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  1. 1. VietnamSubmitted ByVarun AggarwalShashank RanaNitin KumarPreeti PawariaSapna RanaJyoti ChauhanVijay KundraRahul Yadav11/5/2008<br />Vietnam<br />Vietnam, officially the Socialist Republic of Vietnam, is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea to the east. With a population of over 86 million, Vietnam is the 13th most populous country in the world.<br />Vietnam was under Chinese control for a thousand years before becoming a nation-state in the 10th century. Successive dynasties flourished along with geographic and political expansion deeper into Southeast Asia, until it was colonized by the French in the mid-19th century. Efforts to resist the French eventually led to their expulsion from the country in the mid-20th century, leaving a nation divided politically into two countries. Bitter fighting between the two sides continued during the Vietnam War, ending with a communist victory in 1975.<br />Emerging from a long and bitter war, the war-ravaged nation was politically isolated. The government’s centrally-planned economic decisions hindered post-war reconstruction and its treatment of the losing side engendered more resentment than reconciliation. In 1986, it instituted economic and political reforms and began a path towards international reintegration. By 2000, it had established diplomatic relations with most nations. Its economic growth had been among the highest in the world in the past decade. These efforts culminated in Vietnam joining the World Trade Organization in 2007 and its successful bid to become a non-permanent member of the United Nations Security Council in 2008.<br />Vietnam at Glance<br />Area: 127,243 square miles (329,560 square km)<br />Capital: Hanoi (3.5 million in 1994)<br />Independence: September 2, 1945<br />Reunification: July 2, 1976<br />Type of government: Communist people's republic; the Politburo of the Vietnamese Communist Party largely determines government policy<br />Head of state: President<br />Head of government: Prime Minister<br />Other government branches: Legislative (National Assembly and, locally, People's Councils); Judicial (Supreme People's Court)<br />Monetary unit: Dong; valuation (April 11, 2000) 1 U.S.$ = D 14,055<br />Official language: Vietnamese, Chinese, Khmer, French, mountain tribe languages. English is becoming more common as a second language People<br />Population: 77 million<br />Density: (1998): 596.5 persons per square mile (230.3 per square km)<br />Urban-rural ratio (1995): urban 20.8 percent; rural 79.2 percent<br />Ethnic groups: Vietnamese, Chinese, Hmong, Thai, Khmer, Cham, mountain groups<br />Religions (1995): Buddhist 66.7 percent; Roman Catholic 7.7 percent; Protestant 1.0 percent; Cao Dai 3.5 percent; Hoa Hao 2.1 percent; other 19.0 percent<br />Birth rate per 1,000 people (1997): 22.0 (world average 25.0)<br />Death rate per 1,000 people (1997): 7.0 (world average 9.3)<br />Natural increase rate per 1,000 people (1997): 15.0 (world average 15.7)<br />Life expectancy (1997): -- 65.0 years for males -- 69.9 years for females Quality of Life<br />Average household size (1989): 4.8 people<br />Telephones (1995): 800,000<br />Radios (1992): 7.2 million<br />Televisions (1992): 2.9 million Economy<br />Gross domestic product (1998): U.S.$26 billion<br />Per capita income (1998): $333<br />Annual growth rate: GDP growth of 8.5 percent in 1997 fell to 4 percent in 1998<br />Labor force (1990): 32.7 million -- agriculture 65 percent -- industry and services 35 percent Education and health<br />Literacy (1995): 93.7 percent of people over age 15 are literate<br />Percentage of population 25 and older with no formal schooling (1989): 16.6 percent<br />Infant mortality (1997): 37.0 deaths per 1,000 live births Transportation<br />Railroads: 1,762 miles (2,835 km)<br />Highways: -- Paved 14,552 miles (23,418 km) -- Unpaved 43,425 miles (69,882 km)<br />Vehicles (1994): 200,000 passenger cars, trucks and buses Military<br />Active duty personnel (1997): 492,000 (army 85.4 percent, navy 8.5 percent, air force 6.1 percent)<br />Military expenditures as percentage of GNP (1995): 2.6 percent<br />VIETNAM'S Key Area FocusForecast the pace and stability of Vietnam's economic and industry growth through end-2017- In the last 15 years, 1990 - 2005, Viet Nam's gross domestic product (GDP) was nearly triple, the GDP has been increased by 7.5% per year on the average.- The 5-year socioeconomic development plan(2006-2010) has a target of 7.5-8.0% annualaverage GDP growth, broken down into 3.0-3.5%in agriculture, forestry, and fisheries; 10.0-15.0%in industry; and 7.2-7.5% in serviceIdentifing and evaluating adverse political and economic trends in Vietnam, to facilitate risk mitigation strategiesVietnam National Convention CenterThe Socialist Republic of Vietnam is a single-party state. A new state constitution was approved in April 1992, replacing the 1975 version. The central role of the Communist Party was reasserted in all organs of government, politics and society. Only political organizations affiliated with or endorsed by the Communist Party are permitted to contest elections. These include the Vietnamese Fatherland Front, worker and trade unionist parties. Although the state remains officially committed to socialism as its defining creed, the ideology's importance has substantially diminished since the 1990s. The President of Vietnam is the titular head of state and the nominal commander in chief of the military of Vietnam, chairing the Council on National Defense and Security. The Prime Minister of Vietnam Nguyen Tan Dung is the head of government, presiding over a council of ministers composed of 3 deputy prime ministers and the heads of 26 ministries and commissions.The National Assembly of Vietnam is the unicameral legislature of the government, composed of 498 members. It is superior to both the executive and judicial branches. All members of the council of ministers are derived from the National Assembly. The Supreme People's Court of Vietnam, which is the highest court of appeal in the nation, is also answerable to the National Assembly. Beneath the Supreme People's Court stand the provincial municipal courts and the local courts. Military courts are also a powerful branch of the judiciary with special jurisdiction in matters of national security. All organs of Vietnam's government are controlled by the Communist Party. Most government appointees are members of the party. The General Secretary of the Communist Party is perhaps one of the most important political leaders in the nation, controlling the party's national organization and state appointments, as well as setting policy.The Vietnam People's Army is the official name for the combined military services of Vietnam, which is organized along the lines of China's People's Liberation Army. The VPA is further subdivided into the Vietnamese People's Ground Forces (including Strategic Rear Forces and Border Defense Forces), the Vietnam People's Navy, the Vietnam People's Air Force and the coast guard. Through Vietnam's recent history, the VPA has actively been involved in Vietnam's workforce to develop the economy of Vietnam, in order to coordinate national defense and the economy. The VPA is involved in such areas as industry, agriculture, forestry, fishery and telecommunications. The total strength of the VPA is close to 500,000 officers and enlisted members. The government also organizes and maintains provincial militias