Vietnam Review Economy 2012

Economic and Trade Office
Embassy of Israel in Hanoi
Economic Overview
Vietnam entered 2012 in a phase of heightened macroeconomic vulnerabilities. This was
characterized by the high and rising inflation rate, extreme volatility in the foreign
exchange market, rapidly dwindling international reserves, a sharp rise in country risk
following default by one of its biggest state-owned enterprises, high level of fiscal and
trade deficits, and weaknesses in the banking and corporate sectors. These
vulnerabilities and the absence of a persuasive strategy to address them led to
progressive weakening sentiments towards the countrys economic prospects.
In early 2012 Vietnam unveiled a broad "three pillar" economic reform program,
proposing the restructuring of public investment, state-owned enterprises and the
financial sector. Throughout the year these three issues were at the focus of public
interest, political turmoil and concern from business community. But what has so far been
missing is a restructuring roadmap with a clear timetable and an effective oversight
mechanism for implementing it.
The lack of implementation resulted in credit crunch (mainly for small and medium
enterprises which practically could not get reasonable loans) and concerns of defaults
due to increasing lost debt by the SOEs. The latter scenario has been prevented so far,
mainly due to the governments tightening of its spending.
GDP in the first three quarters, 2012 went up by 4.73% y-o-y, still far from 5.77% of
quarter 3 of 2011. Loosening monetary and fiscal policies, aggressively implemented
since quarter 2 in order to revert growth momentum via public investment and financial
supporting packages for businesses and companies, have resulted in the improvement of
GDP. However, aggregate demand and retail sales still remained weaker than expected.
GDP is expected to grow around 5.2% by the end of 2012 and 5.5%-5.8% in 2013.
Agriculture's share of economic output has continued to shrink from about 25% in 2000 to
about 22% in 2011, while industry's share increased from 36% to 40% in the same period
Chart of GDP Growth
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Quarter 3 of 2012 economic statistics showed a slow improvement in the economy, while
pressure on inflation returned. Hence, in quarter 4/2012 and next year the Government
would focus on stabilizing prices, prudently disbursing public investments, and continuing
to restructure the banking system and state-owned groups.
With gains from macroeconomic stabilization still recent and fragile, especially in an
external environment that is fraught with uncertainty, the government needs to be careful
not to shift to an expansionary stance prematurely. With rapid disinflation and negative
credit growth during the first four months of the year, a decline in interest rates (from 15%
in 2011 to 9% in 2012) was perhaps justified.
Similarly, Governments Resolution 13 tries to support affected enterprises by deferring
tax payments and lowering land lease fees, whose fiscal impact will be limited to less
than0.5 percent of GDP. But given Vietnams history of premature loosening of policy,
there are reasons to exercise caution.
Since public debt is at a more elevated level, there is less room for fiscal stimulus in
2012-3 than was the case in 2009. Finally, with lingering inefficiencies in state-owned
enterprises and weaknesses in the banking system, stimulus measures will contribute to
preserving an inefficient growth model, going against the Governments own desire to
move towards a more productive and competitive economy.
Fiscal Policy
There is a need for the government to rein in the fiscal deficit, both to prevent the
economy from overheating and also to avoid financing problems (outstanding public debt
is estimated to have stood at 51% of annual GDP at the end of 2011). However, the
authorities will make only limited progress in reducing the shortfall in 2012-16. The deficit
narrowed to an estimated 4.8% of GDP in 2011, in part reflecting the fact that the
government had some success in its efforts to reduce public investment spending.
However, the Economist Intelligence Unit expects the deficit to widen in 2012, to the
equivalent of 6.1% of GDP, as slowing growth in exports and a fall in global oil prices will
reduce the amount of tax collected (the Vietnamese authorities receive substantial tax
and royalty revenue from the oil and gas sector).
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Monetary policy
The State Bank of Vietnam (SBV) has reiterated its commitment to taming inflation, and
in January its governor, announcement of reducing target for annual credit growth this
year of between 15% and 17%, compared with a goal of 20% in 2011. However credit
growth declined rapidly to 14.3 percent by the end of 2011 and continued its decelerating
trend in the first four months of 2012.
The rules on lending to real estate and for private consumption were relaxed. SBV
encouraged commercial banks to lower lending rates and promote credit for production,
agriculture and rural development, exports, and small and medium enterprises. SBV also
lowered the foreign exchange position limit of credit institutions and branches of foreign
banks by day-end to 20 percent, from the current level of 30 percent.
Inflation
Annual inflation has slowed for more than
9 consecutive months since August 2011,
suggesting that the rate of price increases
may have peaked. Inflation is expected to
remain elevated and that it will average
10% in 2012, above the governments
target of 9%.
Inflation in 2013 is expected to reach
around 12% as economy recovers and
government increases it spending.
Credit Rating
The near-bankruptcy and subsequent default of the state-owned-enterprise Vinashin, a
leading shipbuilder, led to a ratings downgrade of Vietnam's sovereign debt, exacerbating
Vietnam's borrowing difficulties. Two major credit rating agencies (S&P and Moodys)
gave opposite outlooks on Vietnam. Standard & Poors revised its Banking Industry
Country Risk Assessment (BICRA) on Vietnam to group 9 from group 10, while the
economic risk score was lowered from 10 to 9 in the wake of changes in assessment of
economic imbalance to high risk from very high risk. On the contrary, Moodys
Investor Service downgraded domestic and international bonds by one notch to B2, longterm foreign currency deposit to B3 from B2, with all being assigned stable outlook.
These credit rating agencies commended Vietnam governments effort on mitigating
macroeconomic imbalance, inflation, restructuring economy, especially banking sector.
However, bad-debt fears, co-ownership among banks as well as macroeconomic
uncertainties (accelerating inflation, low aggregate demand, high inventory levels signify
heaps of challenges while long-term macroeconomic stability is not clear.
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Foreign Direct Investment

