Indonesia and Vietnam are among the Asian countries which have core emerging markets characterized by huge investments in the infrastructure that is a major priority for the government. The infrastructure presence ranges from the basic road highways and railway transport to the renewable energy and complex urban infrastructures. These infrastructures for the main government budget allocation of over 45% and are aimed to facilitate trade within the country and abroad. This paper seeks to explore the nature of market emergence in Asia with specific focus on Indonesia and Vietnam. In this respect, a close comparative analytical approach will be pursued in a bid to grasp the comparisons and differences of the two economies in terms of the potent for market emergence.
Background of Indonesia and Vietnam
According to Organization for Economic Cooperation and Development (OECD), Indonesia has the fourth largest population in the world, with a huge consumption base and a wealth of natural resources. It has a high infrastructure deficit and a young population, that has, a half of its 240 million is aged 29 and below. Indonesia's score in BMI's Asia Pacific Risk/Reward Ratings (RRRs) is 57.8 out of 100. It has one of the fastest growing construction industries in South East Asia. It has moderate score in labor market infrastructure with mostly low cost labor hampered by poor legislative framework and corruption. According to Transparency International (2012), the Corruption Perception Index (CPI) of Indonesia remains poor. For example, in the year 2012, Indonesia scored 32/100 ranking position 123 in corruption index out of 174 countries that was evaluated and rated (Transparency International, 2012). It has one of the Asia’s worst investment climates due to corruption, graft and long tendering process hence discouraging the entry of foreign investors.
Indonesia is ruled by a democratic party which has two thirds majority in parliament. The ruling regime gained much confidence from the public in first term of the ruling president, Susilo Bambang Yudhoyono. However, in his second term, that confidence has been lost due to several corruption allegations with his high profile leaders. A case in point is his Prime Minister who is facing a sentence for corruption activities. It has also affected the other organs of government including the judiciary and hence the public views it as the inability of the President to provide good leadership. As a result, several infrastructural projects aimed at improving the market economy lag behind schedules due to laxity of the lawmakers to pass supportive legal frameworks.
On the other hand, the Communist Party of Vietnam (CPV) provides the leadership for the Socialist Republic of Vietnam. There is however factions between the hardliners and reformists but it is evident that there will be no major shift to stability for at least 5 years. The government is however ruled as one party state with no chance given to push for democracy. The country is not doing very well in terms of corruption. The country scored 31/100 in the recent Corruption Perception Index (CPI) 2012 evaluation by Transparency International (Transparency International, 2012). The country was thus ranked position 123 out of the 174 countries that were rated. Severe punishment is given to individuals or organizations that try to challenge the government. They are however pushing for legislative reforms to allow faster infrastructural development and attract investors. There are weak links with China due to conflicts arising from contested islands.
Three major ports are being worked on. Inadequate electricity supply and power is also purchased from neighboring countries. There is a plan to build a second oil refinery. The planned merger of the main Vietnamese banks to address non-performing loans was seen as a noble idea though questions are already being raised on the likely weak administration which may cause additional challenges. Vietnam is the most productive coffee hub in the world. The U. S made it one of its franchises. The coffee exports and domestic consumption has been on the rise. The entry of retailers from ASEANs has contributed to expanding the underdeveloped internal retail network.
Construction Industry in Indonesia and Vietnam
The performance of the Indonesian construction industry is exponential between 6.9% to 7.6%. The growth is associated with Foreign Direct Investments (FDI). The government ear-marked 14 infrastructure projects worth US$6.1 billion for railway, power and water supply projects using public-private partnership programme (Indonesia Country Report, 2013). Indonesian transportation ministry also signed a memorandum of understanding with six provinces for the construction of a 2000 km integrated railway network in Sulawesi through a public private partnership. The railway line was meant to connect major towns and the port hence facilitating trade within the country as well as imports and exports.
The government raised funds from the public. For example, in December 2012, the issuance of Sukuk state bonds to raise US$ 103.5 million to form part of the cost of constructing a 126 km double track railway worth US$ 156 million that would reduce congestion at the port to allow cleared goods reach their destination faster using railway containers as opposed to road transport in which heavy containers and tractors greatly reduce the lifespan of the roads much faster than it should be (Indonesia Country Report, 2013).
The Indonesian government embarked on the expansion of its port system to improve the trade. The expansion of the port was in line with the expansion of the railway network (Indonesia Country Report, 2013). The main aim was to improve on the quantity and the quality of services at the port that would handle more containers for shipping abroad as well as to the mainland within a reduced time. This has greatly reduced the duration of waiting for shipping. Additionally, faster handling of goods at the port has improved the image of the government with regards to supporting efficient trade hence attracting investors (Indonesia Country Report, 2013).