and police forces. The role of the military in public life has steadily been reduced since the 1980s.Assessing critical shortcomings of Vietnam's business environment that pose hidden barriers and costs to corporate profitabilityInflation continued to run high, exceeding 7% on average during 2006 for the third year in a row (Figure 2.29.7). Rising food prices were one cause; increases in administered prices of domestic fuels and in transport charges were others. In February 2007 inflation was 6.5%, and is expected to stay around this level through the year. For employers, rapid growth in demand for workers and professionals pushed up payroll costs. The minimum salary of civil servants was increased by 30% in October 2006, a component of reforms to the civil service. Administered domestic fuel prices were raised in April and in August 2006, by a cumulative 18.5%, and then reduced twice by a cumulative 12.5%. Subsidies have been largely eliminated for gasoline and kerosene, and the Government plans to eliminate fuel subsidies completely next year. The International Monetary Fund has estimated that subsidies, mainly on diesel fuel, were still equivalent to 1.3% of GDP in 2006.Target business opportunities in Vietnam's high-growth industry sectorsTourism IndustryThe official logo of Vietnam, used to promote the tourist attractions in the countryVietnam's number of visitors for tourism and vacation has increased steadily over the past ten years. About 3.56 million international guests visited Vietnam in 2006, an increase of 3.7% from 2005. The country is investing capital into the coastal regions that are already popular for their beaches and boat tours. Hotel staff and tourism guides in these regions speak a good amount of English.The Government encourages all economic sectors to produce goods and export, particularly labour-intensive products including agricultural produce, seafood, textiles and garments, leather goods and footwear, and handicrafts. As regards imports, Vietnam gives priority to import of materials, equipment, high technology and advanced production processes that are required for industrialisation and modernisation. But it also restricts import of goods that are adequately manufactured and supplied by domestic producers. However, these restrictioins are gradually being phased out in line with the country's process of economic integration into the regional and global economy. Evaluate external threats to doing business in Vietnam, including currency volatility, the commodity price boom and protectionist policiesVietnam is still a relatively poor country with an annual GDP of US$280.2 billion at purchasing power parity (2006 estimate). This translates to a purchasing power of about US$3,300 per capita (or US$726 per capita at the market exchange rate). Inflation rate was estimated at 7.5% per year in 2006. Deep poverty, defined as a percent of the population living under $1 per day, has declined significantly and is now smaller than that of China, India, and the Philippines.The Vietnam War destroyed much of the economy of Vietnam. Upon taking power, the Government created a planned economy for the nation. Collectivization of farms, factories and economic capital was implemented, and millions of people were put to work in government programs. For a decade, united Vietnam's economy was plagued with inefficiency and corruption in state programs, poor quality and underproduction and restrictions on economic activities and trade. It also suffered from the trade embargo from the United States and most of Europe after the Vietnam War. Subsequently, the trade partners of the Communist blocs began to erode.Domestic risks to the projections include a possible backtracking in the Government’s commitment to implementing reforms and controlling corruption, which would discourage investment. This risk currently appears low. Power shortages remain a problem, given an estimated 15% annual growth in demand. Power sector investment needs are large ($2.5 billion–3.5 billion) a year. Hydropower accounts for 56% of power supply, but this leaves the country vulnerable to droughts. A failure to meet energy demand and to reduce reliance on hydropower could undermine growth. Related to the productivity issue is the shortage of skilled workers. This has been cited in surveys as the third most important constraint faced by manufacturers, after access to finance and to land. The education system is not up to the task at this time, with generally out-of-date curricula, a lecture-centered method of teaching, and research activities separated from teaching.Another challenge is to maintain controlled development of the stock market in the face of the boom in share prices. A sudden reversal and capital outflows could jolt the economy. While the supply of securities has been increasing, demand has been even stronger, given limited outlets for savings. Investor education and better corporate disclosure would seem part of the answer. On the macro level, a timely and comprehensive set of data on capital flows is needed to guide policy making and to facilitate market functioning. VIETNAM'S POLITICAL OUTLOOK:What are the political risks to doing business in Vietnam over the next 10 years?Vietnam Country Risk Ratings evaluating the short and medium-term threats posed by government instability, adverse economic policy-making, deterioration in the business environment and external shocks.Vietnam Political Outlook ContentsSWOT Analysis for the Vietnamese MarketPolitical Strengths, Weaknesses, Opportunities and Threats facing Vietnam.Outlook for 2008-09 The Communist Party will continue to reject demands for major political reform and will remain indifferent to calls for political pluralism in 2008-09.Vietnam's leadership is plagued by endemic corruption and will need to prove that progress is being made in order to maintain its authority.The government is set to face a number of challenging policy issues in 2008-09, most notably the need to control inflation and to reduce downward pressure on the currency.The Economist Intelligence Unit has revised downwards its real GDP growth forecast to 6.9% in 2008, from 7.3% previously, owing to lower credit expansion and dampened consumption growth.We forecast that inflation will average 23.3% this year before dropping back to an average of 12% in 2009.The dong is set to depreciate slightly in 2008 on an annual average basis to reach D17,440:US$1 at the end of the period. The dong will remain volatile in 2008-09.Owing to the large deficit on the merchandise trade account in 2008-09, the current account will remain in negative territory, with the deficit standing at the equivalent of 9.2% of GDP in 2008.One of those to praise Vietnam’s entry into the WTO was Masayuki Karasawa, Chief Representative of the Japan Bank for International Cooperation in Vietnam who heralded the accession as a positive moment for global commerce. And little wonder given that Japan is one of the largest foreign investors in the country with its FDI totaling over US$8.8 billion and bilateral trade between the two countries reaching up to US$10 billion. The ties are cross-industry: Olympus are furthering their investment by planning to build a major Vietnamese plant in 2008, Japanese supermarket chain Seiyu plans to open more stores, and Mizuho bank is continuously boosting its investment and retail arm in the country. Other companies from around the world are also getting more involved such as HSBC from the UK and Alacatel–Lucent