Vietnam's economic recovery is serving as an example for other developing Asean countries as it applies the lessons learned from recent difficulties. After years of struggling with double-digit inflation and unsustainable non-performing loans (NPL), the country is now building up immunity for future economic turbulences.
General views of Ho Chi Minh City for Vietnam-Economy story
The year-old Vietnam Asset Management Company (VAMC) has helped to improve the liquidity flow in the banking sector by taking bad loans off banks' books and exchanging them for VAMC bonds. As a result, a number of banks have been able to lower their lending interest rates to between 5% and 8.5%.
Many businesses have struggled for years because of a credit squeeze brought on by high central bank interest rates, as well as commercial banks' subsequent reluctance to lend and further exacerbate their bad-debt situation.
Inflation, meanwhile, has moderated to 6.6% over the past year and is expected to remain around that level for the next year, according to the Asian Development Bank. While the figure is high by regional standards, it's a steep decline from 18.6% in 2011.
While macroeconomic stability in Vietnam is improving, growth remains moderate and the economy is still performing below its potential, according to a recent World Bank report.
The World Bank projects growth at a moderate 5.4% this year, supported by continued foreign direct investment flows and strong exports.
But domestic demand remains weak because of subdued private sector confidence, overleveraged state-owned companies, and still-high bad loans at commercial banks, according to the report.
"Slow progress in banking system and state-owned enterprise reform could prolong sub-par growth and create self-reinforcing adverse feedback, possibly resulting in large contingent liabilities for the public sector, bringing public debt to unsustainable levels," the World Bank said.
Tharabodee Serng-Adichaiwit, general manager of Bangkok Bank in Vietnam
However, authorities are aware of the challenges and are acting resolutely on them, says a Thai banker based in Ho Chi Minh City.
"Vietnamese authorities are fixing the right problems with the right approaches. Changes are implemented fast as a result of its single-party socialist administration," said Tharabodee Serng-Adichaiwit, general manager of Bangkok Bank in Vietnam.
With high political stability and a sustainable dong, the country's economy is conclusively on the rise, said the Thai executive with nine years of experience in Vietnam.
"A decision-maker in any company should be based here and be ready onshore, in order to act in response to changes in systems and regulations immediately," Mr Tharabodee said in a recent interview with Asia Focus in Ho Chi Minh City.
The growth potential of Vietnam is highly attractive given its population of 90 million. People aged under 30 account for more than half the population, ensuring the availability of a young workforce to drive the economy in the future.
According to Mr Tharabodee, low labour costs remain a major draw for foreign companies in Vietnam, where monthly wages average around US$200.
Although low-income earners today constitute the largest proportion of the population, Mr Tharabodee firmly believes there will be substantial growth in middle-income earners, who should account for almost 50% of the population by 2020, up from just 6.2% at present.
Middle-income households are defined as having total income exceeding US$1,000 per month.
"The Vietnamese are fast learners. People here are tough, ambitious and financially productive. They have strong eagerness to pursue entrepreneurship and be their own boss," he added.
Overseas remittances, one of the main sources of foreign-currency earnings for Vietnam, continue to climb as well. The Bank for Investment and Development of Vietnam expects a 10% rise in remittances to the country this year.
A World Bank report noted that about 4.5 million Vietnamese living abroad sent home $10.6 billion last year, a 6.5% increase from the previous year and generating a slight lift in gross domestic product (GDP).
"Domestic consumption of goods and services will grow by threefold in the coming years. That is why it is interesting to tap into the Vietnamese market today because when the time comes, the first movers will be gleefully enjoying the view from above," the Bangkok Bank executive said.
However, penetrating the Vietnamese market remains challenging because of outmoded logistics systems, ambiguous investment regulations and complex licensing procedures.
Mr Tharabodee told Asia Focus that any commercial policies imposed by the Vietnamese government place a priority on the benefits of local people. Legal barriers prevent foreigners from exploitation and over-occupation of assets.
Thai investors are encouraged to carefully explore the market first and identify any vacant spaces for the products or services they offer.
"Newcomers could get a glimpse of the local market by bringing in their products through some investment and trade exhibitions," said Mr Tharabodee. "Product localisation is then an obligatory step to adapt to domestic demand.
"Once the products gain a reasonable amount of market share and volume, full-fledged manufacturing plants could eventually be constructed."
The good news, he said, is that Thai products have been acquiring a positive reputation among Vietnamese consumers.
On the other hand, non-native small and medium enterprises (SMEs) still face high risks when they attempt to gain a foothold in the domestic market. Not only must they compete with locally owned SMEs which account for 98% of the all businesses in the country, but also with big-budget rivals from Japan, South Korea, Taiwan, Singapore and Malaysia, all of which offer good-quality products.
"Conspicuous risks abound [for foreign SMEs]. If you start with 100 SMEs, 40% of them would confront irresistible failure in the first year. Another 35% [of those remaining] would be gone in the second year and 40% more in the third. Only a handful of the businesses would survive after three years of losing profits and struggling in a new environment," said Mr Tharabodee.
"The fourth year would be profitable for small firms. They just have to intensively target a very niche market."
Key success factors in investing in Vietnam, he said, included respecting local regulations, managing human resources and understanding the culture of Vietnamese consumers.
The Thai banker also downplayed concerns about anti-foreign sentiment, despite continuing tensions with China and the nationalistic fervour that escalated into deadly rioting in May.
He said the Vietnamese government acted quickly to restore investors' confidence by providing compensation for damages caused by its own citizens.
Vietnamese protesters outraged over the positioning of a Chinese oil rig offshore attacked several Chinese-owned factories as well as others they thought to be Chinese, including Taiwanese, Singaporean, Korean and Japanese businesses. At least four people died and 100 were injured.
"Problems are managed efficiently. Vietnam's economy is at a fast-recovering stage. The banking industry is recovering. Everything is going really well. If nothing unexpected happens, it will be extremely prosperous in the next five years," Mr Tharabodee said.