A major source of the growth deceleration is the slow growth in public and private
investment, as the government prepares to move the economy away from factors
accumulation to productivity as the key source of growth. With slowdown in credit growth
and efforts to restructure public investment, total investment has fallen sharplyfrom
41.9 percent of GDP in 2010 to 34.6percent in 2011 (panel A). The decline has been
uniformly shared between state budget, state-owned enterprises and private sector. And
within the private sector, while domestic private enterprises have scaled back their
investment plans, the disbursement from foreign firms has not slowed down significantly.
However, the commitment of foreign investors has declined in recent months (panel B)
a source of major concern, since Vietnam is looking for new sources of growth and will
require infusion of foreign capital to restructure its stateowned enterprises and banking
sector.
Monthly Foreign Investment Forecast

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Exchange Rate
Exchange rate was stable in 2012 around
VND20,900 per USD
The strengthening of the Vietnam Dong (+2%
ytd) was due to a Balance of Payment surplus,
estimated around USD8 bn in the first three
quarters. Healthier foreign reserves, which
amounted to USD22 bn in October according
to the SBV, also gave some firm support to the
dong. According to some officials, the value of
the dong should be stable through year-end as
expecting the SBV will continue to enhance its
reserves (~USD23bn by year end) while USD
inflows via FDI and remittances should be
stable, reaching USD10-11bn each.
Trade Performance
Vietnams growth pessimism stands in sharp contrast with its robust export performance
in recent years. As shown in figure 10, at 34.2 percent in 2011, Vietnam recorded the
highest rate of export growth in developing East Asia, with China coming at a distant
second. The same performance has been repeated in the first four months of 2012,
though Vietnams overall growth of exports has declined.

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Foreign Trade Policy

Vietnam and the United States signed a bilateral trade agreement in July 2000 and
Vietnam acceded to the WTO in January 2007. Since then, Vietnam has done well in
exploiting the benefits of these trade agreements and has steadily increased the market
share of its main export items relative to key competitors. In 2011 Vietnam became the
26th largest source of merchandise imports for the United States, with its total exports
increasing by 21 times in nominal terms between 2000 and 2011.
Obama and his second term cabinet will focus more on trade with Vietnam than during
the first term. Partners in the Asia-Pacific and Vietnam can expect a more focused effort
to bring the Transpacific Partnership Agreement (TTP) negotiations to a successful end
and will drive for an agreement as early as end of 2013. The TPP is a multilateral free
trade agreement that aims to further liberalize the economies of the Asia-Pacific region.
The objective of the original agreement was to eliminate 90 percent of all tariffs between
member countries by January 1, 2006, and reduce all trade tariffs to zero by the year
2015. It is a comprehensive agreement covering all the main pillars of a free trade
agreement, including trade in goods, rules of origin, trade remedies, sanitary and
phytosanitary measures, technical barriers to trade, trade in services, intellectual
property, government procurement and competition policy.

