In late June Taiwanese entrepreneurs, who years ago left Taiwan for Vietnam in search of greener pastures, were faced with the most dramatic ups and downs in their lives to date. Like the U.S. troops who were bogged down in a futile campaign in the Vietnam War of the 1970s, the Taiwanese investors, who have poured some US$10 billion into Vietnam, are trapped in their own Vietnamese quagmire.

Over the past decade Vietnam had quickly risen from the ashes, proving itself to be the Cinderella of Asia. Japan's Nomura Research Institute rates Vietnam as the production base with the greatest prospects in the Association of Southeast Asian Nations (ASEAN). Vietnam is the second largest recipient of Taiwanese investment next to China. More than 4,000 Taiwanese companies set up shop in Vietnam, their new promised land. But overnight, the magic vanished, just as Cinderella's princess dress and horse-drawn carriage disappeared without a trace when the clock struck midnight.

In April the Vietnamese government announced that the trade deficit had widened to historic levels in the first quarter of this year. (Table 1)

In May the major rating agencies downgraded Vietnam's sovereign credit rating, which undermined international investor confidence. The Vietnamese stock market, which had once soared to 1,200 points, plummeted for nearly a full month, with volume shrinking by 80 percent. Presently the index has shed two thirds of its value, hovering slightly above 400 points. (Table 2)

Following on the heels of the stock market bust, consumer prices in May and June rose by as much as 25 percent, making Vietnam the Asian country with the most severe hyperinflation. (Table 3 - see next page)

Adding to the nation's woes, the consistent depreciation of Vietnam's currency, the dong, and a global shortage of US dollars have caused currency exchange rates on the streets to mount. (Table 4)

More than a few observers are dumbfounded by the Vietnamese economy's high-speed downward spiral.

Taiwanese investors who readily invested in plant expansions during the economic boom now find themselves between a rock and hard place, stifled by skyrocketing inflation and exorbitant interest rates of up to 21 percent.

"If it keeps going like this, more than 10 percent of Taiwanese businesses will face an operational crisis," predicts Hua Ngoc Lam, owner of Dai Phat food company, Vietnam's major wedding cookie and gift box manufacturer. Hua is deeply worried, given that his own business last year posted the first losses in its ten-year history.

Is it by accident that the clock struck midnight? Or is it fate? Will Cinderella be able to find her lost glass slipper? Is investing in Vietnam still a viable option?

Government Allowed Situation to Spin out of Control

The Vietnamese government opened the economy too quickly, which caused it to lose control. Now speculators manipulate everything from the stock market to real estate and rice prices. 

In downtown Ho Chi Minh City, Mr. Cao, who has been running a barber shop for 20 years, works from dawn to dusk busily serving a dozen or so customers per day, but only makes about US$5 a day. Yet Cao has not dared to raise his prices in a decade. The problem is that rice prices have almost doubled, while rice noodles, another Vietnamese staple, are 50 percent more expensive. Electricity rates have risen, and seem certain to rise further. Nowadays, Cao says, he first checks how much money he has left in his pocket before he decides whether to take a meal. When asked why he doesn't raise his own prices, Cao explains with a wry smile that he already moved his barbershop to a cheaper location to cut costs, after his rent was doubled. But he does not dare to charge his customers more for fear that the loyal old customers will stay away.

Martin Rama, chief economist for the World Bank in Vietnam, does not mince words. He points out that in comparison with China, which is using foreign investment to develop its industry, the Vietnamese government tends toward directly taking high profits and boosting tax revenue through real estate deals, giving capital free rein to engage in speculation. Asian Development Bank figures show that some US$14 billion of hot money flowed into the Vietnamese property market in 2007, which means that 70 percent of foreign direct investment is speculating in real estate.

"That money has come here too fast," asserts Jan Yei Fong, director of Indovina Bank, a joint venture between Industrial and Commercial Bank of Vietnam and Taiwan's Cathay United Bank.

The Vietnamese government took a leading role in creating the real estate bubble, instead of encouraging down-to-earth industrial investment.

Hua Ngoc Lam relates a telling story: A couple of months ago he wanted to take out a bank loan to finance a factory expansion. To his surprise, the state-owned bank encouraged him to buy a private residence instead, on the grounds that it would take more time recouping costs for the factory than for making a quick buck in the housing market.

Since the government wants to boost economic figures and tax revenue, the state-owned banks are easy on credit, and developers are eager to launch projects. In the middle of last year, real estate prices in the prime areas of Hanoi and Ho Chi Minh City surpassed US$1,800 per square foot, markedly more than in Taipei and almost as expensive as in downtown Tokyo. Yet Vietnam's national income stands only at one thirtieth of Japan's.

Another clear example for the government taking the lead in speculation is the stock market. Vietnam has proceeded in a fashion that differs markedly from Taiwan and China, which have been cautious and fearful of hot money, and opened their economies to outside forces at a snail's pace. Catherine Yeung, investment specialist with Fidelity International, notes that Vietnam has been overly hasty in encouraging foreigners and overseas Vietnamese to invest in the local stock market, despite a still unsound system that lacks a mechanism for full information disclosure and has no hedging instruments. As a massive amount of capital flowed into Vietnam's miniscule stock market, with scarcely over 250 listed companies, stock prices skyrocketed across the field, enticing small investors, who account for 95 percent of the market, to blindly follow the bullish sentiment, and creating a bubble with price-to-earnings ratios as high as 73.