from France—the latter of which has just concluded a multi-million dollar deal with the Vietnamese government to provide telecommunications infrastructure.As well as joining the WTO, Vietnam also benefits from having the World Bank on its side. The bank’s Multilateral Investment Guarantee Agency (MIGA) guarantees capital investment against political risks which has inspired confidence in foreign speculators. Viewing the country as an ‘Asian Tiger’ in the making, the World Bank has been particularly keen to improve Vietnam’s power infrastructure and it boasts a portfolio of US$1 billion in this sector as well as providing guarantees—from MIGA—for multiple projects at the Phu My power complex—the largest of its kind in the country. Other multilateral institutions have also shown an interest with the Asian Development Bank voting US$700,000 of development assistance aid in November 2007. Japan has been the largest single country in its provision of development aid totaling US$800 million for the last year.Such significant growth in development aid and project finance indicate that the country has made itself friendly to the international market. Karl D John, CEO of the TCK Group, which advises on entry into the Vietnamese market for foreign companies, explains that the new Land Law and Personal Income Tax Law have cut out a degree of discrimination and uncertainty for foreign business people. He adds, “Prime Minister Dung has personally taken the lead to present Vietnam on the world stage. His historical visit to meet the Pope at the Vatican, the first by a Vietnamese Prime Minister, was a clear sign that things are changing and that Vietnam really is assimilating into the global community.” Indeed such efforts appeared to have paid off politically as well as economically with the country’s UN Ambassador, Le Luong Minh, being elected to the Chairmanship of the UN Security Council effective from July 2008.However, the lure for many foreign companies lies not only in Vietnam’s reforms and relative political stability, but in its cheaper labor costs, giving even China a run for its money—Vietnamese workers earn on average between US$50–100 per month, about half of what is earned in China. This ‘cheap sweat,’ as it is often called in the media, may also have worrying social side-effects but a Vietnamese IT industry insider assured us that Vietnam is taking advantage of foreign presence in order to enhance its technical ability. He explained that there is an “education revolution” taking place in Vietnam, particularly in the IT industry that is seeing graduates come out with programming skills that are useful not only on the foreign labor market but also potentially for domestic research and development initiatives.The sectors where there has been a significant rise in foreign activity are supermarkets and banking. In the former France’s Bourbon Corp, Japan’s Seiyu and Malaysia’s Parkson have all entered the market via M&A activity. According to the Vietnam Investment Review, the supermarket sector is booming and it forecasts that Germany’s Metro Cash & Carry, the first foreign supermarket to open in the country, to account for 30% of retails sales in 2010. In banking there have also been some big moves by foreign players such as BNP Paribas who have partnered with the Oriental Commercial Bank while Australia’s ANZ did a deal with Sacombank. Karl D John expects the insurance, IT and tourism sectors will also see an increased interest and HSBC has already entered into a strategic relationship with local insurer, Bao Viet.So will Vietnam become an ‘Asian Tiger’? The question is not really ‘if’ but when. According to John of the TCK Group, it will be five years, “That is an optimistic viewpoint, some respected observers expect that to happen in ten years.” Vietnam is definitely a space worth watching.Political Stability and Risk Assessment for VietnamWith the Declaration of Independence on September 2nd 1945, the Democratic Republic of Vietnam, the first independent republic in Southeast Asia, was born. On January 6, 1946, the first universal suffrage general election was held to elect the National Assembly, the supreme organ of power of the new Vietnam.In November 1946, the National Assembly adopted the first Constitution of the Republic. The Constitution clearly pointed out that Vietnam is an indivisible and monolithic bloc; it is a democratic republic; power belongs to the whole Vietnamese people irrespective of race, gender, property, social class and religion.After the complete liberation of South Vietnam on April 30th, 1975, the second universal suffrage general elections were held to reunify the country and choose the All-Vietnam National Assembly. On July 2nd, 1976, Vietnam was renamed the Socialist Republic of Vietnam.According to the Constitution, the National Assembly is the highest representative organ, the People's Supreme Authority, the legislative branch that shall be elected every five years in accordance with the principle of universal, equal, direct and secret ballot. The National Assembly's 450 members elect a Chairman and members of its Standing Committee. The full body meets at least twice a year at the convocation of its Standing Committee.The National Assembly elects the President of the State, the Prime Minister, the Chief Procurator of the Supreme People's Court and the Chief Procurator of the Supreme People's Office of Supervision and Control. The President of State serves as Head of State and Commander in Chief of the Armed Forces, representing Vietnam in domestic and foreign affairs. The Prime Minister heads the Cabinet that oversees the running of the Government, the executive organ.Localities elect People's Councils at different levels- province, town, city, district, ward, and commune- in accordance with universal suffrage. The People's Council elects local executive bodies and People's Committees of different levels. There are also People's Courts and People's Procuraries at provincial and district levels.Article 4 of the Constitution stipulates the leading role of the Communist Party of Vietnam. The National Congress of the Communist Party of Vietnam convenes every 5 years to outline the overall direction of the country and formalize policies for the future. The National Congress elects the Central Committee, which elects the Politburo. The highest position in the Party is that of the General Secretary, who is appointed by the Politburo.The Constitution guarantees all citizens fundamental rights such as freedom of speech, press, assemble, demonstration, association, belief, religion and non-belief, equal rights between man and woman, the right to education and health care, the right and duty to labor, the right to build homes, and freedom to do business.The State of Vietnam has exerted efforts to improve people's living conditions. In addition to the Constitution, Vietnam has issued 90 laws and ordinances. The Legal system has been improved to ensure rights to freedom and development to every Vietnamese citizen in all civil domains, politics, economy, culture and society.Current Administration and Policy-making in VietnamKey policy-makers and power-brokers in the Vietnamese government, assessing threats to the continuity of Vietnamese economic policy, and likely changes to the business operating environment through end-2017.Vietnamese Foreign PolicyKey trends and shifts in Vietnam's foreign relations and alignments with Asia neighbours, the United States and Europe, focusing on external