Vietnam's lustre fades as economic uncertainty looms

KUALA LUMPUR: This year, Vietnam celebrates 25 years of the "Doi moi" ("renewal" in Vietnamese) economic reforms initiated in 1986 that paved the way for a socialist-oriented market economy.

In the past decade, these reforms have made Vietnam one of Asia's success stories as it made its transition from a command to a more market-oriented economy.

The country of 89 million became a favourite of foreign direct investments as investors looked to Vietnam as a low-cost industrial base or as an exciting consumer story with its large and increasingly affluent population.

Vietnam was then touted as the next China and investors' euphoria reached its peak in 2008.

Since then, however, the Vietnam story has been looking more cloudy as investors are caught in a period of economic uncertainty.

Indeed, the silver anniversary of "doi moi" appears far from shiny for many investors.

When Vietnam was held up as the poster child for Asian development, Malaysian investors were amongst the flock of foreign investors that ventured to the Communist-run country for growth opportunities.

But after the global credit crisis that struck at the end of 2008, Vietnam has been struggling to regain a sound footing.

With the country headed for a period of tighter economic policies, Malaysian companies which poured into Vietnam are left to re-evaluate their expectations and plans.

In the past weeks, Vietnam has rolled out a number of measures to stabilise its economy and revive investor confidence which had been roiled by a confluence of economic issues, including rising inflation, the depreciating currency and a widening trade deficit.

On Feb 11, The State Bank of Vietnam devalued the dong for the fourth time in 15 months by 9.3% against the US dollar to curb a trade shortfall that reached US$12.4 billion (RM37.8 billion) last year and narrow the gap between official and black market exchange rates.

Vietnam's central bank recently also raised its refinancing rate to 11% and increased the reverse repurchase rate to 12%, having raised it some six times, from 7%, since November.

The country also has one of the most worrying inflation problems in the region which some observers say looks set to remain, given the higher import prices as well as fuel and electricity prices.

For February, Vietnam's consumer price index rose at its fastest pace to hit a two-year high of 12.31%, driven by higher prices for housing and building materials, education services and food.

Last Thursday's increase in petrol and diesel prices by 17.5% and 24% respectively, as well as the scheduled 15% hike in electricity tariffs, have cast doubt over the Vietnam government's target to cap inflation at 7% for the whole year.

For companies that have invested in what was hailed as Asia's most promising emerging market, is this the end of the Vietnamese dream?

Not quite, said RAM Holdings Bhd chief economist Dr Yeah Kim Leng who opined that Vietnam's recent moves are merely short-term pains as these were largely structural issues that typically take two to three years to ease.

Yeah said Vietnam still has potential in the medium to long term even if the current operating environment is proving more difficult than expected.

"It would be more difficult for companies to meet profit expectations, but if they can cope with the current problems, they should still be able to capitalise on the growth potential presented once the Vietnam economy recovers," Yeah told The Edge Financial Daily.

Indeed, this view is echoed by several Malaysian property players who have various ongoing projects in Vietnam.

S P Setia Bhd president and CEO Tan Sri Liew Kee Sin maintained that the company was mindful of Vietnam's underdeveloped mortgage and financing markets and had thus adopted a "go slow" approach there.

"Vietnam is a long-term growth story for Setia," Liew recently told The Edge Financial Daily via email.

S P Setia ventured into Vietnam in 2007 with its joint venture development of EcoLakes at My Phuoc Industrial park, some 40km outside Ho Chi Minh City. Its two other projects are EcoXuan at Lai Thieu in the Binh Duong province and EcoXanh at the Saigon Hi-Tech Park in District 9 of Ho Chi Minh City.

For the company's Vietnam projects, Liew said S P Setia periodically adjusts the prices for their properties to ensure that the US dollar value can be maintained apart from borrowing capital and paying contractors in the Vietnam dong currency.

He added that any potential foreign exchange losses would merely be book losses with no material impact expected.

Asked about the fate and fortunes of Malaysian property players in Vietnam, Yeah said the developers would have to find ways to minimise the pains of likely slower demand and declining prices.

"If they have holding power, they won't be faced with the need for a fire sale which will result in higher losses," said Yeah.

Ireka Corp Bhd chief financial officer Monica Lai said the impact for Ireka's 23%-owned associate Aseana Properties Ltd is expected to be limited given that Aseana had yet to aggressively launch projects in Vietnam.

"There may be more bad news before good news. The Vietnamese government is taking the right steps to address the inflation, which is positive for the economy in longer term. However. this may result in some pain in the near term," Lai told The Edge Financial Daily.

London-listed Aseana is a property fund, focusing on Malaysia and Vietnam, which is managed by Ireka's wholly owned unit Ireka Development Management Sdn Bhd.

Aseana is currently building a general hospital at the International Hi-Tech Healthcare Park which is the only ongoing project it is exposed to in Vietnam. The hospital will anchor a healthcare themed integrated project at the 93-acre development in Ho Chi Minh City, which is expected to generate gross development value of US$770 million.

Lai said Aseana's other development projects in Vietnam are still in the planning stages and are unaffected. She said the company's plans to launch a residential component at the International Hi-Tech Healthcare Park, earlier scheduled for later this year, can be delayed depending on economic conditions.

"Developers who had launched earlier and are in the midst of building their projects now will be the most affected (due to higher building and interest costs)," Lai said.

Apart from S P Setia and Ireka, other Malaysian property developers with presence in Vietnam include Berjaya Land Bhd, Gamuda Bhd, Mudajaya Group Bhd and WCT Bhd.

Property players aside, Malaysian financial institutions that have entered Vietnam include Malayan Banking Bhd (Maybank), Public Bank Bhd, CIMB Group Holdings Bhd, RHB Capital Bhd and Hong Leong Bank Bhd.

Interestingly, in a note dated Feb 14, Maybank Investment Bank Research said Vietnam's currency devaluation is expected to have minimal impact on local companies with operations there.

Maybank IB Research said the dong devaluation will affect Malaysian corporates' financials in the foreign exchange losses and balance sheet impairments for investments sunk in.

The research house noted that any impairment can be offset by higher US dollar-based selling prices.

It also said the current Vietnamese economic growth remains strong with the government targeting real GDP growth of 7.5% this year although the latest consensus forecast is eyeing 6.7% expansion.

"Household wealth is however, normally not kept in the domestic currency but in US dollar and property, which should further support property demand as GDP per capita grows," Maybank Investment Bank said.