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The Vietnam-Japan Economic Partnership Agreement came into effect on July 1 2009
and has already aided an increase in garment exports to Japan. It is currently negotiating
bilateral free trade agreements with South Korea and the European Union and will start
negotiating with Ukraine in early 2013.
Vietnam is a member of a growing network of regional trade agreements, both
individually and as part of the Association of Southeast Nations (ASEAN). In its capacity
of member of ASEAN, Vietnam is part of the ASEAN-China Preferential Trade
Agreement, ASEAN-China Economic Integration Agreement and the ASEAN Free Trade
Area (AFTA), ASEAN-Japan Free Trade Agreement and ASEAN-Australia-New Zealand
Free Trade Economic Integration Agreements. Vietnam is a signatory of the Global
System of Trade Preferences among Developing Countries (GSTP), a Preferential Trade
Agreement signed with other seventy-six developing countries.
Summary
Vietnam still has much to do in terms of stabilizing the economy and restoring consumer
and investor confidence. Vietnams currency, the dong, has fallen sharply in value in the
past two years, and there has consequently been strong demand for locally available
safe-haven assets in the form of US dollars and gold.
On the international front, there remains the risk that the global economy could re-enter
recession, triggered by sovereign debt defaults in the euro zone. This would not only hit
Vietnams export performance but would also have a knock-on effect on domestic
consumer and business spending, thereby inhibiting economic growth. Given the
precarious nature of the countrys foreign-exchange reserves, there is also cause for
concern regarding Vietnams ability to finance its current-account deficit. Citing concerns
about the possibility of an external-payments crisis global credit rating agencies have
downgraded Vietnams sovereign debt rating.
A fall in inward foreign investment in the past year which was previously one of the main
drivers of economic growth is expected to hang over until inflation stabilises and global
economic conditions improve.
In light of the weak economy, the National Assembly approved a GDP growth target for
2013 of 5.5%, lower than its previous plan of 6% growth. Hence, the consensus is that
Vietnams economy will continue to grow relatively slowly, around 5-6% for the next 2-3
years. It will be hard for the country to restore confidence among businesses and
consumers until inflation issues are addressed.
Vietnam will continue to make strides in strengthening its ties with the West, and
particularly the US. Relations with China will remain strained over competing claims to
the Spratly and Paracel islands in the South China Sea.
The growth slowdown in Vietnam needs to be viewed also through the prism of several
developments at home and abroad. The global economy as well as the East Asia
regional economy are both expected to slowdown in 2012 even more than in 2011
reflecting weaknesses in the external environment and slower than expected recovery
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from the financial crisis. Given the structure of Vietnams economy that is characterized
by high trade to GDP ratio, large share of foreign investment in total investment, and
sizeable level of remittances it is unlikely to remain immune from global developments for
an extended period of time. At the same time, efforts to stabilize the economy through
tight monetary and fiscal policies and the ongoing restructuring agenda are having
adverse effects, including closure of enterprises and loss of jobsthough not stabilizing
the economy would have led to even bigger losses.
Sectors at a Glance
Medical Devices
In October 2009, Vietnam Government introduced a new law regarding compulsory
health insurance for all citizens and expects to achieve total coverage by 2014. There are
three levels of benefits under the health insurance scheme; the first level covers all or
100% of expenses at nominated medical facilities, another cover 95% and 80% of the
expenses respectively with the patient making up the rest.
In addition, the government has pledged 45.2 trillion Dong (US$2.5 billion) to build or
upgrade specialty hospitals and some provincial-level general hospitals in mountainous
and other disadvantaged areas in the 2009-2013 period.
The private healthcare sector in Vietnam has expanded since the lifting of the ban on
private practice in 1989. People often choose to use private facilities, if they can afford to
do so, as the quality of state healthcare provision is very poor. According to latest data,
an estimated 62.2% of healthcare expenditure is private.
An estimated 91% of the medical device market is supplied by imports, and the sector is
growing rapidly. Japan, Germany, China and the USA are the leading suppliers,
accounting for 42.6% of imports in 2011. Local production is limited to basic items such
as syringes and hospital beds. The value of exports reached US$420.9 million in 2011,
with 34.2% of medical products exported to Japan.
In 2012, the Vietnamese market for medical equipment and supplies is estimated at
US$634 million, or just over US$7 per capita. It is expected that the device market will
continue to expand strongly at 18.6% per annum to 2017. This will take the Vietnamese
market to around US$1.5 billion in 2017, although the per capita rate will remain low at
only US$16.
Vietnams government has been changing its policies by creating more land leasing and
tax incentives in order to attract more investors to get engaged in health care services
with the motive of assisting Vietnamese people have better access to medical facilities&
services. According to ministrys statistic of Foreign Press Center, Vietnam currently has
90 private hospitals. Franco-Vietnam hospital, for example, was built in 2001 and located
in the central area of Southern Saigon. It was sponsored by France with a total cost of