influences.There are normally three sources of laws governing foreign trade contracts as follows:International Treaties: Vietnamese Trade Law allows the contracting parties to a foreign trade contract to apply the provisions of an international treaty to which Vietnam is a signatory in case there are differences between the treaty and the Trade Law of Vietnam. Although Vietnam is not yet a signatory to the UN treaty on international sale and purchase of good signed in Vienna in 1980 (CISG - 1980), the provisions of this treaty are allowed to apply if the treaty is referred to, except those which are contrary to the country's basic principles of social and law system.National Laws: The contracting parties may agree to apply Vietnamese laws or foreign laws to their foreign trade contract provided that foreign laws are not inconsistent with Vietnamese laws or where an international treaty to which Vietnam is signatory provides for the application of such foreign laws.If a foreign trade contract does not refer to a particular governing law, Vietnamese laws governing foreign trade (including the Trade Law and other relevant laws such as the Civil Code, the Ordinance on Economic Contracts etc.) shall apply in case the dispute is settled by a Vietnamese Court.International Commercial Practices: The contracting parties may agree to apply international commercial practices if they are not inconsistent with Vientmaese laws. As Vietnamese Trade Law and other relevant laws governing trade had not been in place until recently and because of their simplicity and incompletion, the Incoterms published by the International Chamber of Commerce is widely and frequently applied in foreign trade contracts to which Vientamese companies are parties.VIETNAM'S ECONOMIC OUTLOOK:How will Vietnamese economic policy-making and performance impact corporate profitability over 2008-17?Independent 10-year forecasts for Vietnam through end-2017 for more than 35 macroeconomic variables. We evaluate Vietnamese growth, and also forecast the impact of economic management, including central bank policy, on profitability.Economic Activity in VietnamReal GDP growth; industrial growth; employment growth; inflation and consumer prices; consumption (indicative wages, retail sales, consumer confidence)Fiscal Policy in VietnamCurrent macroeconomic strategy and implementation policies; government finance (revenue, expenditure, budget balance); tax reformsMonetary Policy in VietnamInterest rate trends (bank lending and deposit rates); inflation (retail price inflation, consumer price inflation); exchange rate policy in Vietnam; Vietnamese currency controls; influence of foreign direct investment inflows; exchange rates and foreign exchange reservesBalance of Payments in VietnamMerchandise trade (exports, imports, trade balance); current account balanceForeign Direct Investment in VietnamForeign direct investment approvals and inflows; the foreign investment climateVietnamese External DebtDebt profile (short- and long-term debt; public and private sector exposure)The near- and medium-term forecasts for the economy assume that the Government will continue to implement market-oriented reforms by, for example, preserving macroeconomic discipline and further improving the investment climate, including enforcing the new investment laws. Fiscal prudence will necessitate further efforts to raise revenues and increase the transparency of off-budget expenditures. Progress with restructuring and recapitalizing SOCBs, along with reforms of state enterprises, is expected to help reduce distortions in credit allocation and to restrain credit growth, thereby easing inflationary pressures. It is assumed that Viet Nam will join WTO within the next couple of years, possibly in 2006. Forecasts for the agriculture sector in particular rest on the assumption that the country does not face a prolonged and widespread drought and that the spread of avian flu remains contained.GDP growth is projected to consolidate at around 8% in the next 2 years. The momentum for domestic demand is likely to be maintained through sustained growth in FDI inflows, private remittances, and tourism receipts. FDI inflows will be supported by a 38% increase in FDI commitments to about $6 billion in 2005, and a $300 million investment in a semiconductor assembly plant, the first in the country, announced by Intel Corporation in early 2006. The new investment laws should provide additional incentives for businesses. In addition, the equitization of Vietcombank and MobiFone, if successful, will signal the authorities’ commitment to increasing business efficiency and expanding the private sector. On the production side, industry and services will continue to drive activity with projected growth rates of 10% and 8%, respectively. An increasing share of industrial production comprises higher value-added goods, including computers and other electronic products for export markets. The textile and clothing sector will continue to face strong competition from the People’s Republic of China and other competitors until Viet Nam joins WTO, when it will no longer be subject to quota restrictions on exports to the US. Construction is likely to record strong growth with continuing high levels of investment in industrial, tourism, and real-estate developments as well as in infrastructure. The services sector will get additional stimulus from the Asia-Pacific Economic Cooperation forum summit this November. Agriculture is forecast to expand by 2.7% in the next 2 years, somewhat weaker than in the past 4 years because of softer prices expected for some agricultural commodities.  Exports will probably grow at slightly below the recent rate as world prices for certain commodities, such as rice, dip. Antidumping tariffs against exports of bicycles, footwear, and wood products by the European Union could hit exports, and clothing exports to the US are likely to remain under pressure. Prices of certain imported inputs, particularly steel and fertilizer, are expected to soften this year, so the growth in total imports will be restrained, as it was in 2005. Coupled with buoyant inflows of private remittances and tourism receipts, this should keep the current account deficit manageable. The balance of payments will likely be bolstered by FDI inflows, leading to further accumulation of official foreign exchange reserves. Continued efforts to contain credit expansion and a forecast easing in international prices of commodities, especially rice and other food items, should help damp inflationary pressures brought on by likely further increases in domestic fuel prices and a probable increase in wages. Inflation is projected to be 5–6% over 2006 and 2007.  