Magazine article Business Credit

Hot Spots: Vietnam

Magazine article Business Credit

Hot Spots: Vietnam

Article excerpt

International Insight

The long-delayed, historic trade pact with the United States, which Vietnam's National Assembly approved late last year, has finally gone into effect. Despite the long runup to its implementation (the deal was signed back in 2000), most Vietnamese firms are, as yet, illprepared for the opportunities and challenges confronting them. The accord grants U.S. companies gradually improving access to the Vietnamese market. It also promises them strengthened protection of intellectual property rights. But it gives Vietnamese exporters immediate relief from the high tariffs (averaging 40 percent) they had to overcome to enter the U.S. Duties now average only about 4 percent, allowing Vietnamese companies to compete on equal terms with rivals from other countries in the largest market in the world.

Some Vietnamese industries producing textiles, garments and aqua products are already selling successfully here. But most are manufacturing poor-quality goods at a relatively high cost and will find it difficult-even with the newly low tariffs-to compete with good and cheap products from China and other Southeast Asian countries. One can only hope that, by contrast, U.S. companies will take full advantage of the market opening offered to them, since Vietnam, with its population of 76.5 million, is likely to become a thriving market at one of the world's more important crossroads.

The economy will slow its growth this year, but will still put in a strong performance by international standards. It has been weighed down by a number of factors, among them low world market demand and prices for oil and coffee. One of the risk factors that one should keep an eye on is a property bubble, particularly in the urban centers of the capital Hanoi and Ho Chi Minh City (formerly Saigon), which has taken land and housing prices to unsustainable levels and is bound to burst one of these days.

But world market prices for oil and gas have already strengthened since earlier this year, and Vietnam should soon see a pickup in earnings from this source. Regarding coffee, of which the country was only a fringe producer a decade ago (it is now second-ranking, after Brazil), the authorities are making efforts to persuade farmers on marginal land in the Central Highlands, the primary growing areas, to switch to other crops such as rubber, pepper, cotton and corn, while trying to expand plantations with higher-value arabica in the northern part of the country.

On February 1 of this year, new banking rules went into effect that not only freed state-run banks to make their own lending decisions but also made them fully responsible for the condition of their portfolios. Previously, these institutions had to get all significant loans approved by the Central Bank, and much of their lending was officially directed toward state firms which, in many instances, could not repay what they borrowed. Now, the banks can determine for themselves where they wish to channel their resources (essentially, instead of doing what is specifically allowed, they can now do whatever is not specifically forbidden), but they will have to compete in the market and use funds effectively and will survive only if they get paid interest and can retrieve the loan principal-or else they will be allowed to go bankrupt.

Under the new rules, banks must record their activities using Western accounting standards. …

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