I recently visited Ho Chi Minh City (formerly Saigon), where my colleagues and I met many local business leaders (mainly Vietnamese, but also foreign expatriates). Although Vietnam is undoubtedly suffering from the global recession – real GDP growth slowed to just 3.1% y-o-y in Q1 2009 from 7.4% in Q1 2008 – the country should still avoid the massive dislocation that we are seeing elsewhere in Asia. (Business Monitor International forecasts 2.9% growth in Vietnam this year, compared with 6.2% in 2008 and 8.5% in 2007. The IMF forecasts 4.75%, and the Vietnamese government 6.5%).

Vietnam's GDP Growth (% year-on-year)

Vietnam is suffering from the global downturn because its rapid growth has become highly dependent on exports (now equivalent to around 70% of GDP) and strong foreign investment. The fact that its biggest foreign investors are Japan, Korea, Singapore, and Taiwan – all of which will suffer severe recessions in 2009 – means that foreign direct investment (FDI) already fell sharply in the first quarter.

Domestic private consumption generates 65% of GDP, which is a major plus point (other Asian economies with similar consumption-to-GDP levels such as Indonesia and the Philippines will also outperform the region and register positive growth this year), but as I always like to point out, there is a false dichotomy between external and domestic demand. The closure of export-oriented factories will mean less money to be spent by consumers. The government has warned of 300,000-400,000 job losses this year, mainly in the garments and footwear sectors, which would amount to almost 1% of the workforce.

Meanwhile, it seems to me that there is little the government can do to mitigate the impact of the global recession. A US$17bn fiscal package has been announced, but given Vietnam’s already big budget deficits and off-the-books spending, it cannot really spend itself out of the slowdown. As such, I was hardly surprised that the authorities widened the dong’s trading band this week to allow greater depreciation.

Exchange Rate, VND/US$

Still, Vietnam has a substantial ‘grey’ economy which I believe can act as the ‘Dark Matter’ that holds things together. There’s a lot of off-the-books activities and money kept under the mattresses that can act as a cushion in the event that the economy tanks.

Infrastructure Is Still A Problem
Arriving by plane, the new terminal at Tan Son Nhat international airport makes a good impression. However, businesses continue to bemoan Vietnam’s poor infrastructure. Ho Chi Minh City (HCMC) has wide boulevards, and most of the traffic consists of motor scooters, some with a family of three riding on them. However, rising incomes will eventually lead to increased car ownership, brining severe congestion. HCMC is building a new metro system, but this will take a while to complete and lead to more disruption as roads are dug up. Meanwhile, even in downtown HCMC there are bundles of thick black electricity cables stretching for miles above the pavements of major thoroughfares. Given Vietnam’s budgetary constraints, the key to infrastructure improvements will be foreign financing, by Japan, South Korea, and a whole bunch of multilateral agencies. But even then, corruption, questionable planning, and deficiencies in follow-up maintenance present significant obstacles.

The Future Is Still Positive
Despite some shortcomings, I believe that Vietnam’s future is probably bright. Its youthful population (45% is under the age of 25) and increasing urbanisation will continue to drive growth for many years to come. This will provide big opportunities for urban development, mass-market consumption, the specialisation of economic functions, and ultimately rising per capita incomes.

Vietnam's Demographic Profile (Source: UN)

Several multinationals are already entering the fray ahead of their better-known competitors. There are no McDonalds, but there are branches of Kentucky Fried Chicken, Lotteria (a Japanese hamburger chain) and Jollibee (a Filipino hamburger chain). There are no Starbucks, but there are Gloria Jean’s Coffee shops (an international competitor). There are no 7-Elevens, but there are Circle Ks (no sign of Bill and Ted, though). There are also designer label stores such as Louis Vuitton, etc. There were no mega-malls of the kind in Singapore and Kuala Lumpur, but there are several very large combined shopping, business and hotel complexes under construction in downtown HCMC. Foreign banks are also developing a growing presence. Overall, HCMC displays many of the hallmarks of a newly affluent and increasingly consumerist society.

I am of course aware that Ho Chi Minh City, with less than 10% of the country’s total population and its status as the main commercial centre, is not representative of Vietnam as a whole (for that matter few metropolises are in any country). However, I still believe that it offers pointers for the future.