Fiscal policy is expected to remain supportive of economic growth. In the near term, high world oil prices should continue to boost revenues, though receipts from trade taxes will decline when the country implements its AFTA and WTO commitments. Over the medium to longer term, collection of profit, income, and value-added taxes will have to be strengthened to contain the fiscal deficit, but tax collection will likely gain from continued rapid expansion in both the number and size of registered private firms, which will provide a much broader tax base. The 10th Congress of the Communist Party will be held in the first half of 2006, followed by the induction of a new National Assembly. Party congresses are usually held every 5 years to agree on key policy directions and targets for the following period. A draft of the 5-year socioeconomic development plan to be put to the new National Assembly indicates a continued focus on transition to a market-oriented socialist economy. It includes more specific recognition of the role of the private sector and international economic integration than previous plans.Medium-term outlook The socioeconomic development plan for 2006–2010 envisages average annual GDP growth of 7.5–8.0%, with 3.0–3.2% in agriculture, forestry, and fisheries; 10.0–10.2% in industry; and 7.7–8.2% in services. One goal is to bring down poverty, using a new measure based on minimum income, to 15–16% of households by 2010 from 24% in 2004. These targets appear achievable, given the assumptions listed above. Inflation over this period is projected to average about 5% and the current account deficit about 3% of GDP. To meet the challenge of greater competition in the face of the country’s AFTA (and subsequently WTO) commitments, including allowing foreign firms to operate in the country, competitiveness will have to be honed. This will entail further elimination of structural weaknesses in state enterprises and the banking sector, development of adequate infrastructure and human resources, reduction of the regulatory cost of doing business, more efficient public service delivery, and continued macroeconomic stability. The economy will need to make a rapid transfer of workers into industry and services employment if it is to meet the targets in the 5-year plan. Currently, 57% of the labor force are employed in agriculture, accounting for 20% of GDP. Productivity in agriculture will need to increase if real incomes for these people are not to lose more ground, but it is probable that more farmworkers will migrate to other sectors. With the total labor force increasing by more than 1 million every year (Figure 2.29.13), employment generation is a challenge over the medium term. Over 2006–2010, total investment is expected to reach an average of 38.5% of GDP, with a little over half of it originating in the domestic and foreign private sector. (The private sector provided 46% of all investment in 2001–2005.) Further improvement in the business environment should pave the way for greater private investment and employment. With investment performing such a significant role in the economy, assuring its quality is a significant policy issue and underscores the importance of improving financial intermediation with the reform of SOCBs and the development of stock and bond markets. The shift toward a higher share of private investment should improve the productivity of capital, since private companies will screen investments more rigorously, given their focus on profitability. In the public sector, the quality of (mainly infrastructure) investment may improve now that budget allocations are more transparent, with closer scrutiny by the National Assembly and People’s Councils.  The restructuring of state enterprises is expected to enhance their productivity. Available data suggest that in 2003, 1,004 state enterprises (23% of the total) either incurred a negative return on equity or were insolvent. Another 1,153 (27%) earned a 10% or more return on equity. This suggests that payoffs to reform within the sector, either through liquidation or bringing the laggards closer to good practice, are high. A study involving the World Bank has found that the productivity and earnings of enterprises in Viet Nam generally pick up sharply after equitization. AFTA and WTO commitments are likely to preserve the momentum toward domestic reforms. Further removal of tariff and nontariff trade barriers and barriers to FDI will facilitate the introduction of new technology, increased productivity, and the development of a more competitive economy. Moreover, when it does join WTO, Viet Nam will be eligible for most-favored nation treatment by WTO members and no longer be subject to quotas—a crucial point for the textile and clothing industry (as well as footwear to some degree). Domestic risks to the scenario outlined above include a possible slippage in the Government’s commitment to implementing reforms and controlling corruption, which would discourage investment. This risk currently appears low, considering the AFTA and WTO commitments, acceleration in recent years of the restructuring of state enterprises, financial sector development, promotion of the private sector, and current action to control corruption. The authorities are also more explicit in recognizing the benefits of further market-oriented reforms, as indicated in policies outlined in the socioeconomic development plan for 2006–2010. Another risk is that the authorities may attempt to buy growth with directed lending through SOCBs. Strong credit expansion would also put upward pressure on inflation and could lead to higher levels of nonperforming loans, particularly as banks and the state-owned Development Assistance Fund have limited risk-management capability. A third potential problem is a shortage of power, given a high 14–15% estimated annual growth in demand.VIETNAM BUSINESS ENVIRONMENT:How internationally competitive is Vietnam's regulatory environment, and what changes can be expected?BMI assesses levels of transparency, flexibility of labour market, tax burden, development of the banking sector and credit availability, infrastructure and IT, foreign investment regime and trade liberalisation in Vietnam.Vietnam's Business Environment Risk Rating with SWOT AnalysisShort and long-term business environment risk ratings for Vietnam, benchmarked against ratings for Asia neighbouring countries.The Vietnamese economy has by most standards performed very well over the last decade. For instance, economic growth has averaged around 8 per cent per year during the 1990s. The high growth rate has mainly been achieved through large increases in investment, and a large share of the investment has come from foreign sources. However, it is likely that the Asian crisis will lead to a significant reduction in the inflows of foreign capital, which will make it difficult to maintain a growth strategy based on increased capital formation. Continued high growth requires improved economic efficiency. Such efficiency gains have to focus on the state-owned enterprises that account for a large share of the Vietnamese economy, but are known to face serious efficiency and profitability problems. This paper discusses economic consequences of some different choices regarding the role of the state-owned sector. We discuss two scenarios where the state will continue to play a dominant role - centralized or localized state-owned enterprises - and two scenarios with a stronger private sector - supporting the establishment of new private firms and privatizing existing state-owned enterprises.Country Competitiveness for VietnamCompetitiveness of Vietnam's business operating environment in supporting corporate growth and profitability over the 10-year forecast horizon, compared with regional neighbours.Vietnam has moved towards a more open trading system since it introduced market-oriented reforms. As a result, imports and exports have expanded rapidly. While the Vietnamese government is eliminating some non-tariff barriers and is reducing tariffs in preparation for meeting its goals under AFTA (ASEAN Free Trade Area), there is still a concern that high trade barriers will be maintained in the next few years to protect certain sectors. At the same time, export-oriented industries are becoming a higher priority in thegovernment's economic development plans. Eventually, these seemingly contradictory development strategies will need to be reconciled. Moreover, formal rules in many areas of the trading system have not been defined; while in others, the measures and their practical interpretation are frequently changing. Companies are advised to seek current and specific information about the issues discussed below in planning their market entry approaches.