For the past few years, the transformation of Vietnam has been a standout story on the world economic scene. When you look at the breathtaking pace of change, it is little wonder that many international companies have jumped on the Vietnam bandwagon.

In the past decade alone, the country has undergone amazing economic changes. New regulations and tax laws have been introduced and changes made to the legal system. Foreign direct investment (FDI) has boomed and capital market reforms have been implemented. In addition, accession to the World Trade Organization in 2006 opened the market further.

In short, Vietnam boasts a growing economy and a young, highly educated and hard working labour force with a competitive cost.

As World Bank president Robert Zoellick said, 'Vietnam has already achieved one of the fastest improvements in living standards in the world, with a great reduction in poverty. Vietnam is on pace to become a middle-income nation by 2010.'

But the story is not all rosy. The newest Asian tiger is suffering growing pains - inflation is running at an alarming rate and the cost of housing in the key economic centres of Ho Chi Minh City and Hanoi has rocketed. Also, the stock exchange rose to an unsustainable level before dramatically correcting.

What do such conflicting signs mean? Should Singapore companies continue to eye Vietnam? Will its economy continue to run hot? Will recent corrections and attempts to fight inflation have an effect? Should companies invest now or wait to see what the next few months hold? The answers are simple - be patient, stick to a long-term strategy and learn to understand the lie of the land. The outlook for investors in Vietnam is generally positive, and strong growth should see the economy double over the next 10 years. But to take advantage of Vietnam's opportunities, investors need to be in the market for the long haul and overcome obstacles such as soaring rents and rocketing inflation.

This advice was given to a group of more than 20 Singapore business leaders who were invited to Ho Chi Minh City by HSBC in Vietnam to see first-hand the opportunities and obstacles to doing business. With more than 130 years of experience in the country, HSBC is in a unique position to advise foreign investors.

Additionally, the advice was given by some of the leading international names in the country. The Singapore delegation heard from a panel of experts including KPMG on tax matters, CB Richard Ellis (CBRE) on property issues and JSM on the legal system. HSBC's own financial and business experts were also on hand to decode the banking and finance system.

These industry experts concluded that Vietnam's future prospects far outweigh current teething issues. Inflation was the big story in 2007, and by February 2008 the year-on-year rate was running at an unmanageable 15.7 per cent. The government clearly knows inflation is a huge issue and has made getting it under control a top priority.

In the real estate sector, inflation has resulted in higher rents and sale prices. Currently, the vacancy rate is low and there are long queues to get good office, residential or retail space. CBRE forecasts that buyers may have to pay a whopping US$75 to US$85 per square metre for Grade A office space. In the retail sector, Ho Chi Minh City's CBD is 100 per cent occupied and there is a waiting list.

On the bright side, hundreds of small office buildings are being constructed across Vietnam. An additional 916,000 sq m of office space is expected to be on the market in Ho Chi Minh City by 2010, which should ease the squeeze. New retail space is also under construction.

Meanwhile, a look at the economic figures should convince the naysayers. Vietnam has a growing population of 85 million, a staggering 75 per cent of whom are under 35. They form a huge consumer base and potential market for a whole range of goods and services offered by Singapore companies. There is little doubt that this consumer base aspires to the 'good life' enjoyed by young people in more developed countries. In addition, the literacy rate is high (93 per cent) and the estimated labour cost, at US$90 a month, is 30 per cent lower than in China.

Gross domestic product (GDP) grew 8.44 per cent in 2007, still behind China at 11.8 per cent but faster than Singapore's 7.5 per cent and blistering compared with America's 2.2 per cent. Exports grew 21 per cent to US$48.4 billion but were outpaced by a 31 per cent increase in imports to US$60.1 billion.

Foreign investment doubled in 2007 to US$20.3 billion, taking the cumulative total to US$80 billion, with 8,500 projects under way from 86 different countries. Singapore boasts the second-largest FDI in Vietnam at US$9.87 billion.

Numerous industries in Singapore can take advantage of this growth. Increased consumer spending has kick-started a booming retail market in products ranging from dairy and nutritional goods to pharmaceuticals. Clothing, footwear, cosmetics all have seen double-digit year-on-year growth.

Manufacturing, particularly clothing and textiles, is the mainstay of the Vietnamese economy. And the government is actively trying to attract heavy industry. At the same time, education, real estate, telecommunications and information technology all have excellent prospects.

So while the economic boom has caused high inflation, soaring rents and labour shortages, and strained Vietnam's economic infrastructure, the country has enough advantages to make it an attractive option for Singapore companies looking for new markets. Anyone who has been to downtown Ho Chi Minh City in the past few years will attest to its buzz.

Vietnam is an exciting place whether you're a traveller or an investor - and the bustle is set to continue. Many Singapore companies have already paved the way. Vietnam has opened its doors to international organisations to invest in its economy, and Singapore companies would do well to accept the invitation.

Source: The Business Times - July 22, 2008