``Uhhh, we need a bigger ballroom.'' That lament was uttered by many AsiaMoney staffers in Hanoi, Vietnam, last month.

The magazine hoped its inaugural Vietnam conference would attract a few hundred investors and businesspeople. On the first morning of the March 15-16 event, AsiaMoney had a little seating problem on its hands -- more than 800 from 20 countries showed up. Even Vietnam officials were taken aback.

The turnout said it all about the $45 billion economy: The secret is out on Vietnam. As investors and executives search for the newest frontier of global capitalism, many are eyeing the politically stable nation of 84 million people.

``In Asia, people are realizing that it's not just China that's growing 8 or 9 percent,'' John Shrimpton, a director at Dragon Capital, told me in Hanoi. ``Vietnam is being added to that list, and the world is discovering this place.''

Actually, ``rediscovering'' may be more accurate. Vietnam has been noticed before, and not always with good results. As it opened its economy in 1986, foreign capital zoomed in. Figuring that Vietnam's transition from a centrally planned, Communist Party-run economy to a free-market one would make it the next Asian Tiger, investors bought into as many businesses as possible.

Past Experience

In 1996, the peak year, Vietnam received $8 billion of foreign direct investment. Economic growth doubled over the next decade to about $30 billion. Then, things overheated and investors fled faster than they had arrived.

Making money proved more difficult than many foreigners expected, and more money arrived than could be used productively and profitably. Investors were put off by government bureaucracy, poor transparency and an underdeveloped legal system.

The 1997 Asian financial crisis didn't help. Former growth stars like Indonesia, Malaysia, South Korea and Thailand became third-rail investments. The stampede out of the region affected economies large and small. With even the U.S., Japan and Europe reeling amid the crisis, investors had scant appetite for developing nations like Vietnam.

Now that Vietnam is back in the spotlight, the trick is to avoid the problems of the past.

Intel's Bet

``Vietnam has the perfect combination for success,'' said Michael Smith, Hong Kong-based chief executive officer of HSBC Holdings Plc's Hongkong & Shanghai Banking Corp. ``Yet it's time to prove Vietnam deserves all the attention it's getting.''

Intel Corp. sure seems to think it does. In late February, the world's biggest semiconductor maker received a government license to invest as much as $605 million in a chip-assembly and testing plant in Vietnam. It's the country's biggest technology- manufacturing project ever.

Vietnam needs to be more than just a cheap place to produce; it also must raise living standards so its consumers can buy the products they churn out. Evidence that per-capita income has more than doubled over the past decade suggests that's quite likely. Still, it's not a given, and China's boom continues to dominate investors' attention.

While China's job-creation challenge is far bigger, Vietnam's also is quite daunting. ``In order for rapid population growth to matter, a nation must steadily create good, decent- paying jobs to benefit from it,'' said Ifzal Ali, Manila-based chief economist at the Asian Development Bank.

Shaky Banks

The government needs to strengthen the legal system, modernize the finance industry, boost tax enforcement, cultivate a more-vibrant private sector, reduce corruption and spend more on roads, bridges, ports and power plants. Better disclosure by small and medium-size state-run enterprises also is needed.

The banking system is hampered by poor-quality lending by Vietnam's biggest government-owned banks in spite of the shift toward market-oriented policies, Fitch Ratings said in a recent report. In November, the World Bank's Hanoi office said that based on international accounting standards about 15 percent of all loans in Vietnam were classified as non-performing at the end of 2004. It added a disclaimer that the figure was based on ``weak data.'' The number of bad loans could be much higher.

The good news is that officials say they're tackling these issues, and more. ``We are trying to tap all of our different areas of economic potential,'' said Vo Hong Phuc, minister of planning and investment. ``We are on top of things.''

Huge Potential

What intrigues investors most about Vietnam is the low base from which it's growing. According to Merrill Lynch & Co., less than 5 percent of the population is using banking services. Just think of the potential for mortgages, and car and consumer loans. In the first quarter, for example, financial and credit-related services expanded at an annual rate of 9.4 percent.

Vietnam also hopes to join the World Trade Organization this year, something that will boost economic growth and pull in more foreign direct investment. WTO membership will draw even more attention to one of Southeast Asia's most promising economies -- one struggling to get out of China's shadow.

``There are many risks, but Vietnam has a tendency to surprise,'' said Kelvin Lee, Hanoi-based managing director at VinaCapital Corporate Finance Vietnam Ltd. ``My advice is: Stay tuned.''

William Pesek Jr. 
wpesek@bloomberg.net

Source: http://www.bloomberg.com, April 6, 2006