services or that begin to develop such operations, including the software de­velopment and design and engineering com­panies that are clustered around Ho Chi Minh City, are in the best position to weather this period and look forward to a lucrative future.

Author Profiles:

Dennis J. Meseroll is a director of Tractus Asia Limited, a firm that focuses on Asian startup investments, acquisitions, and market opportunities.
Kendall K. Turner is a research analyst at Tractus.
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