Vietnam is still living in difficult times. The challenge of restoring higher growth and employment to sustain rapid reduction in poverty, remains. The regional crisis is abating, exports are recovering and macroeconomic performance is good. But private investor confidence remains weak and domestic demand continues to falter. Severe floods in the central region have imposed additional costs. Overall economic growth rate is 4 percent this year, the same as last year, but mainly because of stronger agricultural performance. Non-agricultural growth continues to slide. With per capita GDP growth lower than a third of the rate of earlier years, sustaining earlier rates of poverty-reduction or of employment generation will not be possible unless higher employment-creating growth is restored.

Two years of low economic growth have taken its toll. Urban unemployment has risen to 7.4 percent from 6 percent in 1997. Imports are down and any pick-up in GDP growth will require faster import growth. The fiscal balance is under pressure as the share of revenue in GDP has fallen by nearly a quarter relative to 1996. Two consecutive years of stagnating domestic demand and rising import competition have hurt SOEs and the private sector. SOEs are able to accumulate further losses and debts, albeit at the cost of the budget and the banks. But the domestic private sector -household and corporate-Vietnamese enterprises -- has little cushion to do that. The country's banks, burdened at end-1997 by a high share of NPLs to SOEs, are more fragile and vulnerable today.

The Government has continued to reform, though not at a pace that could compensate for the deteriorating economic situation. New and important legislative measures to facilitate entry of private enterprises and to liberalize trading rights have been taken, but the challenge of effective implementation remains. Private exporters have been given greater access to rice and garment export quotas and a private-sector action program has been developed but not announced. Actual equitizations of SOEs have picked up momentum relative to earlier years, but it fell short of Government's targets. Comprehensive and credible three-year programs for reforming state enterprises, banks, and the trade regime have been developed by individual ministries and agencies, but those programs have neither been announced nor adopted.

There is a risk that Vietnam will not benefit fully from the strong regional recovery that is underway. Foreign investment is returning to Korea, Malaysia and Thailand but not yet to Vietnam. That is in part because investors, both domestic and foreign, do not know whether the Government will adopt accelerated reforms. Export growth has picked up sharply this year together with recovery in regional demand, but it may not be sustained without new investments. The Government needs to signal whether it will harness the drive and dynamism of all sectors, including its embryonic private SMEs. It needs to act now to show that waste is being cut and bailout of inefficient SOEs or inefficient banks will not be continued. Other countries, competing for the same foreign investment, are making those signals clear and Vietnam must too.

This year, real GDP is growing at around 4 percent, [2] the same as last year. Higher agricultural growth has made this possible, as growth in industry and service sectors continued the downward slide that began in 1997. Thus non-agricultural growth is the lowest it has been in four years (see Table 1.1).

Higher growth in rice, fisheries and livestock contributed to robust agricultural performance this year. Rice output is projected to rise to 31 million tons from 29 million and 27 million tons in 1998 and 1997 respectively. As a result, rice exports are expected to top 4.2 million tons this year, compared to 3.5 million tons last year. Livestock which has been growing quite rapidly for sometime, maintained its strength, while fisheries showed renewed vigor, in part led by strong export demand.

Lower industrial growth in the first nine months was due to negative growth in construction and slower growth in both manufacturing and utilities; mining grew faster, mainly because production of crude oil rose significantly. Rising inventories of produced goods [3] suggest weaker growth of manufacturing output in the remaining three months of this year. Slower growth in trade, real estate and the financial sector is dominating the decline in service sector growth.

Total investment as a share of GDP fell sharply from 29 percent in 1997 to 19 percent in 1999, led no doubt by the fall in foreign investment, especially in 1998. Almost all components of investment fell this year. Public investment, funded by Government's own resources, rose slightly, largely due to mid-year efforts to enhance investments in rural infrastructure. Private investment by households and Vietnamese corporate sector fell by nearly two percentage points. SOE investment and ODA-funded public investment are also down.

Foreign investment inflow continued its decline this year. Recession as well as adverse investor sentiment contributed to the continuing decline in foreign investment disbursements. After an average inflow of $2 billion a year for three years until 1997, it fell to $800 million in 1998, and is running now at around $600 million this year. The biggest decline came in foreign investment from East Asia and Japan, which is not surprising given the crisis in the region. However Figure 1.1 shows that declines in FDI commitments had started as early as in 1996. The fall in commitments in 1999 is likely to reduce future disbursements.
(Figure1.1)

Recent Government decisions on the development of gas fields and of the gas pipeline will encourage future foreign investment in the energy sector. The US - Vietnam trade agreement, when it happens, will generate additional export demand and thus foreign investments in processed agriculture and manufactured exports. Most of that investment is likely to come from this region. Also the finalization of BOT projects in the pipeline could encourage new foreign investment in infrastructure sector. Though recovery in foreign investment to Vietnam, however strong, is unlikely to reach the levels of the 1995-97 period - because that was exceptional and because overall foreign direct investment flows to the region have declined -- it could be higher than what it is today.