Lying in the shadows of China, bordering bustling Thailand, and next to emerging Cambodia, Vietnam occupies the sweetest spot in the region. It is nowhere near as developed as Thailand but much further ahead than Cambodia or even Laos. It has a massive coastline (almost 2,000 miles); huge, navigable rivers; fertile land; and easy road access to its neighbors. It has a hardworking population that is interested in education.
Over the past decade Vietnam’s economy has grown at between 6 and 7 percent per year. GDP in 2010 came in just north of $100 billion, a number that is expected to quadruple over the next 15 years. One can easily see where the growth is coming from: exports. Vietnam’s exports totaled more than 60 percent of its GDP, and those exports - things like rice, fabric, electronics, and even crude oil - found their biggest home in the United States, followed by Japan and then China.
Those countries will continue to dominate the export horizon, but their order will shift. Vietnam’s biggest import partner is China, and I believe China will also become the country’s largest export partner within five years.
China needs Vietnam more than Vietnam needs China. While Vietnamese inflation has been out of control recently, approaching the mid-teens, that is a consequence of high growth and increasing consumption locally and easy money that has financed the growth. It is not unusual in the least for countries that are doubling their GDP every five to seven years to have high inflation.
The key is for the inflation to show signs of moderating after a few quarters of hyperinflation; otherwise, a major recessionary period will set in as governments impose strict policies to curtail growth. The biggest pain suffered in Vietnam has been by investors who have seen the stock market plunge by as much as 75 percent from its highs to current levels.
And the currency, the dong, has depreciated by 25 percent in five years versus the U.S. dollar. Yet, the future for this socialist country remains extremely bright if forces that contributed to inflation can be moderated. The one thing that cannot be stopped is the growth that has led to massive declines in poverty in the country.
China is getting expensive by third-world manufacturing standards. Its growth has outstripped that of even Vietnam, and that is for a country that measures its GDP in trillions not billions. A result of China’s growth is an increase in living standards, higher wages, and higher costs.
Now, some of the business that found a home in China, particularly manufacturing, is moving to places like Vietnam - even Chinese businesses are setting up shop across the border. In 1999, China has 76 projects in Vietnam with a total investment value of $120 million. In 2009, that number was almost 700 and the value exceeded $2.5 billion.
Early Chinese projects were focused in areas like hospitality and consumer products. Today, more than 70 percent of the projects are in the manufacturing sector. That trend will continue for the foreseeable future.
China will have no choice but to engage its much smaller neighbor, and Vietnam will gladly accept the crumbs that fall from the Chinese tables. That is what makes Vietnam a compelling investment opportunity - the most compelling in my opinion - in the region.