This move became evident when the government approved the environment impact assessment in 2012 for the construction of Kalibaru port by Pelindo II which would expand Tanjung Priok port to facilitate handling of more imports and export (Indonesia Country Report, 2013).
On the other hand, the Vietnam construction industry is forecasted for 5.2% growth in 2013. The recovery growth is due to the country’s growing monetary conditions allowing benefit in construction activity due to the lower cost of capital. The government of Vietnam is in the process of documentation for the Van Don International Airport project, an investment of Republic of Korea. The international airport will boost trade by facilitating faster movement of people and goods. Additionally, the international airport would facilitate tourist movement in the country. In turn, this has the prospect of boosting the Vietnamese foreign exchange (BMI Vietnam, 2013).
They Vietnamese government also laid down Dau Giay-Phan Thiet highway project on a public private partnership to cost US$1.12 billion, a 98 km highway and 2.58 km access road. The highway is aimed at facilitating mainland transport of goods and people. When this transport infrastructure is improved, both trade and security will likely improve leading to better market destination for both local and foreign investments (BMI Vietnam, 2013).
Construction sector in Vietnam is in an upward cyclical phase. It is however far from maximizing growth potential due to poor trade activity, housing oversupply and difficulty in securing project funds in the infrastructure sector. The corruption allegations in the government have caused most financial institutions to hesitate the support to the construction work. This is not attractive for external investors. The housing oversupply discourages construction of more houses as well as having direct effect of companies dealing in trade with construction materials (BMI Vietnam, 2013).
Indonesia and Vietnam Market Overview
The Indonesian government launched the 2011-2025 Master Plan for the Acceleration and Expansion of Indonesian Economic Development (MP3EI) in May 2011. They earmarked six regions as key economic corridors.
The government aims at fulfilling the above plan (fig 1) through a public private partnership (PPP). This intention led to the formation of Indonesian Economic Development Committee Integration to spearhead the PPP which managed to draw a regulatory framework to guide their collaboration (BMI Indonesia, 2013).
Labour Availability in Indonesia and Vietnam
In Vietnam, there is youthful population with a wide consumption base able to provide the needed labor (ILO, 2012). Although Vietnam remains attractive for most investors, labor still poses a great challenge for most foreign investors. The youthful population that is being targeted to fill the labor gap is greatly deficient of management talent (ILO, 2012). Lack of skilled workers is great challenge for investors in Vietnam. Those who have these qualities therefore earn higher salaries than the rest. Further, the cost of skilled and managerial workers has been cited to be the relatively high-paid local staff (ILO, 2012). Recruitment of staff by foreign investors is only allowed to occur through state-owned bureaus although if this fails to locate suitable workers within the first thirty days they are then allowed to recruit directly.
On the other hand, Indonesia is blessed with a youthful population, large customer base, wealth of natural resources and good infrastructure. The youth have remained unemployed for a prolonged period of time since employment opportunities has not expanded in the period between 2000 and 2010 (ILO, 2012). This population added to the high percentage of unemployed women remains great potential and target for investors in the Indonesian market. The public private partnerships has helped to create job opportunities in both the partnering sectors as well as support the private entreprenuering industry (BMI Indonesia, 2013). There is widespread labor migration from the rural to urban centers. Although economic growth has been has been registered in the recent past, this has only slightly reduced the high rates of unemployment in Indonesia (ILO, 2012). Although the agricultural sector has been providing much of the employment, this has since changed as more employment is in the services sector.
Comparison in Terms of Financial Support
Indonesia relies on multilateral financial institutions (MFIs) for funding. Included here are; World Bank, Asian Development Bank (ADB), state-owned Sarana Multi Infrastruktur, Indonesia Infrastructure Finance and PT Penjaminan Infrastruktur Indonesia (PT II). Indonesia needs $100 billion from the IMF to support its budget and register and maintain a stable economic growth (IMF, 2010). They have also issued Islamic bonds, seeking to utilize the Association of South East Asian Nations (ASEAN) and Infrastructure Fund (AIF) to fund infrastructural development besides pursuing government to government lending options (Indonesia BMI, 2013). There is limited private investment in Vietnam due to bureaucracy and rigid internal market. The main funds are from government taxes, public borrowing and trade. Vietnam is in great of support from IMF and World Bank to overcome prolonged stagnation (IMF, 2010). The financial aid the country needs from the world’s funding bodies is estimated to be 250 trillion dong ($12 billion) to 300 trillion dong. This will help in growing the economy which has registered a downward trend dropping from 8.5 per cent to 44.4 per cent in 2007 (IMF, 2010).
