Despite Vietnam’s persistent economic woes, a record deal this month has shown foreign investors are still lured to the frontier market by its young, growing population and rising disposable incomes.
The sealing of the communist country’s largest-ever private equity deal, at a time of soaring inflation and a struggling currency, has underscored faith in Vietnam’s long-term potential, beyond its current macro instabilities.
US-based investment firm Kohlberg Kravis Roberts & Co (KKR) is to pay US$159 million for a 10 percent stake in Masan Consumer Corp, the leading fish sauce producer in Vietnam, the companies announced on April 13.
“KKR is bullish on Vietnam,” KKR spokesman Ming Lu said. “In the past decade, there has been considerable economic progress, structural reforms and a notable increase in living standards.”
With annual GDP growth averaging 7.1 percent from 1990 to 2009, Vietnam’s 87 million people — about half of them under 30 — are now a “ferocious” consumer force, according to Adam Sitkoff of the American Chamber of Commerce in Hanoi.
“Now I walk around seeing a 10-year-old Vietnamese with an iPod and a Gucci hat — it still shocks me,” he said, adding that decades of limited choice, poor quality and high prices had generated pent-up demand.
Boutique shops, BlackBerry smartphones and BMWs are almost as common as the red banners, army uniforms and loudspeakers that dot the capital Hanoi’s streets — symbols of the socialist regime still dominating the political landscape.
However, rapid expansion since the early 1990s — after the country began to turn away from a planned economy to embrace the free market — has come at a cost to Vietnam, once celebrated as a new “Asian Tiger.”
Relative to other members of ASEAN such as Singapore or Malaysia, Vietnam has struggled to keep up with its own expansion, Marc Mealy of the US-ASEAN Business Council said.
“In Vietnam’s case, the pace of liberalization to global capital has in some ways outpaced the development of their institutions and human resources to manage their macroeconomy,” he said.
The hurdles are formidable and persistent: inflation that hit nearly 14 percent year-on-year last month, a trade deficit of an estimated US$12.4 billion last year and a weak currency, the dong, devalued four times since late 2009.
Corruption and wasteful bureaucracy have also damaged Vietnam’s global financial reputation, with the credit worthiness of state-owned enterprises further threatened by the near-bankruptcy of shipbuilder Vinashin.
Economic stabilization, rather than growth, has subsequently become the government’s main focus, with the Communist Party announcing an overhaul of its business growth model during a five-year congress in January.
While analysts have welcomed the moves, global credit ratings agency Moody’s upheld a negative outlook for Vietnam in a report issued on Wednesday.
This “reflects concerns about the sustainability of the country’s balance of payments despite the government’s recent macro--stabilization measures,” the report said.
Moody’s analyst Christian de Guzman said the country was “fraught with risks” for foreign portfolio investors considering buying Vietnamese stocks or bonds, and interest had “dried up.”
However, he said long-term foreign direct investment (FDI) was “still very healthy and coming through at a steady pace.”
Government figures show disbursed FDI into Vietnam totaled US$2.54 billion in the first quarter of this year, up 1.6 percent from the same period last year.
Such long-term investors “believe in the strong underlying potential and believe the current macroeconomic factors to be transitory,” economist Dariusz Kowalczyk at Credit Agricole CIB said.
One key attraction is lower labor costs, encouraging foreign manufacturers to relocate from China to Vietnam, or to use it in a “China plus one” strategy of adding a second production base outside the Asian giant.
“Vietnam has very strong growth potential because of the entrepreneurship of the population,” Kowalczyk added. “People seem to be really driven to improve their lives.”