(i) Membership in Free Trade Agreements: In July 1995, Vietnam became a member of Association of South East Asian Nations (ASEAN) and subsequently, a member of ASEAN Free Trade Area (AFTA). As part of AFTA, ASEAN members (including Brunei, Philippines, Indonesia, Laos, Myanmar, Malaysia, Singapore, Thailand, and Cambodia) are committed to making this region a competitive trading area. Under the harmonization process called CEPT — the Common Effective Preferential Tariff Scheme — intra-regional tariffs, especially for manufactured goods, would be reduced to a level of between zero to five percent by year 2003. Vietnam has been granted an extension until 2006 to comply with this requirement.(ii) World Trade Organization (WTO): Vietnam has initiated the application process for membership into the WTO and has engaged in several working group meetings on accession in Geneva and bilateral negotiations with other WTO members.(iii) Trade Regime Developments: Streamlining the tariff structure is one remaining key trade liberalization issue. However, some of the government's major obstacles stem from pressures to protect domestic industries and the potential loss of significant tax revenues. Nevertheless, Vietnam is committed to reducing or eliminating tariffs and other trade restrictions, since it is a requirement for its membership into AFTA, and if it is to realize its hopes for membership into the WTO. Vietnam signed a Bilateral Trade Agreement with the United States, a prerequisite to Vietnam gaining Normal Trade Relations (NTR) status. This bilateral trade agreement addresses various market access considerations, including both tariff and non-tariff barriers.Coverage of Key Business Environment Issues in Vietnam's Domestic EnvironmentTransparency, cronyism and corruption; labour market flexibility; corporate tax burden; interest rate levels; access of private sector to lines of credit; sophistication of banking sector and stock market; levels of business confidence; infrastructure and ITForeign Direct Investment in VietnamAnalysis of foreign investment regime, foreign ownership laws; attractiveness of business environment to foreign investors; review of major foreign direct investments over the last 24 months, and of strategic sectors attracting most interest.Registered foreign direct investment in Vietnam during the period 1988-2001 was valued at approximately US$ 40 billion in 3,000 projects. Of this, approximately US$ 20 billion has been realised. Of the FDI committed so far, Singapore is at the top with committed capital of US$ 6.88 billion, followed by Taiwan with US$ 4.88 billion and Japan with US$ 4.06 billion. In terms of realised FDI, Japan topped with up to US$ 3.03 billion (75% of its registered capital), followed by Taiwan with US$ 2.6 billion (54% of registered capital) and Singapore with US$ 2.2 billion. In 2001, registered FDI was worth US$ 3.02 bn. an increase of 25.8% over 2000 (US$ 2.1 bn.). Total realised FDI was US$ 2.3 bn. in 2001, an increase of 3% over 2000.In the area of foreign trade, import & export restrictions have been reduced significantly, gradually moving away from state monopoly. Vietnam is now a member of ASEAN Free Trade Area, APEC and is currently negotiating for its accession to WTO. Last year, Vietnam signed a Bilateral Trade Agreement with USA which came into effect 11th December 2001.Tariff and non-tariff barriers on trade have been gradually brought down/eliminated. Import duties have been substantially reduced.The tax system has been reformed with the broadening of the tax base and the introduction of new taxes such as VAT and corporate income tax to replace turnover tax and profit tax respectively.The number of products subject to export or import prohibition or restriction has been reduced. Prices and domestic trade have been liberalised and most subsidies have been removed. The requirement of government approval of contracts and prices for lot shipments has been abolished.Multiple exchange rates have been replaced with a single rate reflecting market forces. A tight monetary policy has been adopted to check inflation. The banking system was also reformed into a two-tier system; a central bank and commercial banks. Private sector has been allowed into the banking sector.During the period 1993-2001, ODA committed by donor countries and agencies to Vietnam was US$ 19.7 billion, of which US$ 9.2 billion was disbursed. Disbursement in 2001 was estimated at US$ 1.7 billion. The biggest donors are Japan, World Bank, and ADB, accounting for 75% of the total. ODA pledged for 2002 is US$ 2.4 bn.Exports grew at an average of nearly 20% annually during 1999-2000. In 2001 exports grew by 3.8% to US$ 15 bn., as against the 24% growth rate achieved in 2000. Imports increased by 3.4% in 2001 to reach US$ 16.2 bn., as against the 34.5% growth rate achieved in 2000. From a food importer, Vietnam has become world's third biggest rice exporter and second biggest coffee exporter.Foreign Trade with VietnamAnalysis of trading environment, government trade policy, liberalisation measures, tariffs and membership of trade areas Foreign Exchange ControlsGenerally, the inflow of foreign currency into Vietnam is welcomed with minimum restrictions while the transfer of foreign currency out of the country is still controlled. Foreign currency income generated in Vietnam from exports, services and any other sources must be deposited at or sold to licensed banks in the country, except in special cases which have the approval of the State Bank. Vietnamese companies, foreign invested eneterprises, parties to business cooperation contracts, foreign contractors and foreign branches must sell upon the receipt, at least 50% of their current foreign currency earnings. Normally, banks give priority in sale of foreign currency to the companies who need foreign exchange for import of materials and supplies for production of export goods.Tariff RatesTariff Code: In late 1998, the National Assembly of Vietnam issued a new Law to amend the Import and Export Tariffs Law. This law was drawn up in accordance with the Harmonized Tariff System (1996 Version) to facilitate the country's global integration. The amended law, effective on 1 January 1999, contains more than 6,400 tariff lines.Import Tariffs: Under the current law, import taxes are issued by the National Assembly and then detailed by the Ministry of Finance. There are three tariff rates for imported goods: ordinary tariffs, preferential tariffs, and special preferential tariffs. Ordinary tariffs apply to goods originating from countries which have not exchanged Normal Trade Relations (NTR) agreements with Vietnam. The preferential tariffs on the list apply to goods imported from countries or regions, which have NTR status with Vietnam. (India has NTR status with Vietnam and hence imports from India are subject to preferential tariff rates). The special tariffs apply to goods imported from countries that have exchanged special preferential tariffs agreements with Vietnam. For instance, ASEAN