New challenges for Vietnam
By Ngoc Tran in HCMC
After many decades of closing its doors to the world and facing the Western embargo, Myanmar has been embracing drastic reforms, thus attracting the attention of foreign investors. The country could become a magnet for investment in the region – and, as such, a challenge for Vietnam.
Myanmar is one of the large Asian markets with a population of over 60 million people, but it has yet to be explored. It is a large country rich in natural resources such as petroleum, natural gas, wood and precious stones; and it could become a leading exporter of rice and marine products. The country also holds exciting potential with regard to petroleum. As for rice, Myanmar has drawn up a plan to more than double its rice exports this year to 1.5 million tons and that number will rise to 2 million tons in 2013 and to 3 million tons by 2015.
Tourism in Myanmar is gaining momentum with attractions such as a temple area that includes over 2,000 temples built in the sixth and seventh centuries in Bagan, the primary tourism city of Myanmar. Other famous tourist cities in Myanmar are Yangon (home to the Vang Temple, which is 2,500 years old) and Mandalay (a city known for precious stones).
In 2011 the number of foreign tourists in Myanmar was only 330,000, but that number was a speedy increase – the average rise is 20% per year, according to the Myanmar Ministry of Hospitality and Tourism. As well, because Myanmar was once a British colony, the English-speaking workforce in this country is by no means small. Schools teach in both English and Burmese – an advantage in attracting foreign investment.
Myanmar’s present circumstances may remind many people of Vietnam during the early years of the Doi Moi (reforms). At that time many foreign entrepreneurs jumped at opportunities to do business in Vietnam.
Certain foreign companies have made known their intentions to develop roads, railroads and ocean ports of in Myanmar. Petroleum, mineral production, banking and tourism are also other industries in Myanmar that may attract the most investment. Jim Rogers, chairman of the conglomerate Rogers Holdings of Singapore, commented, “If you can find a direction in which to go with your investment, you may get rich over the next 30 years or so.”
According to statistics of Myanmar’s government, from the end of 1988 to March of 2011, the country attracted US$36.05 billion in foreign direct investment (FDI) from 31 nations and territories. FDI in Myanmar has skyrocketed since the country reopened its doors. From 2010 to 2011, it took in over US$20 billion in foreign capital, more than the amount it had received in the two previous decades. Of that number, China (including Hong Kong) is the largest foreign investor in Myanmar to the tune of US$15.5 billion followed by Thailand with US$9.56 billion, South Korea with US$2.92 billion, Britain with US$2.66 billion, and Singapore with US$1.82 billion.
Alongside the bright outlook, foreign investors still face many difficulties. Having just opened its doors to the world, the legal system in Myanmar is insufficient, so administrative practices are bureaucratic. The banking system is very weak and inadequate; exchange rate risk is high because the country is lacking in foreign currency. Foreign currency trading is not closely regulated, thereby creating a great disparity in foreign exchange rates, which negatively affects import and export activities.
At present, the disparity between the banks’ U.S. dollar exchange rate and that of the open market is nearly 100 times. Even so, this is a highly potential market. It was in a deep sleep for 30 years. Now the doors have opened very quickly. “If you move too slowly, there won’t be any room left,” Tran Bac Ha, chairman of the Vietnam Bank for Investment and Development, said in his remarks about the Myanmar market.
In recent years, the Vietnamese government has encouraged domestic enterprises to do business with partners in Myanmar. Statistics, however, show trade between Vietnam and Myanmar in 2011 reached only US$150 million.
Vietnamese businesses can certainly do a better job of tapping into this newly opened market by importing products from the industries of forestry and seafood as well as exporting machinery, clothing and footwear, investing in industrial tree planting and building industrial and export processing zones.
Some enterprises are engaged in present-day pioneering, such as Thien Long Company, which has partnered with university departments of economics and the Honorable Consulate of Myanmar in HCMC to train a number of top-performing students in order to send them to Myanmar as company agents. Biti’s and VNPT have both opened Myanmar representative offices. And the biggest investment project, valued at US$300 million, belongs to Hoang Anh Gia Lai. It will develop a complex in Rangoon that includes a hotel, a business center and luxury apartments.
Opportunities for business partnerships with Vietnamese enterprises are not small. Still, once Myanmar has taken longer strides on the economic front, it will become a formidable competitor for Vietnam in attracting foreign investment capital.
It would seem that the period of foreign investors excitedly bringing their money to invest in Vietnam has passed. In 2011, according to the Ministry of Planning and Investment, FDI approvals in Vietnam declined 26% versus 2010. Not a small number of investors silently withdrew and left Vietnam. Investment funds that channeled money indirectly into Vietnam have also pulled out their capital in droves. Registered FDI capital in January 2012 dropped to a record low of only US$37.5 million, part of which included registrations of increased capital investments – only 2.5% compared to January 2011.
Difficulties faced by the world economy are still having negative effects on Vietnam. But the main cause lies in flaws within the Vietnamese economy itself: The slow pace of economic restructuring, high inflation, and state-owned enterprises that are inefficient but are still subsidized.
“High-quality” education in Vietnam is not really of high quality. Most students cannot speak English though they have spent many years at high school and university learning English.
Vietnam still needs additional reforms
An even deeper, wider restructuring of its economic foundation is the best way for Vietnam to return to success, maintaining the momentum of development of the past years and building a truly strong, stable economy.
The country needs to take steps to truly move towards becoming a market economy, meaning a lessening of government intervention in economic activity and the formation of a truly competitive environment, creating conditions for the private sector to grow strongly. Strict control must be brought to bear on the operations of state-owned corporations that rely on the government to maintain their business monopolies.
Another emerging issue is the spread of ineffective public investment. According to General Statistics Office numbers, the total investment throughout society from 2006 to 2010 trended upward at a high rate – 42.7% of GDP – 2.5 times greater than the period from 2001 to 2005. The forecast is for the rate to be at 33.5% to 35% of GDP from 2011 to 2015. The Incremental Capital Output Ratio (ICOR), which shows how much investment capital in the Vietnamese dong is required to increase GDP by VND1, has steadily increased over the years, showing that investments have been more and more ineffective. From 1996 to 2000, Vietnam’s ICOR was 5.0 but rose to 6.2 from 2006 to 2010.
Aside from this issue, investments made by state-owned enterprises achieved a low level of effectiveness in comparison to other kinds of enterprises. According to the Committee for Enterprise Reform and Development and the Ministry of Planning and Investment, state-owned enterprises hold 70% of the total real property in the economy, account for 20% of investment capital throughout society, and devour a staggering 60% of the credit in the commercial banking system, 50% of state investment capital and 70% of official development aid capital.
However, these same enterprises are responsible for only 25% of total sales revenues, 37% of pre-tax profits and 20% of the value of national industrial output. The rate of credit use by state-owned businesses to generate revenue is definitely higher than that of other enterprises. It takes VND2.2 in capital to create VND1 in revenue compared to VND1.2 in capital spent by businesses outside the state corporate sector and VND1.3 in capital expenditures by foreign enterprises operating in Vietnam.
Located within the dynamic ASEAN region, Myanmar will surely make quick progress thanks to wide-ranging reforms as well as its wealth of natural and human resources. Investors always look for places that guarantee higher returns. And as such, this country could prove to be a good place to invest.
Philipp Hoffman, general manager of Jebsen & Jessen, a commercial and industrial services firm in Singapore, said, “If it goes in the right direction, it’s very possible that the economy of Myanmar will develop fast – maybe even faster than that of Vietnam.”
The Saigon Times Daily