Private sector reform

Vietnam is undergoing significant legal and regulatory reforms intended to further open its domestic capital markets, including passage in 2005 of the new Enterprise Law and Common Investment Law, and the passage of the Securities Law in 2006. The Investment Manager believes that these new laws will both improve access to domestic capital markets by foreign investors, and clarify investor and shareholders’ rights. Furthermore Vietnam has also been undertaking a campaign over the past several years to reform and equitize SOEs. From 2000 to 2005, more than 2600 SOEs were equitized.

In addition, Vietnam is taking steps to further integrate into the global economy, which we believe will enhance the economic prospects for companies in which we intend to invest. WTO member will bring several benefits to Vietnam, including greater access to foreign markets, removal of existing quotas on key sectors such as garments and textiles, increased attractiveness of Vietnam for foreign investors and access to an international forum to resolve trade disputes. Finally, the Investment Manager believes that WTO ascension will also provide additional motivation for the government to accelerate domestic reforms and require Vietnamese enterprises to become more competitive as tariff and non-tariff trade barriers are further reduced.

A key aspect of Vietnam’s plans for continued liberalization of the economy is to encourage the development of a robust private sector. In 2005, the private sector contributed 61.6% of GDP at current prices. Development of the private sector is intended to facilitate broad-based economic growth, primarily through increasing export capacity, and to reduce dependence of the economy on the State sector.

The government’s reform efforts have been designed to accelerate private sector development by providing incentives for domestic private investment. The enterprise law, which became effective on January 1, 2000, created a modern legal regime for the establishment and operation of private enterprises. A principal change introduced under the enterprise law was to allow the establishment of companies under registration, rather than by discretionary government licensing. This change has reduced the cost of, and the bureaucratic impediment to, establishing private companies and has resulted in the creation of a significant number of new businesses. Minimum capital requirement for private enterprises other than financial institutions have been eliminated. According to ADB, some 38,100 private enterprises were newly registered in 2005, up from 14,400 in 2000. There are now about 200,000 private enterprises, with a total registered capital of about US$19 billion.

On November 29, 2005, the national assembly of Vietnam passed the common investment law and the new law on enterprises. These laws aim to simply administrative procedures and provide more equal treatment for local and foreign businesses.

The intent of the common investment law is to create a unified legal regime for investment activities and promote investments by allowing all participants in the Vietnam economy to invest and conduct business on the basis of equality, fair competition, transparency and order. Despite this stated goal, the common investment law still provides a somewhat bifurcated foreign/domestic investment registration and evaluation process based upon sector regulation and investment value.

The degree of sector regulation depends on the government’s desire to attract investments into a certain sector. Incentives are, for instance, offered for investments into the biotechnology and technology sector. Investments into other sectors including banking and finance, public health and medicine, are subject to condition.

The new law on enterprises allows foreign organizations and individuals to establish and manage enterprises in Vietnam on the same legal basis as domestic organizations and individuals. Investors can freely choose the appropriate business form. The new law on enterprises also recognizes the ownership rights of companies and their owners with respect to assets, invested capital, revenues and other legitimate interests, as the case may be. Accordingly, companies whose assets are expropriated for defense or for reasons of national security or national interest are entitled to receive compensation based upon market prices prevailing at the time of expropriation.

Favorable demographic characteristics

Vietnam’s population and workforce is large, growing, young, highly literate, and experiencing rising income. Vietnam’s population is the thirteenth largest in the world, with an estimated 83.1 million people in 2005, up from 77.6 million in 2000, an increase of 7.1%. Its workforce was estimated to be 42.7 million in 2005, up from 37.6 million in 2000, an increase of 13.6%. More than half its population is under the age of 25. Vietnam enjoys high literacy rates in excess of 90%. In addition, university and college attendance rates in 2005 increased 56.2% over attendance rates in 2000. In term of wealth, per capita GDP as measured at constant 1994 prices has risen 34.1% from 2000 to 2005.

The Investment Manager believes that these favorable demographic characteristics have contributed to the growth of private consumption in Vietnam. Private consumption based on constant 1994 prices has increased by 39.8% from 2000 to 2005. The Investment Manager believes Vietnam’s favorable demographic characteristics will continue to fuel domestic consumption-related economic growth and produce investment opportunities for investors, such as the Fund.