members are entitled to such special preferential tariffs. Ordinary tariffs are 50 percent higher than preferential tariffs and can be increased or reduced as long as the margin does not exceed 70 percent of the preferential tariffs.In addition to the above-mentioned tariff rates, Vietnam also reserves the right to impose surtaxes such as anti-dumping and countervailing duties. No regulations on surtaxes are available at present.Exemptions are granted if the goods fall into the following categories: (i) special goods for the purpose of national security and defense, science, education and training; (ii) specialized equipment, machinery and facilities for investment projects (both domestic and foreign); (iii) non-refundable aid, goods in transit, temporary imports and re-exports for exhibitions. Goods brought in for foreign-invested projects may qualify for exemption if they fall under five general categories: (1) equipment and machinery imported for the formation of the fixed assets of the project and spare parts and components attached thereto; (2) construction materials imported to build the fixed assets of the project that are not produced locally; (3) materials and supplies imported for the local manufacturer of the equipment and machinery included in the technological process of the projects; (4) specialized means of transport included in the technological process of the project or for transportation of groups of employees (with 24 seats or more); and (5) technology transfer that is considered as capital contribution by the foreign partner.Special Consumption Taxes: Other taxes include the special consumption taxes on goods such as cigarettes, alcohol, spirits and beer, automobiles with twenty-four seats or less, and other miscellaneous items such as gasoline, air conditioners with capacity of 90,000 BTU or less, playing cards, and joss-paper. Special consumption taxes also apply for services such as dancing, massage, karaoke, casino, jackpot machine games, certain betting activities and golf. The special consumption tax is applicable to the import and production of the previously mentioned goods and services. Importers pay the special sales tax upon importation, ranging from 15 percent to 100 percent. The tax is calculated on the basis of applying the applicable tax rate to the CIF value of the goods. Since 1 January, 1999, the Government issued a " luxury tax" on passenger automobiles produced in Vietnam. The luxury tax applies for five seat or less, six-fifteen seat, and sixteen-twenty four seat vehicles at rates of 100 percent, 60 percent, and 30 percent, respectively. Locally produced commercial automobiles such as trucks and vans are exempt from the luxury tax, but subject to Value Added Tax (VAT) of 10 percent, which is not applied to passenger automobiles.Value Added Tax (VAT): VAT replaced the previous turnover tax, and is levied on a sliding scale from zero percent to 20 percent. There are four rates of VAT: (i.) zero percent for exported goods; (ii.) five percent for the provision of essential goods and services (e.g. clean water, food stuff, medicine); (iii.) standard rate of 10 percent for activities such as power generation, mineral products, postal, and transportation services; and (iv.) 20 percent for activities such as lottery and brokerage. Import QuotasThe Ministry of Trade (MOT), in consultation with the Ministry of Planning and Investment and other relevant ministries and ministerial-level agencies, requested the Government's approval to set formal import quotas on several commodities. As Vietnam is on track to fully implement its international commitments to liberalize trade, the list of import quotas is now limited to certain imports that have great impact on the economy such as petrol. Also, the Government, from time to time, decides to suspend the import of some commodities. In the past, those commodities included automobiles (under twelve seats), some types of steel, paper and other items. Import quotas are often administered through the import licensing system managed by MOT and are mainly granted to state-owned enterprises. Information about the allocation procedures for import quotas and how the process is enforced is not made publicly available. Export Controls:As of 2001 the Government implemented a new import and export policy under which lists of imports and exports subject to restrictions and licenses will be in effect for a period of five years (2001-2005) rather than just one year as previously provided. This is a positive step to make the country's import and export regulations more stable and predictable to importers and exporters. The list of export/import items banned/restricted are given in Annexure.Permits and Licenses: Permits and licenses are now required for exports of a certain number of goods under supervision of the Ministry of Trade, the General Department of Post and Telecom and other ministries. They include (i) textiles and garments exported within quotas agreed upon between Vietnam and other countries, (ii) goods subject to export control under international agreements to which Vietnam is a signatory and (iii) postage stamps. Other than these, any enterprise can export goods in accordance with its business license.Export Duties: Export duties are levied on many natural resources and commodities with a maximum rate of 45 percent. The government has recently increased export duties on many raw materials as part of a strategy to stimulate more value-added processing in the country.Indo-Vietnam Bilateral Trade(in US$ million)YearExports to  VietnamImports from  VietnamBalance of tradeTotal  trade2001-02   164.216.69147.51180.892000-01220.0011.50208.50231.501999-2000141.6311.48130.15153.111998-99128.329.10119.22137.421997-98112.736.83105.90119.561996-1997112.601.70110.90114.301995-1996124.8815.68109.20140.561994-199558.5053.974.53112.651993-199429.0545.80-16.7574.851992-199318.6366.03-47.4084.661991-199212.8738.03-25.1650.901990-199117.1457.85-40.7174.991989-19908.10141.46-133.36149.561988-198917.037.999.0425.021987-19885.359.89-4.5415.241986-198711.372.978.4014.341985-198611.217.233.9818.44India's Principal exports to Vietnam(in US$ million) 1998-991999-002000-012001-02Oil meals20.9826.0940.1315.23Drugs, pharma-ceuticals & fine chemicals36.7432.0940.1936.23Inorganic/organic agro chemicals7.809.7510.887.86Rubber manufactured Products8.6013.7515.469.13Plastic & Linoleum Products1.303.0530.6224.98Machinery & Instruments29.0014.6619.668.00Transport equipment1.8612.020.820.71Cotton yarn, fabrics & made-ups7.004.457.162.63Manmade yarn, fabrics & Made-ups 0.681.591.07Marine products 4.5210.045.94Manufactures of Metals 5.734.413.61Iron & Steel bars, etc. 4.506.906.25Primary & semi-finished iron & steel 3.806.152.13Aluminium, other than products  2.524.38Residual chemicals & allied products 2.323.352.82Paints, enamels, varnishes, etc. 0.162.320.31Wheat   12.59India's share in Vietnam's importsYearTotal ImportsImports from IndiaIndia's share in VN's importsIndia's ranking among exporters to VN2001160002291.44%N.A.2000156351781.14%15th1999116621231.05%16th1998115001090.94%17th199711592870.75%18th199611114880.79%N.A.VIETNAM'S KEY INDUSTRY SECTORSWhich industry sectors in Vietnam will grow fastest, and where are the major investment opportunities in the Vietnamesemarket?Investment opportunities in Vietnam's high growth industries, including automotives, food and drink, infrastructure, oil and gas, pharmaceuticals and healthcare, telecommunications and IT.Vietnam's Key