$40 million. Franco hospital is one of a few modern hospitals in Vietnam. This hospital is
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specialized in imaging, emergency care, laboratory service and more. The hospital is
financed by 20% of government budget and 80% of foreign aid.
Vietnam receives a large amount of international aid in the form of loans and donated
medical equipment. A number of small projects are currently taking place in Vietnam,
including those funded by the World Bank and the EU. However, Vietnam has been
facing budget deficit and regional economic crisis since 2010 which influenced pending
payment to public hospitals and medical devices suppliers/ traders.
There is a trend that local hospitals are seeking for modern technologies and technique.
For instance, In 2012 two hospitals, Viet Duc and Bao Son, have applied advanced
medical technologies of Israel. Viet Duc hospital used Laparoscopic surgery with the
support of the robot that helps remote surgery applications in gyne-cological surgery,
urology, general and heart diseases. Bao Son hospital engaged with ExAblate integrates
that focuses ultrasound thermal ablation with GEs MR imaging capabilities to provide a
non-invasive surgery for ablating (destroying) targeted tissue.
Pharmaceuticals
Report by Ministry of Health revealed that the total value of Vietnams drug consumption
reached almost US$2.0 billion in 2010. During the period 2005 to 2010, production
increased by a CAGR (Compound Annual Growth Rate) of around 25%. The government
announced that improving the domestic pharmaceutical industry is the health sectors
highest priority over the next few years, in order to meet around 70% of the nations drug
demand by 2015. A plan to develop and restructure the pharmaceutical industry is
underway, which includes boosting production of essential drugs in order to cut prices,
stabilise the market and reduce the countrys dependence on foreign pharmaceutical
imports.
Vietnam is one of the few countries, alongside China and South Korea, which have fully
integrated traditional medicines within their healthcare system. Additionally, the WHO has
organised training workshops on the use of traditional medicines for selected diseases
and disorders in Vietnam. However, despite having a vast and diverse array of medicinal
plants, Vietnam lacks the investment to turn these into commercial medicines. Currently,
many materials required to manufacture herbal medicines are imported from China.
According to the DAV, locally-produced drugs accounted for just50.18% of
pharmaceutical demand in 2008.
In 2011, Vietnam spent around VND 154,919 billion (US$7.5 billion) on healthcare,
equivalent to 6.1% of GDP. Private spending accounted for around 61.6% of the total, the
majority of which was out of pocket spending. At US$85 in 2011, per capita spending
was comparable to Indonesia and slightly higher than the Philippines. By global
standards it is relatively low, with Vietnam ranking well outside the top 50 countries in the
world for per capita health spending.
Despite recent improvements to the IP environment, illegal copying remains
commonplace due to the lack enforcement of legislation. The government has little scope
to tackle the problem, since majority of drug sales in Vietnam are achieved not through
regulated pharmacies but through private dealers that handle drugs worth an estimated
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US$450mn per year. In addition, the country has long, poorly monitored borders with
countries such as Laos, China and Cambodia, where the counterfeit drug trade is active.
Not only fake forms of common drugs, such as Tanganil, for the treatment of vertigo,
Mobic tablets for the short-term treatment of painful osteoarthritis are illegally made, but
other specialised drugs such as Vastarel, for chest pain and Dogmatil, mental
imbalances, have been on the market. The Vietnam National Institute of Drug Quality
Control said that in 2011, they discovered 31 different kinds of fake drugs being sold.
Furthermore, of 48,261 drug samples that were tested, 940 did not meet the standards.
According to regulations, after the discovery of low quality medication, the Vietnam Drug
Administration or the local department of health must immediately issue a ban on that
drug on hospitals, pharmacies and enterprises to purchase them. But the system has
been slow in action and many of these drugs slipped through the cracks.
New Media
With 30 million of Internet users, every Vietnamese person has 82 friends on social
networks, and he is a member of eight different social networks. These are high figures if
compared with other countries in the region.
New Media is a new concept in Vietnam but it has been applied widely especially in
Marketing for Fast Moving Consumer Goods (FMCGs)*, electricity, consumers services
etc. Social Networks (use interaction social pages such as Facebook, Zingme), web
advertising, chat rooms, online community (different industry has different specialized
forum), email and mobile computing starts to have a position in this market. However, the
use of a variety of advanced New Media technologies is very limited in the market.
Currently, there are 3 main mobile providers present in the Mobile Value Added Service
Market- Mobifone, Vinaphone, and Viettel. Each operator has hundreds of value-added
services for particular users but there is not much difference among operators which
have made users confused. Mobile value-added services used to be provided via SMS,
now subscribers can use these services by directly browsing website, online stores and
application stores. Though credit card and on line payment is not very common in
Vietnam, payment methods are becoming more convenient and transparent and that
helps to boost the users demand.
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According to interviews with Vietnamese gamers, many were spending 60,000 to

