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Series: The Mekong Region and Japan Part 4: Vietnam (1) The Vietnamese Economy Today and Japan’s Economic Cooperation | Tatsuya Hoshino, Executive Director ASEAN & East Asia Business Support Organization [Date of Issue: 31/July/2012 No.0209-0852]

Date of Issue: 31/July/2012

Series: The Mekong Region and Japan Part 4: Vietnam (1)
The Vietnamese Economy Today and Japan’s Economic Cooperation

Tatsuya Hoshino
Executive Director
ASEAN & East Asia Business Support Organization

Economic fundamentals are improving. The number of investments from Japan in 2010 are record high in these recent years. However, factors such as rising wages are leading businesses to look to Cambodia, Myanmar, Central Java and other cheaper locations. Vietnam receives around US$11 billion every year in actual foreign investment, approximately US$8 billion in ODA, and around US$6 billion from overseas Vietnamese, with Japan’s ODA playing a major role in underpinning the Vietnamese economy.

1. The Vietnamese economy today

(1) Vietnam was growing rapidly at around seven percent for a number of years. The global recession triggered in late 2008 by the collapse of the securities and real estate bubble and the Lehman Shock persuaded the government to institute a massive economic stimulus package of around US$7.5 billion (more than 25 percent of government revenue), which prevented the GDP growth rate symbolizing the country from experiencing a major drop. The only key ASEAN members which did not see their growth rates plunge in 2009 were Indonesia and Vietnam, but in Vietnam’s case, the excessive stimulus package also caused the budget deficit to deteriorate. The depreciation of the dong against the greenback also continued, plunging 30 percent in these 10 years, while prices began rising more steeply than anywhere else in ASEAN. Economic fundamentals worsened, including a growing trade deficit and power shortages. The situation improved slightly in 2010, but a real recovery is not expected until at least 2013.

(2) The GDP growth rate has remained sluggish at 5.3 percent in 2009, 6.5 percent in 2010, 5.9 percent in 2011 and 5.6 percent (IMF estimate) in 2012, but is expected to lift above six percent in 2013. The budget deficit stood at US$4 billion in 2011, evincing a turn for the better (approximately US$32 billion revenue against around US$36 billion expenditure).
The debt-to-GDP ratio of 4.9 percent cleared the 5.3 percent target.

The greater problem has been the consumer price index (CPI), which rose 18.58 percent in 2011 to top ASEAN. Bringing down the CPI is accordingly the government’s top priority. Austerity measures taken in 2011 have succeeded in preventing the CPI from rising on last year as at June 2012. However, they have also caused the economy to stall, with the number of bankruptcies rising to around 22,000 over January-May this year and expected to reach 50,000 by the end of the year. The government has recently begun to ease up in some areas to counter this trend.

The trade deficit has improved by US$3 billion on 2010. Foreign investment stood at US$14.9 billion in 2011 (1,465 investments), down on the 2010 total of US$18.6 billion (1,238 investments) but achieving a record high in terms of the number of investments. Japanese investment and the establishment of Japanese business operations also reached a record high of 208 (up around 80 percent on the previous year), second only to Korea’s 270 investments, which reflect Korean firms’ current proactive interest in setting up in Vietnam. Small and medium-sized investments are increasing, and companies from a range of industries continue to move into Vietnam to use the country as, for example, a production base for certain machinery types. Big companies are also being set up, including a new plant built by Kyocera for printers and low-end multi-function printers and by Panasonic for fridges and washing machines, and capacity added to Honda’s motorcycle production facilities (ultimately boosting annual production from two million units to three million). YKK has built a new plant for clothing fasteners, color-coated flat steel production has been launched by Nippon Steel & Sumikin Coated Sheet and Marubeni-Itochu Steel, and Taiheiyo Cement has set up another cement plant. Bridgestone has set up an automobile radial tire factory, while Shin-Etsu Chemical has established a new plant to process rare earths. Nipro has built a plant to produce generic drugs, Sagawa Express has set up a logistics business, and Takara Tomy is building a production base in Vietnam to add to its Chinese and Thai operations.

Concern over the future of textile and garment operations in China due to major wage hikes and changing investment conditions is prompting more Japanese firms to consider shifting to Vietnam. In such cases, many firms are spreading their production facilities out to other ASEAN countries while holding on to their China factories.

(3) At the same time, foreign firms investing in Vietnam in search of cheap labor have recently found themselves struggling there too with steep wage rises (the highest rate in ASEAN) and recurrent strikes, leading some companies to look beyond Vietnam to Cambodia and Myanmar. Central Java in Indonesia offers cheap wages—around US$80 per month—and Korean garment manufacturers are moving from Vietnam to there.

2. Inflow of foreign investment

The Vietnamese economy is underpinned by a total of US$25 billion flowing into the country every year, including actual foreign direct investment of around US$11 billion, around US$8 billion in ODA and approximately US$6 billion remitted home by overseas Vietnamese, accounting for around 25 percent of Vietnam’s GDP of US$104.6 billion (2010 GSO statistics). This capital inflow supports the Vietnamese economy, channelled into the advance of companies and industries, infrastructure construction, project and development investment, and domestic consumption.

3. Japan’s economic cooperation

(1) The top recipients for Japanese ODA in 2009 were Vietnam (US$1.2 billion), India (US 500 million), and Turkey (US$200 million). Within ASEAN, Cambodia received US$130 million, Lao PDR and Malaysia US$90 million each, and Myanmar US$50 million. Vietnam receives by far and away the most ODA from Japan.

Aiming to move out of the ranks of low-income countries by 2010 and become an industrialized nation by 2020, the Vietnamese government’s strategy is to use foreign capital and other private-sector investment to sustain economic growth. To that end, the government is prioritizing the development of basic infrastructure and various economic systems, environmental protection and the elimination of income disparities.

(2) Japan’s ODA is implemented in line with this national development strategy. Main ODA support areas are as follows:

(a) Promoting economic growth and supporting greater international competitiveness: improving the business environment, developing supporting industries and otherwise supporting private-sector development, strengthening electricity supply capacity, developing cities and creating transport, freight and telecommunications networks;
(b) Boosting social and living conditions and supporting elimination of income disparities: addressing health and medical care, improving rural living conditions, etc.;
(c) Supporting environmental protection: Developing waterworks, managing waste, combating air pollution, etc.; and
(d) Supporting stronger governance: Anti-corruption measures, administrative reform, legislative development, judicial reform, etc.
(3) Japan is Vietnam’s top donor country, making a definite contribution to Vietnamese economic growth through ODA. Recent specific ODA cases include 15.2 billion yen for the Hoa Lac Science and Technology City Development Plan (Phase I), 20.5 billion yen for onstruction of Terminal 2 at the Noi Bai International Airport, 44.3 billion yen for the Ho Chi Minh City Urban Railway Construction Project (Phase II) , 20 billion yen for improving the water environment in the southern province of Binh Duong, 8.7 billion yen for regional and provincial hospital development (Phase II), and 21 billion yen for construction of the Lach Huyen Port (harbor, roads and bridges; a public-private partnership project). Grant aid projects include repairing bridges in the central provinces, development of a traffic control system for Hanoi City, computerization of customs clearance procedures, and human resource development scholarships.

(original article : Japanese)

(For the Japanese version of this article)

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