Vietnam’s Roaring Private Sector
By
Dominic Scriven
One of the more hackneyed laments of recent years has focused
on the moribund state of Vietnam’s economy, and the absence
of a serious private sector. A closer look is merited, however,
not least since Vietnam is now established as Asia’s second
fastest economy. The following comments address the power of the
private sector; its problems; and a confident prognosis for the
future.
First, the last few years have established a firm, and uncontested
legal basis for private business: the landmark Enterprise law
of 1999, the country’s first Banking law in 2000, Decree
48 on the stockmarket, and upgraded privatization legislation
last year. The Constitution, reviewed in 2001, unambiguously leveled
the playing field with the State-owned economy.
The effect has been dramatic: 55,000 new businesses have been
registered, including more than 20,000 in 2002 alone. There now
more than 1,000 privatized companies; 21 listed companies; and
40 private sector banks. This does not include more than 2,000
foreign businesses.
The private sector is the principal source of new job creation
(at 1.4m school leavers per year, this dwarfs the total state-enterprise
workforce of 1.8m); and is responsible for more than half of non-oil
exports – including world-beating performers rice, cashews,
coffee, and pepper; garments, footwear, and housewares. The private
sector invests more than either the state, state enterprises,
or foreign investors, equivalent to more than 6% of GDP per year;
and churns out a quarter of industrial production. The private
sector is the principal motor behind a doubling of bank deposits
and 50% increase in bank credit in the last three years. There
can be little doubt who is the pied piper in this robust economy.
But there are issues, principally as a result of growing pains.
First among these is modest scale: few businesses are more than
first generation, and family ownership is the norm. This leads
to inexperienced management, most visible in an unwillingness
to plan for the long term, and a ruthless focus on near-term profitability.
Partly due to this, businesses suffer from a lack of transparency,
though much of this reflects an outdated allergy to tax payment.
Clearly this, in turn, impacts on the valuations that such companies
attract and almost all business sales are transacted at close
to book value. And lastly, all of the above lead to much distorted
capital structures, over-high real interest rates, and a dysfunctional
financial system: the largest listed company has not one dong
of medium term debt, while half the deposits of the banking system
are kept in dollars, and lent offshore at minimal margins. Vietnam
is not the poor country that many believe – rather it suffers
from a misallocation of resources.
They say that nothing is impossible in Vietnam, but anything can
happen. Here’s a few cheerful, and entirely achievable predictions
for the future:
The number of privatizations will treble in three years; the number
of listed companies will double in each of the next five years;
both money supply and bank credit will double in the next three
years; real interest rates will halve; and asset markets will
boom.
Dominic Scriven is a director and co-founder of Dragon Capital,
and manager of Vietnam’s largest investment fund, Vietnam
Enterprise Investments Limited.
