Tuesday, April 29, 2008

Prodigal shopping: a threat to Vietnam’s economy

ed note: Read and Weep

While the government is calling for everyone to practice thrift, some are still shopping freely because inflation hasn’t influenced their consumption habits. But their prodigal shopping has become a burden for the economy of Vietnam, where the poor are the majority.

Spending money like billionaires

A satisfied Nguyen Thu Trang came out of Parkson shopping mall, which opened in Hanoi early this month, with some bags containing products of Timberland, Calvin Klein and Tommy Hilfiger brands worth more than US$1,000.

“It is wonderful that I can buy all of these things right here,” Trang said happily.

Trang, an employee of a foreign-invested company, is a representative of the class of newly emerging rich people, whose spending habits are not affected by the inflation storm which is sweeping throughout Vietnam.

Trang’s monthly income is around $700 but the material life of this 28-year-old girl is very comfortable. Leaving university six years ago, Trang’s parents, who are officials in a central province, opened a banking account, bought a house and a car for her in Hanoi.

“Now I can buy whatever I want,” Trang said.

The middle class and their children, like the case of Trang, account for only 2-3% of the Vietnamese population and they are not being impacted by the current inflation plague, said Dr. Pham Duy Nghia of Hanoi National University.

Nghia’s comment is proved by the fact that five-star hotels in Hanoi are still fully occupied by Vietnamese families, the increase of luxury imported cars and overseas tours as well as the volume of USD paid for overseas students.

“More and more Vietnamese people spend freely like they were living in Hong Kong or Singapore,” said Ralf Matthaes, Executive Director of TNS Vietnam, a market research firm.

“They promote the sales of lavish products ranging from imported expensive cars to spacious houses and Italian shoes,” he added.

Famous brands flow into Vietnam

This class is the top priority of foreign consumer goods companies. At Parkson, all products on display belong to world famous brands like Calvin Klein, Geox, Yves Saint Laurent, Aigner Tommy Hilfiger, Timberland, and Guess, which are imported from the US, the UK and France. These things, including perfume, cosmetics, clothes, jewelry, and interior decoration items, are priced up to VND20 million ($1,250).

Kelvin Chan, Parkson’s Executive Director, said: “Our major customers are Vietnamese high-income earners.” He said the need for luxurious products in Vietnam continues rising so Parkson will open three more similar shopping centres in Hanoi in the future.

But there are many other places in Hanoi selling lavish items like Parkson. Suits, belts, leather wallets, etc. which cost several thousands of USD and products made by Boss, Bonia, Valentino, Lacoste, Mango, etc. are flowing into Vietnam and also appear at small shops on Hanoi streets opposite luxurious shopping centres like Vincom, Trang Tien Plaza or Ocean Tower.

A Boss or Valentino suit is priced over VND10 million ($700) but a staff of Boss at Vincom shopping centre said: “We have more and more customers. Products costing between VND12 and VND16 million are selling like hot cakes.”

“This is the most suitable moment for Rolls-Royce’s presence in Vietnam,” said Patrick Regis, chief representative of Rolls-Royce in Vietnam.

According to him, Vietnam’s increasing need for expensive cars urged this firm to open a representative office in Hanoi early this year. The number of super-expensive cars like Phantom, Maybach or Bentley has been increasing in Vietnam since late 2007. In the first quarter of 2008, around 12,000 cars were imported, equivalent to 50% of the total figure of 2007. The number of imported cars is forecast to further increase, despite the Ministry of Finance increasing the import tax rate on cars from 70% to 83% on April 21, 2008.

The hazard for Vietnam’s economy

Dr. Nguyen Tri Thanh from the Central Institute for Economic Management said Vietnamese people’s consumption has risen at a higher level than GDP in recent years. The evidence is that the savings/GDP ratio increased from over 27% in 2000 to only 31% in 2006 and 2007.

“Consumption growth, especially from import sources, will affect the macro balance of payment and this is a worry,” Thanh said.

Vietnam’s trade deficit hit $7.4 billion in the first quarter of 2008 and it is calculated to reach $19 billion for the whole 2008.

Dr. Le Xuan Nghia from the State Bank of Vietnam (SBV) told journalists that he didn’t believe in the modest statistics of imported consumer goods in Vietnam in official statistics. “Foreign goods are flooding the Vietnamese market. It shows that the need for consumption has been pushed up very highly,” he said.

A World Bank report reflects this fact as well. The report divided the Vietnamese population into five groups of the same scale. They discovered that the group of 20% of the richest people account for up to 43.3% of the total spending, compared to 7.2% of the poorest group. It means that one in the richest group spends six times more than one in the poorest group.

Perhaps Trang doesn’t know this. She is enjoying her beautiful life. But it is clear that the shopping habits of Trang and the people of her class are becoming a big problem for Vietnam, where most people live around the threshold of poverty. And the trade deficit, which is up to 17% of GDP and partly contributed to by imports of luxurious products for the middle class, is a threat to the economy that is based on agriculture.
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