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VVVVVol 17 Issue 6 June 2006ol 17 Issue 6 June 2006ol 17 Issue 6 June 2006ol 17 Issue 6 June 2006ol 17 Issue 6 June 2006South East Asia Vol. 1Business Monitor International’s monthly regional report on political risk and macroeconomic prospects

ISSN 1470-7810

Asia MonitorAsia Monitor

BUSINESS MONITOR INTERNATIONAL’s country riskanalysis and forecasts, market research on leadingindustries, and multinational company research is reliedupon by corporates, banks, government departments andmultilateral organisations in over 125 countries worldwide.

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VIETNAM

Why The Baht Will RiseBMI View: Thailand’s national currency, the baht, has risen rapidly duringthe past six months and there is little reason to expect a major reversal.The baht remains on course for a lengthy period of appreciation.

THIS MONTH’S TOP STORIES

Vietnam: Optimism Over ReformsVietnam continued its impressive recent record in 2005, withreal growth accelerating further to 8.4% on the back of strongdomestic demand. BMI View: There will be some moderationin growth in 2006, to 8.1%, but our view of Vietnam’s prospectsremains positive given the potential benefits of continued reformand membership of the WTO.

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Cambodia: China Relations ReinforcedChinese Premier Wen Jiabao visited Cambodia in April andpledged US$600mn in aid and loans, reinforcing ties between thetwo countries. BMI View: Improvements to Cambodia’s infra-structure will attract greater foreign direct investment, but theinternational community will become more uncomfortable.

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Thailand: At Odds With Malaysiapage 3

Laos: Powering Uppage 7

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THAILAND

e/f = BMI estimate/forecast. *consumer price inflation. Sources: national central banks, statisticalbureaus, BMI.

2004 2005e 2006f 2007fReal GDP Growth, %

Indonesia 5.1 5.6 5.3 5.2Malaysia 7.1 5.3 5.6 5.5Thailand 6.2 4.5 4.8 5.0Philippines 6.0 5.1 4.5 4.2Singapore 8.7 6.4 5.7 4.5Vietnam 7.7 8.4 8.1 7.7

Inflation, % **

Indonesia 6.1 10.4 12.6 4.8Malaysia 1.4 3.0 3.0 3.1Thailand 2.7 4.4 3.9 2.6Philippines 6.0 7.6 6.7 5.1Singapore 1.7 0.5 1.6 0.8Vietnam 7.7 5.7 4.2 4.2

C/A Balance, % GDP

Indonesia 1.2 1.4 2.1 1.9Malaysia 12.8 13.0 12.8 11.4Thailand 4.2 -2.1 -0.8 0.7Philippines 2.6 2.2 1.7 1.8Singapore 24.4 28.4 25.8 21.8Vietnam -5.7 -5.7 -4.3 -2.0

Thailand’s exchange rate is on astrengthening trend and this is likelyto continue for the next 12 months atleast, in BMI ’s view. The baht, Thai-land’s national currency, is set to riseto its strongest level since the Asianfinancial crisis of 1997-98, peaking ataround THB35.00-36.00/US$ nextyear. The rise will not be rapid, but itwill, give or take a few blips, be fairlyconsistent in its trajectory.

In recent months the baht hassurged, and hit a six-year high ofTHB37.40/US$ in May. It has strength-ened by around 7.5% against the USdollar since the start of the year. Thisis more impressive than gains seen byother Asian currencies. The Singaporedollar, for example, has risen by 5.2%since the start of the year and theMalaysian ringgit has climbed by

4.9%. The only other Asian currencyto have kept pace with the baht is In-donesia’s rupiah, which has strength-ened by 7.0% against the US dollarsince January.

Given that the baht’s recent rise hasbeen so rapid, one understandable re-action is to think it cannot last. Theeconomy is losing momentum, the cur-rent account could slide into deficit,consumer confidence is evaporatingfast, and the political scene is in a mess.Furthermore, the Bank of Thailand(BoT) has expressed concern about theappreciation of the baht, and is moni-toring the unit closely. All this sug-gests that there are significant forcesacting to cap any further rise in thevalue of the baht.

The problem is that these forces,

REGIONAL INDICATORS

Late 2006 WTOAccession LikelyVietnam reached an agreement with the US in mid-May that paves theway for it to join the WTO later this year. BMI View: Membership wouldmark a significant coming-of-age for Vietnam, and serve as the country’sanchor to the global economy. This bodes well for the country’s long-term growth rate.Vietnam To Lower Trade Barriers –Following the agreement, Vietnamplans to reduce tariffs on 94% of USexports to the country to 15% or less.Hanoi will also eliminate non-tariffbarriers to entry for US insurance, finan-

cial services, telecommunications, andenergy companies. Foreign banks willnow be allowed to own 30% stakes inVietnamese banks, compared with 10%previously. Furthermore, US retailers

4 SOUTH EAST ASIA 1 – JUNE 20064

RISK SUMMARY

� VIETNAM

POLITICAL RISKCongress Focus On CorruptionThe Communist Party of Vietnam (CPV) heldits eight-day 10th National Congress at theend of April with a focus on faster economicreform and a fight against corruption. Theneed to address corruption was highlightedin the run-up to the National Congress by ascandal involving the head of transport, thegovernment’s richest agency. CommunistParty leaders admit that corruption is a threatto one-party governance. Incoming primeminister, Nguyen Tan Dung, has pledged toincrease the transparency of government ashe attempts to address the problem.Our short-term political rating remains at 80.0, withthreats to the one-party state still minimal.

