Risks loom for the brave foreign investors in Vietnam

Risks loom for the brave foreign investors in Vietnam

By Dean Yates

HANOI (Reuters): Few countries have disappointed foreign
investors like Vietnam.

To many businessmen, Vietnam has gone from being an El Dorado
to an investment backwater in less than a decade despite the
nation's industrious people and vast natural resources.

Indeed, the short-term outlook looks even bleaker as reforms
stall under a hesitant communist leadership and the risk of
tighter economic regulation appears the favored solution to a
growth slowdown and lack of hard currency.

Vietnam specialist Ari Kokko from the Stockholm School of
Economics said there was no compelling reason for foreign firms
to invest in the country at the moment if they were risk averse.

"The uncertainty about the future direction of Vietnamese
development is too large," Kokko told Reuters.

"The main risk for foreign investors is broad re-regulation of
the economy. If the government is unwilling to enter into phase
two of Doi Moi and the supply of foreign capital keeps shrinking
there is no other way to keep the economy afloat."

Vietnam insists it will deepen the landmark Doi Moi
(renovation) reforms adopted in the late 1980s that revived a
moribund economy and lured investors in the first place.

But those assurances do not stack up for investors tangled in
bureaucracy, many operating costs priced in U.S. dollars and now
strict foreign exchange rules.

A number of foreign firms have laid off staff and scaled back
operations in Vietnam, although complete details are not
available. Officials have said 19 foreign banks closed their
representative offices last year, although they have attributed
that mainly to Asia's economic crisis.

Executives say foreign business activity in construction,
property and banking has slowed in the past 18 months.

Analysts said re-regulation of the economy was already
apparent in new currency rules enacted late last year that
require many foreign-invested firms to immediately convert 80
percent of dollars held in current accounts into the local dong
currency.

Mark Whitehead, chief representative at Jardine Pacific
(Vietnam) in Hanoi, said a key risk would remain the threat of
devaluation and non-convertibility of the dong.

Vietnam has adopted a policy of incremental devaluations to
ease pressure on the dong. But with foreign currency reserves
believed to be less than US$2 billion, most economists expect the
local unit to stay under the hammer amid flat export growth and a
big slowdown in foreign investment inflows.

Whitehead said few investors doubted the ultimate potential of
Vietnam to be a success but added that in the near term the
country would suffer from a poor reputation.

"One of the greatest problems is that investors here are not
about to go away and praise Vietnam as a great place to do
business. Others will listen to this sober assessment and are
unlikely to jump in," he said.

Businessmen added that there was little concern about social
unrest in the near future.

"I don't have to tell my customers to be afraid about politics
over the next five years at least and that is actually a very
good argument to invest," said Gerrit Thissen, country manager at
ABN-AMRO Bank in Hanoi.

"Vietnamese society is quite homogeneous and I don't see
anything upsetting that balance. It took 30 years for things to
unravel in Indonesia," he said, referring to violence and
instability racking the world's fourth most populous country.

Vietnam's Communist Party also maintains a tight grip on
political expression through an extensive public security network
and tolerates little dissent.

But while bullish long term, Thissen expressed concern over
short-term economic problems, especially the lack of hard
currency and the heightened potential for bad bank loans as the
economy slowed.

The International Monetary Fund has predicted economic growth
of 3 percent or less this year. Hanoi says the economy grew 5.8
percent last year although many economists believe the figure was
closer to between 3 percent and 4 percent.

Kokko said hard currency reserves would be insufficient to pay
for necessary imported consumer goods, machinery and other items,
leaving some companies holding their breath.

"The decisions about how to allocate available resources will
not be taken by the foreign investors. That's not a nice scenario
for any foreign company operating outside really strategic
sectors," he said.

Kokko and some businessmen doubted Vietnam would ride the wind
of an eventual Asian recovery because neighboring countries
implementing sweeping reforms would emerge leaner and meaner.

Investors burnt during the regional crisis would also be aware
of risk more than ever before, they added.

Thissen said Hanoi needed to pay attention to investors that
had sunk roots in the country and understood the risks.

"These companies will be easier to convince to stay or
expand," he said in an interview.

Analysts cited other risks as weak central control over
economic decisions in the provinces, or as Vietnamese are fond of
saying: "The king's rule stops at the village gate".

In addition, there was risk of policy changes that made little
sense, such as the recent move to increase tariffs on U.S. goods
by 50 percent while Hanoi and Washington are negotiating a trade
agreement.

Then there was the perceived attraction of 79 million people
-- whose annual per capita incomes are just above $300.
"Investors had convinced themselves they needed a foothold in
this market. But how long will it take before all these people
have any money to spend?" asked Jardine's Whitehead.