Changes in Regulatory Framework
The Indonesian President accented to the Land Acquisition for Public Interest Development to allow a clear and speedy land acquisition that replaced the basic agrarian law of 1960 and the presidential decree of 2005. On the other hand, the Vietnamese government is revising regulations to allow public private partnership as they ease the state owned services to win the confidence of investors especially following the hard-hit corrupt government ministries. The ongoing constitutional reforms may address the weak state-owned sector to tackle the bad debts. The fiscal position remains low as the government spends huge amounts in infrastructure and social welfare. Budget deficit equivalent of 4.7 GDP in 2012 and will remain so even in 2013. Negotiations with EU on Free Trade Agreements (FTA) are ongoing.
Energy is a key determinant of economic development. The main energy supply for both countries is hydroelectric power. Indonesia has a plan to develop the second hydroelectricity plant to ease its current power shortages. Besides, coal mining provides a ready source of coal energy forming a big contribution in this sector.
Under the Vietnamese government power development plan 7, the government plans reach a target of 75000MW capacity by 2020 which would greatly improve the acute shortage of power in the country. However, the government does not seem to have a financial plan for the execution of it. The tax collections and other government revenues are mainly directed towards fighting inflation and reducing the bank debts. There are underway plans for nuclear energy in collaboration with Japanese and South Korean governments. The Vietnamese government has already established relevant regulations on the nuclear power but is yet to finalize the plan and win the confidence of the international community in their ability to manage the nuclear plants (Vietnam Country Report, 2013).
A Synthesis of Emerging Markets in Indonesia and Vietnam
The factors that have contributed to a fast growing industry in Indonesia are mainly in line with huge investments in the infrastructure. The expansion plans of the PT Perusahaan Listrik Negara (PLN)’s 20-gigawatt (GW) electricity generation are already attracting huge investors who are sure of reduced power outrages. The move by the government to set aside funds (US$440 billion) in the 2011-2025 master development plan dubbed Acceleration and Expansion of Indonesian Economic Development (MP3EI) gave direction and specificity in priority and carrying out development initiatives ( Indonesia Country Commerce, 2013).
On the other hand, the move by the legislative assembly of Indonesia towards the new land acquisition regulation has paved way for a clear and faster land acquisition process. Additionally, the political support for public private partnerships and agreements towards improving infrastructure has won public support and attracted investors. Moreover, the availability of some of the Asia’s largest construction companies provides ready contractors to carry out the much needed infrastructural development and trade (Indonesia Country Report, 2013).
The challenges facing Indonesian development are mainly touching the infrastructure, leadership and policy. The power outages and shortfalls, poor business environment due to corruption, red tape and lack of transparency, high foreign exchange risks and poor collateral and bankruptcy laws derail the economic growth.
Vietnam’s poor state of infrastructure allows easy win for foreign investors and construction companies towards the development of infrastructures. There is likely stimulation of investment in the energy sector due to high electricity so that other options like coal and nuclear energy have become of great thought and plan. The demand for urban infrastructure projects in transport and sanitation is rising with increasing urbanization hence attracting more investors (Vietnam Country Report, 2013).
The state owned companies in Vietnam dominate the infrastructure hence deterring investors. On the other hand, the country relies on foreign imports like steel which hinders the development due to the high cost of import. Additionally, the finance operation is very poor leading to a very risky trade environment. The power outages due to severe drought interfere with production and calls for diversification of energy from hydropower to gas fire or wind power (Vietnam Country Commerce, 2013).
The government of Vietnam however faces several challenges which can cause a downward trend in the economy if not addressed. For example, cutting public spending and tight credit condition depresses the economy by slow infrastructure improvement and inadequate finance availability for business. The challenge with energy leads to high cost production and discourages investors. On the other hand, any highlight of government structural difficulties, uncertainty and downside risk in business may have a far reaching negative impact. The EU predicts that Vietnam will not become a true market economy until 2018 (Vietnam Country Report, 2013).
Indonesia and Vietnam remain to be prospective markets within the international trade system. The two Asian economies have great potentials for attracting investments across the globe. However, critical issues are still pending and need to be addressed. In Vietnam for example, the problem of graft and poor governance poses a great challenge to investment into the market. This added to macro and micro-economic policies and structures that greatly hindered investment prospects. It is can be pointed out, with brevity, however that the two economies are still challenged in terms of infrastructural development needed to attract significant foreign direct investment and build the economic structures of the two countries.