The bubbles in Vietnam's property and stock markets were caused by the presently widespread "make a quick buck" attitude. This gold rush mentality can further be attributed to Vietnam's single party regime and its lack of oversight.

Communist Government's Underground Forces

Now and then the Communist red flag is hoisted high along Vietnam's boulevards and small alleys, showing that Vietnam is still ruled by the Communist Party, despite the opening of its economy to market forces.

Lin Chin-ming, director of the Graduate Institute of Southeast Asian Studies at Tamkang University, notes that in Vietnam, when it comes to everything from the nation's land use planning to budget allocation, "the party has always called the shots," and the legislature is merely a rubberstamp body. As a result everyone from the higher-ups in the central government to state-owned enterprises and banks habitually pockets public funds, and vested interests are powerful.

"Their power resembles the dense network of underground tunnels that the Viet Cong dug below Ho Chi Minh City," says an influential Taiwanese investor who has been active in Vietnam for almost 20 years in describing the invisible forces that run the country. Even Vietnamese prime minister Nguyen Tan Dung, who was elected on a reform and anti-corruption ticket, has been forced to strike deals with these underground forces.

The Vietnamese government, for instance, raised loan interest rates to 21 percent to slow down investment. But Vietnam's big enterprises, be they state-owned or privately held, all have high-ranking Communist Party officials on their boards of directors, and are still able to borrow huge amounts of money almost interest-free from state-owned banks, whose boards are equally dominated by party cadres. The four largest state-owned banks have a combined market share of more than 60 percent. Against this backdrop the government's measures to cool down the economy have hardly had any effect, while its fiscal black holes have become even deeper.

Hostile Tolls on Highway 51

The tacit approval the central government gives to local party officials behaving like lords becomes apparent on Highway 51, along which many Taiwanese businesses are located.

Four-lane Highway 51 starts in the southern port of Vung Tau City and moves northward, linking with Highway 1 to connect with Ho Chi Minh City. The highway has always been of crucial importance for foreign companies, because it links the heavily industrialized southern provinces of Dong Nai and Binh Duong. On an entire length of just 123 kilometers, less than the distance between Taipei and Taichung in central Taiwan, Highway 51 has 12 toll stations, three times more than one would find in Taiwan. One trip to the south will set you back at least NT$300.

But what infuriates foreign entrepreneurs even more is that the government takes money, but doesn't do anything. This highway, which purportedly cost US$2 billion to build, not only is full of potholes, but also is only partly asphalted – some sections are just dirt covered with a layer of gravel. In dry weather thick dust is blown into the air, and when it rains the roads become a muddy mess. During the rainy season ordinary cars cannot get through.

In a World Economic Forum survey of international investors in Vietnam conducted in 2007, 15 percent of the respondents picked corruption as the biggest obstacle to the country's development, the highest percentage for any of 14 possible answers. Buying a corrupt official in Vietnam used to cost half as much as in China, but now it has become the other way round.

"As long as the problem of the political structure is not solved, Vietnam's economic structure won't stand a chance of true reform," Lin Chin-ming concludes gravely.

Investing with a Long-Term Perspective

Is Vietnam still a viable option for foreign investors? Arthur Ting, chairman of property developer Phu My Hong Corp., has a straight answer to this question. He says he usually differs with outsiders' views of Vietnam's economic prospects. "In March last year everyone was positive about Vietnam, but I said the bubble is going to come," Ting recalls. "But now I feel that Vietnam is actually not as doomed as everyone is saying."

Ting took over his company, a Taiwanese-Vietnamese joint venture, from his father Lawrence Ting, whom Taiwanese businesspeople admiringly call the "King of Vietnam" for his legendary success in the infrastructure and housing market there.

Depending on when they went to Vietnam, how big their investment is and where they have invested, Taiwanese entrepreneurs are divided over the country's prospects. In the second quarter of this year when Vietnam's financial crisis worsened, large companies such as the Formosa Plastics Group, Hon Hai Precision Industry, TECO Electric and Machinery, and Yang Ming Marine Transport all announced investments in Vietnam worth a combined US$20 billion.

"The main difference lies in how long you want to invest," says Ting in explaining why large investors are not necessarily scared away by short-term economic hiccups. Ting's father began to develop infrastructure and build residential and commercial areas in swampland south of Ho Chi Minh City some 15 years ago. Since then the company has braved three financial crises in Vietnam.

"Although Vietnam is currently in a crisis, its economic development and the soundness of its finances are much better than during the previous two crises," Ting points out. Vietnam cannot escape short-term pain, but if it is able to carry out reforms, its long-term development will be even better, Ting believes.

Ting advices other Taiwanese investors to no longer come and go like nomads, but seize the opportunity this time to develop long-term business plans for Vietnam while at the same time actively strengthening their companies' conditions and searching for long-term niches.

The World Bank's Martin Rama suggests that investors wait with patience for perhaps another year and a half. Meanwhile, he urges the Vietnamese government to carry out long-term reforms, if it wants to stage a comeback. Recently, the Nguyen government has begun to put the brakes on large development projects planned by state-owned enterprises and has also vowed to severely crack down on the black market. Market rumors hold that China has already assisted Vietnam with foreign reserves on the order of US$4-6 billion to stabilize the situation.

Whether Cinderella will be able to find her lost glass slipper entirely hinges on Vietnamese government reforms. Whether Taiwanese businesses will be able to extricate themselves from the current quagmire and come out ahead in Vietnam also depends on the wisdom of their executives.

Translated from the Chinese by Susanne Ganz

---

Chinese Version: 越南還能投資嗎？