Industry Sectors ContentsIndependent 10-year forecasts to end-2017 and industry trend analyses for Vietnam's leading industry sectors, including a selection from:- Automotive - Defence & Security - Food & Drink - Freight Transport - Infrastructure - Oil & Gas - Pharmaceuticals & Healthcare - TelecommunicationsCoverage of Vietnam's Key Industry Sectors - Vietnamese Market OverviewSize, value and structure of industry; impact of liberalisation and privatisation on sector performance and prospects; friendliness of business environmentThe current Vietnamese foreign policy is: " Implement consistently the foreign policy line of independence, self-reliance, peace, cooperation and development; the foreign policy of openness and diversification and multilateralization of international relations. Proactively and actively engage in international economic integration while expanding international cooperation in other fields. Vietnam is a friend and reliable partner of all countries in the international community, actively taking part in international and regional cooperation processes" (Extract from The Political Report of The Central Committee - Vietnam Communist Party, 9th Tenure, at The Party’s 10th National Congress.As of December 2007, Vietnam has established diplomatic relations with 172 countries. Vietnam holds membership of 63 international organizations such as United Nation, ASEAN, AES, La Francophonie, WTO and 650 non-government organizations. Latest Developments in Vietnam INCLUDEPICTURE "" * MERGEFORMATINET Potable Water and Improved Education for Ethnic MinoritiesTo promote better health and education of ethnic minorities VNAH and HealthEd donated ten computers to Kon Ray Boarding High School, constructed ten village water supply systems and a kindergarten school in the mountainous Kon Tum Province villages of Ngoc Tem and Dak Rve.  Each new water system includes a well, an electric pump, and a storage tank. The ten wells will benefit over 1,000 people. The wells will provide safe clean drinking water to these communities, thus reducing the threat of waterborne diseases.In September 2002, VNAH & HealthEd funded a kindergarten, which will serve approximately 50 children from Dak Rve Commune. This school will be supplied with a well water system, teaching aids and toys.Helping Ethnic Minorities in the Central HighlandsVNAH and HealthEd recognize that the ethnic minority population concentrated in the Central Highlands are among the poorest and most in need of assistance of any group in Viet-Nam. They often lack adequate schools, health clinics, or means to earn a living wage. Few outside donors or international non-governmental organizations operate in these areas. These are the reasons VNAH and HealthEd have decided to work closely with the local provincial departments of labor, invalids and social affairs to provide assistance to the ethnic minority populations.  Direct contributions have been the principal source permitting VNAH and HealthEd to address these concerns.  With the assistance and cooperation of the local authorities, VNAH and HealthEd have recently provided 10 computers to the boarding high school, completed a midwife training program, a new kindergarten, and several water wells.Midwife TrainingThe midwife training course is a joint project of HealthEd and the Medical School of the Kon Tum Province Department of Health. The course provides thirty ethnic minority village healthcare workers in the Province with basic knowledge of health care, hygiene, pre and post-natal care, delivery procedures, and nutrition.The village healthcare workers who participated in the training course were from remote mountainous villages where health care facilities, medical skills, and medicine are scarce.  The indigenous women depend on midwives at the time of birth.  There is a high infant mortality rate in the region since few, if any, of the traditional midwives have had any formal medical training.  The issue is further complicated by a lack of health care facilities, medical skills, and medicines. INCLUDEPICTURE "" * MERGEFORMATINET During a brief completion ceremony last October, HealthEd provided each trainee a first-aid kit of medical supplies consisting of a scale, stethoscope, scissors, bandages and other basic sterile instruments.10-year Industry Forecast for VietnamThe latest Vietnam Oil & Gas Report forecasts that the country will account for just 1.37% of Asia Pacific regional oil demand by 2011, while providing 4.64% of supply. Asia Pacific regional oil use of 21.4mn barrels per day (b/d) in 2001 reached 24.87mn b/d in 2006. It should average 25.52mn b/d in 2007 and then rise to around 28.99mn b/d by 2011. In terms of natural gas, the region in 2006 consumed 409bcm, with demand of 618bcm targeted for 2011, representing growth of 50.9% between 2006 and 2011. Production of 329bcm in 2006 should reach 479bcm in 2011 (+45.4%), but implies net imports rising from 80bcm per annum to 139bcm. Vietnam's share of gas consumption in 2006 was 1.71%, while its share of production was 2.12%. By 2011, its share of gas consumption is forecast to be 3.24%, with the country accounting for 4.17% of supply.Global oil demand growth is now expected to be 1.9% in 2007, down from our June forecast, but with Asia Pacific and the CEE regions dominating. While oil demand growth assumptions remain robust, there are early signs that future revisions will be on the downside as factors such as the credit crunch kick in. The overall demand outlook for the period to 2011 remains healthy, but subject to review if the macroeconomic outlook deteriorates. Our projections for 2007 as a whole are revised upwards from the last quarterly report. We are now assuming an OPEC basket price average of US$64 per barrel, compared with the US$59 estimate provided by our last quarterly report. Based on recent price differentials, this implies Brent at US$67.81, WTI averaging US$66.18/bbl, and Urals at US$64.43/bbl.Vietnamese real GDP growth is forecast at 8.2% for 2007, unchanged from 2006. We are also assuming 8.2% growth in 2008, followed by 8.7% in 2009 and 8.5% in 2010/11. Exploration success is on the rise in Vietnam, with a growing number of international oil companies (IOCs) partnering PetroVietnam in finding and developing hydrocarbon resources – particularly gas. We are assuming oil and gas liquids production of no more than 380,000b/d by 2011, although the country is expected to pump 390,000b/d in 2007. Consumption is forecast to increase by 6-10% per annum to 2011, implying demand of 398,000b/d by the end of the forecast period. Gas supply and demand is forecast to increase from the 2006 figure of 7bcm to 20bcm by 2011.<br />Historic data series and 10-year forecasts to end-2012 for all key industry indicators (see list below), supported by explicit assumptions, plus analysis of key downside risks to the main forecast, including:<br />Oil reserves (bn barrels), production, consumption, refinery capacity and throughputs (000 b/d)<br />Oil exports (000 b/d), value of oil exports (US$mn - BMI base case) - Oil price (US$/bbl, OPEC basket)<br />Value of oil exports at constant US$30/bbl and constant US$60/bbl (US$mn)<br />Proven gas reserves (tcm), production and consumption (bcm)<br />Gas exports/(imports) (bcm)<br />Value of gas exports/(imports) (US$mn); value of gas exports/(imports) at constant US$30/bbl and US$60/bbl (US$mn)<br />Value of petroleum exports (US$mn); value of petroleum exports at constant US$30/bbl and US$60/bbl (US$mn)<br />