100,000 VND ($3 - $6) per month on on-line gaming. In one high-end Internet caf, a few
interviewees were spending an average of 500,000 VND ($31) per month. These
consumers are driving the digital entertainment and online games market with virtual item
purchases. Top online games in Vietnam can attract 200,000 users. The Internet cafes
that the researchers visited in Vietnam were consistently crowded with users playing
online games.
Since producing games online is temporarily prohibited by The Vietnamese Ministry of
Information and Communications (MIC), there has been a chance for browser-based
games and social games. As browser-based games and social games are not
considered as game online and also publishing is quite simple and easy, it was
recognised that there were around 60 browser-based games published in 2011. With
This gave birth to a new trend--the operators now co-publish online games, which is
called 'channelling'. Then gamers can enjoy by visiting Business Tycoon Online on
SGame's site, VNG's social network Zing Me, and FPT Online's online gaming portal
Gate.
IBC 2012 The international exhibition to promote Electronic Media and Entertainment
Industry has been taken place in Amsterdam last September and has attracted numerous
of visitors from Vietnam such as Satecom, Thaicom and Mediatec. This reflects the
potentials of Vietnam New Media Market in the recent and coming years.
Sources
1. Country Risks Report 2012 The Economist Intelligence Unit Limited 2012
2. Vietnam Outlook Aug Report 2012 MB Security
3. VCB September Economic Report
4. CIA The World Factbook, Vietnam, https://www.cia.gov/library/publications/the worldfactbook/geos/vm.html
5. Country Report - The Economist Intelligence Unit Limited 2012
6. World Bank Review of Vietnam Report June 2012
7. Macro Update 2012 Viet Capital
8. Vietnam Business Forecast 2012 Business Monitor International Ltd
9. http://www.qdnd.vn/qdndsite/vi-VN/43/Default.aspx
10. Medical Devices Market Vietnam 2012 Espicon Business Intelligence
11. ThePharma Market Vietnam Espicon Intelligence Business
12. BMI Pharmaceuticals & Healthcare 2011 Report Business Monitoring International
13. http://internationalbusiness.wikia.com/wiki/Vietnam_growth_of_private_hospitals
14. http://english.vietnamnet.vn/fms/business/51715/business-in-brief-4-11.html
15. Vietnam Online Game Market 2011 - The Economist
*Fast Moving Consumer Goods (FMCG) or Consumer Packaged Goods (CPG) are
products that are sold quickly and at relatively low cost. Examples include non-durable
goods such as soft drinks, toiletries, and grocery items
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About Us
The Economic & Trade Mission at the Embassy of Israel in Vietnam
aims to enhance the business relations between the two countries by arranging a wide
range of activities through which mutual trust and cooperation can be achieved.
For Further information
Tel: +84-4-3843-3140
Ho Chi Minh City Office:
Email: Israel.trade.hcmc@gmail.com
Disclaimer:
This review is not a recommendation to take action or refrain from taking an action.
This document is for reference only.
December 2012

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Vietnam Review Economy 2012

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Economic and Trade Office

Embassy of Israel in Hanoi

Chart of GDP Growth

68 Nguyen Thai Hoc, Hanoi; Tel: +84-4-38433140 (ext. 513, 514)

Economic and Trade Office

Economic and Trade Office

Economic and Trade Office

Foreign Direct Investment

Monthly Foreign Investment Forecast

68 Nguyen Thai Hoc, Hanoi; Tel: +84-4-38433140 (ext. 513, 514)

Economic and Trade Office

68 Nguyen Thai Hoc, Hanoi; Tel: +84-4-38433140 (ext. 513, 514)

Economic and Trade Office

Foreign Trade Policy

68 Nguyen Thai Hoc, Hanoi; Tel: +84-4-38433140 (ext. 513, 514)

Economic and Trade Office

Economic and Trade Office

Economic and Trade Office

Economic and Trade Office

Economic and Trade Office

According to interviews with Vietnamese gamers, many were spending 60,000 to

Economic and Trade Office

68 Nguyen Thai Hoc, Hanoi; Tel: +84-4-38433140 (ext. 513, 514)

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