Vietnam central city's economic bubble bursts

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Central city grinds to a standstill after a decade or so of runaway growth 

The VND1.7-trillion Rong (Dragon) Bridge was inaugurated on March 29 in Da Nang City. The city's once vibrant economy is paying the price for excessive reliance on the real estate sector. Photo by Huu Tra

Three years ago, Pham Em and many residents had to move to the E 1 Residential Area in Cam Le District to make way for many infrastructure projects in Da Nang, considered a development beacon for the nation.

Pham Em looks around his new home and does not see much evidence of development.

"Many people have built houses but the streets are really messy. They have not been paved and there is no sidewalk," he was quoted by the Tuoi Tre (Youth) newspaper as saying in a recent series it ran on the city's economic difficulties.

The situation is the same in many new residential areas that were sold to residents displaced by infrastructure projects.

Many of the projects themselves have been delayed because of a lack of funds, and Da Nang's development bubble seems to have burst.

After being separated from Quang Nam-Da Nang Province to become a national-level city nearly 17 years ago, Da Nang soared with impressive economic performances, but excessive reliance on the property sector to drive its growth has come home to roost, experts say.

"Economic diversification is a sign of the maturity and depth of an economy," said David Koh, who lectures on Southeast Asian studies at the National University of Singapore.

"The lack of diversification means that the economy will have to go through strong boom and bust cycles whenever the specialization of the economy rises and declines according to the business cycle."

At a July meeting of Da Nang People's Council, the city's legislature, many deputies questioned city mayor Van Huu Chien about its repeated budget deficits.

He said the frozen real estate market was one of the major reasons, leading to a delay in many projects and reducing revenues from land.

In 2011, Da Nang earned up to VND5.1 trillion (US$242 million) from the property market. Last year, this fell to VND1.3 trillion, much lower than targeted VND3.5 trillion.

In the first half of this year, the city's total revenue was VND5.2 trillion while it spent VND7.6 trillion. Last year's budget deficit was VND2.7 trillion.

When the real estate sector was booming, Da Nang maintained its top position in the Vietnam Provincial Competitiveness Index (PCI), based on a survey of around 7,000 Vietnamese and 2,000 foreign companies, for three consecutive years (2008-2010).

However, last year, it had plunged to 12th position.

The city's budget deficit has forced it to halt several infrastructure projects.

Vo Tien Dung, director of the Bach Dang Dong Street Project Management Unit, said they had so far received only VND16.5 billion of the VND29.4 billion the city had earmarked for the agency this year.

"The city authorities have announced that the earmarked reimbursements will be cut by between 30-40 percent by the end of this year. Thus, several other projects will be halted," he said.

The budget deficit, which rose because of excessive infrastructure development has caused difficulties in other sectors, including education.

Le Trung Chinh, director of Da Nang Education and Training Department, said the city had earmarked VND106.5 billion for projects to build schools in remote areas in 2013. However, just one secondary school has been built so far with an investment of VND1.3 billion, he said.

Experts say Da Nang should have focused on diversifying its investments instead of focusing solely on real estate riches.

Le Dang Doanh, former director of Vietnam's Central Institute for Economic Management, said he had warned about this issue in 2005. He had said that with 80 percent of its revenue coming from real estate, Da Nang would face many difficulties, because the source was unstable.

"The bridges being built are [of] very good [quality] but the question is if they have been effective? Would it have been possible to build one less bridge and invest it in industry or education?" Doanh was quoted by Tuoi Tre as saying.

He said Da Nang is "paying the price" for rapid and unsustainable development.

Now, it should focus on developing its strengths, Doanh said.

"Tourism and services, which have been the city's strengths, should be developed. The city needs more time and support from the central government, like approval on issuing bonds."

Koh of the National University of Singapore said if Da Nang City seeks to drive diversification through a budget deficit, "then the deficit is laudable. 

"The money spent, however, has to be spent effectively, because it is not sustainable in the long run. Certainly Da Nang has to diversify as most major cities are by nature diversified, but the road getting there will be difficult if there are no capable leaders and the rules of the government, whether central or local, are not pro-business both in words and in action," he said.

"The lessons for Da Nang are the same for Vietnam long term budget deficits are not sustainable particularly if the money is spent on unproductive activity."

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By Vietweek Staff, Thanh Nien News (The story can be found in the August 30th issue of our print edition Vietweek)

(AN DIEN contributed to this report)

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