ECONOMIC RISKWTO – Mixed ProspectsVietnam undoubtedly has much to gain fromWTO entry. Its competitive textile industryis well situated to exploit opportunities forexport growth to major markets. The arealso, however, dangers involved in entry. Vi-etnam will be required to lower its importtariffs and this will bring its domestic firmsinto greater competition with other Asiancompetitors. Many of its firms are not inter-nationally competitive, with the business en-vironment still creating unnecessary costs.That said, WTO accession should encour-age the government to implement furtherreform, making Vietnam a more vibranteconomy in the long run.Our short-term economic rating remains at 60.0,with WTO accession presenting upside risks.

BUSINESS ENVIRONMENTEducation And Health BoostThe government has pledged extra funds foreducation and health. This spending has ob-vious social benefits and will improve thequality of the workforce. The health of thenation, as illustrated by life expectancy of69.2, compared with the Asian average of65.6, is good, but health spending per capitaat US$134 is low for the region. Adult lit-eracy rates of 90.3% are well above theAsian average of 82.5. Howeevr, only 1.4%of the population complete secondary edu-cation This will need to be addressed if Vi-etnam is to move into higher-end industries.Vietnam’s business environment rating is 44.6. Itscores 40.7 for infrastructure, 31.5 for institutionsand 61.7 for market orientation.

will have greater access to Vietnam’s con-sumer market, where incomes are rapidlyincreasing and a sizeable middle class isbeginning to emerge. Indeed, the rulingCommunist Party of Vietnam (CPV) com-mitted itself to almost doubling per capitaincomes from US$640 to US$1,100 by 2010during its recent National Congress.

However, not all US businesses arehappy. US textile manufacturers are disap-pointed that Vietnam will still be allowed tosubsidise its garment industries, and that theUS will lift restrictions on imports of Viet-namese textiles. In 2005, textiles comprised15% of Vietnam’s total exports, and 41% ofshipments to the US. As Vietnamese export-ers look to build on this, it will be to thedetriment of US textile firms.

Mindful of the need to be seen as com-mitted to fair play, Vietnam has agreed toend subsidies to its textile makers that areillegal under WTO rules by the time it joinsthe body. Yet, US textile lobbyists say thatmuch of the aid Vietnam provides to its tex-tile industries is not illegal under WTO rules.Consequently, the chairman of the NationalCouncil of Textile Organisations is seekingto block the agreement, which he sees asexcessively favourable to Vietnam. Giventhat 2006 is a mid-term congressional elec-tion year, US legislators must be sensitiveto such concerns. Nonetheless, Americanbusinesses are increasingly keen to expandinto the Vietnamese market, and US TradeRepresentative Rob Portman described theagreement as being very positive for Ameri-can exporters. He also described the deal asan historic step in bilateral relations, addingthat the US would work hard to bring aboutVietnam’s accession to the WTO. Going for-ward, though, Vietnam will retain ‘non-mar-ket’ status until 2018, which will make iteasier for US firms to bring anti-dumpingcases that could raise import tariffs.

PNTR Obstacle Not So Problematic – Themain challenge for Vietnam now will be togain Permanent Normal Trade Relations(PNTR) status from the US Congress. Atpresent, this is denied to Vietnam becauseof the Jackson-Vanik amendment datingfrom the 1970s, which restricts US trade withcommunist countries that curtail humanrights, religious freedoms, and emigration.As an example of how resilient existing re-strictions can be, Russia’s quest for WTOmembership has been delayed for years bythis provision. However, Congress granted

China PNTR in 2000, essentially ignoringBeijing’s poor human rights record. Al-though Congress recently passed a resolu-tion linking Vietnam’s WTO accession to therelease of key democracy activists, HouseSpeaker Dennis Hastert, a conservative Re-publican, stated during a visit to Vietnam inApril that he expects Congress to be flex-

ible with regard to Vietnam and PNTR. Heargued that ‘the greater good’ outweighedhuman rights concerns. This suggests that Vi-etnam has a good chance of being awardedPNTR.

New Leaders To Accelerate Reforms –Overall, BMI sees a growing possibility thatVietnam can accede to the WTO by Novem-ber, in time to host the Asia Pacific EconomicCo-operation (APEC) summit. Membershipof the WTO will speed up Vietnam’s eco-nomic reform process and allow the coun-try to converge with the norms of more de-veloped economies. In the meantime, the re-form agenda should receive a boost from theappointment of new leaders by the NationalAssembly, which began a six-week sessionon May 16. Premier Phan Van Khai, 72, hasannounced his retirement and has nominatedhis deputy, Nguyen Tan Dung, 56, as his suc-cessor. Younger officials are also expectedto fill other key posts. Going forward, the CPV must continueto fight corruption. Corruption is a majorbane for the economy and foreign inves-tors, since it raises the cost of conductingbusiness and adds to uncertainty in thebusiness environment. Recent scandalshave the potential to disturb Vietnam’s ex-cellent foreign direct investment record overthe past two years (see graph). These scan-dals could also alienate the public, therebycausing the CPV to lose support. Althoughthe immediate challenge to CPV power isminimal, continued public discontent overcorruption could present a long run threat.

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FDI On The UpFDI Inflows - US$mn

Source: UNCTAD