The race to invest in Vietnam - How FDI is changing Vietnam’s economy and society

Vietnam’s economy has been among the fastest growing in Southeast Asia. Today, it is a key destination for Foreign Direct Investment (FDI) in the region. In 2016, FDI climbed to USD24.4 billion, a 9 per cent growth compared to 2015. This is despite Vietnam suffering an epic drought in 2016 and a third of its vast population of 93 million people living in poverty. Vietnam has won a reputation as a cheaper manufacturing hub compared to China. Could FDI propel Vietnam to become Asia’s next Tiger economy?

A growing economy
With a USD200 billion Gross Domestic Product (GDP), Vietnam’s economy is tracking well since the start of deep economic reforms – known as Doi Moi – in 1986. Since 1990, its GDP per capita growth has been one of the fastest among emerging economies, at an average 6.4 per cent (yearly) growth in the 2000s.

Vietnam has improved provision of basic services. In 2014, the part of the population living below poverty line fell to 13.5 per cent – down from approximately 60 per cent in 1993. 67 per cent of the rural population now has access to sanitation facilities compared to 36 per cent twenty years back.

Path to recovery?
Vietnam is the sixth largest economy among the 10-member states of the Association of Southeast Asian Nation (ASEAN), ahead of Myanmar.

Some factors responsible for steady growth include:

TPP deal – revival or replacement?
With the change in U.S. leadership, the Trans Pacific Partnership will either be scraped or replaced. A replacement deal would help Vietnam as an exporter. Vietnam is also a party to 16 other Foreign Trade Agreements (FTA).

Trade liberalization
Under trade deals, foreign investors receive lower tariffs. In 2015, trade liberalization and changes in permit processing for foreign investors attracted more FDI into Vietnam. More structured legislation also ensured Vietnam to become one of the major global manufacturing hubs.

Vietnam’s accession to the World Trade Organization in 2007 helped increase FDI inflow significantly. The total FDI stock was USD293 billion in November 2016, with investors from 114 countries and a total of 22,280 projects.

Furthermore, the passing of a new Law of Investment (Lol) and Law on Enterprise (LoE) in July 2015 helped streamline procedures for registration, increased eligibility for investment incentives and reduced the number of business lines prohibited to foreign investors from 51 to six, to name a few.

As Vietnam continues to progress on the reform front, this is reflected in its increased ranking for ease of doing business for 2017 – going from the 91st to 82nd position in the world.

Expanding middle-class
Vietnam’s middle-class is set to double to 33 million people by 2020, which means more consumption. This expansion is due to a gradual rise in wages and jobs linked to export manufacturing.

Merger & Acquisition (M&A) transactions
The current scale of M&A business in Vietnam is not as developed as other countries such as Indonesia, Malaysia and the Philippines but there is strong interest in M&A deals in real estate and commercial projects especially from Hong Kong, Japan, Korea and other foreign investment funds.

In order to take full advantage of a possible replacement TPP deal and the ASEAN Economic Community (AEC), the Vietnamese government enacted new policies to allow foreign investors to own and invest extensively in the real estate market, thus enhancing M&A transaction in the hospitality sector.

Move away from traditional industries
The share of high-tech exports reached 25 per cent in 2015, up from 5 per cent in 2010. Electronics is replacing traditional industries such as shoes and garments. Global electronics manufacturing giants like Intel, Canon and Samsung have massive investments in Vietnam. Policy makers also aim to increase the annual export value by eight per cent to ten per cent, which is likely to bring more revenue, higher wages and new skills for companies in this sector.

Growth potential

Vietnam is becoming increasingly attractive for foreign investors with total FDI inflows for 2016 valued at USD24.4 billion. Key sectors of interest include:

Textile and garment industry

As one of Vietnam’s largest industrial employers, the textile and garment industry constitutes of 25 per cent of labor force – more than 2.5 million workers (as of 2016). It generates 17 per cent of export revenue, valued at USD27.2 billion in 2015. This sector has been a pillar of the Vietnamese economy for decades.

Retail

Vietnam’s retail market is among the most attractive globally. Retail sales reached USD117.6 billion in 2016. Year-on-year sales rose by 10.2 per cent due to foreign investment especially from South Korea, Thailand and Japan. This is largely due to a rising middle class and young population. 60 per cent of the population are aged under 35 and are familiar with global brands as well as trends.

Tourism sector

2016 set a new record of 10 million international tourist arrivals, up 25 per cent on 2015. Visitors that top the list are from the Republic of Korea, Japan and China – making up 30 per cent of international tourists in 2016. The country’s tourist industry aims to attract 11.5 million international tourists, serve 66 million domestic visitors and register USD20.24 billion in revenue in 2017.

Education and training sector

The job market is slowly shifting towards services. To that end, parents now seek opportunities to enhance their children’s education to better prepare them for service industry jobs. Approximately 110,000 Vietnamese students went for overseas studies at a cost of USD3 billion as of 2016.

Around 27 per cent of households across the country send their children for private lessons and 90 per cent spend one to five per cent of household expenditures on supplementary lessons.

There is also a growing demand for vocational training to improve employment prospects. The expansion of Vietnam’s higher education system over the past 15 years meant that tertiary enrolment tripled from 2000 to 2013.

Only 15 per cent of working-age Vietnamese managed to complete formal skills training. Going forward, the government aims to target 55 per cent of workers by 2020.

Real estate sector

Vietnam’s real estate sector is on the rebound. It expanded four per cent in 2016, contributing 0.2 percentage points to overall growth. FDI inflows for real estate were valued at USD1.52 billion across 59 property projects.

Significant changes to the Real Estate Law in 2015 permitted foreigners to own and lease up to 250 villas or town houses – 30 per cent of an apartment building. The changes also effectively enabled foreigners to register a 50-year leasehold title on any type of property, giving foreigners the right to inherit, trade, mortgage or sublease.

There is also a growing demand for vocational training to improve employment prospects. The expansion of Vietnam’s higher education system over the past 15 years meant that tertiary enrolment tripled from 2000 to 2013.

Challenges

While investors in Vietnam’s manufacturing sector have boosted exports, there has also been a surge in imports . In 2015, Vietnam registered a trade deficit of USD3.5 billion after three consecutive years of surplus.

Some challenges that hinder its economy include:

Fighting corruption
Corruption is still widely seen as rampant. This is largely due to low levels of transparency, media freedom, accountability as well as low wages for government officials and a legal system that is weak in holding officials to account.

The Central Steering Committee for Anti-Corruption was established in 2007 and since February 2013, has been under the CPV Central Commission of Internal Affairs. However, while Vietnam’s Anti-Corruption Law (2005) sets strict penalties for corrupt practices and requires government officials to declare their assets, enforcement remains problematic.

Transparency in financial sector

Trade liberalization has opened up Vietnam’s economy. This has placed greater demands on its financial sector which had been isolated from international practices and standards until the early 1990’s.

The banking system is weakly capitalized. It is also fragmented at the bottom and highly concentrated at the top. Even though the banking sector remains small, banking services and networks are on the rise. Close to 75 per cent of Vietnam’s 90 million people use limited banking services. That still leaves a large 25 per cent of the population unbanked.

Privatization of State Owned Enterprises

Opening up State owned enterprises (SOEs) to private investment may become a central driver of FDI in coming years. Since economic liberalization, 5,950 state enterprises have been restructured and 4,460 have been equitized. As at 2016, privatization of SOEs has generated USD1.6 billion through sale of companies with a book value of USD1.2 billion.

Infrastructure investment

Vietnam’s private and public-sector investment averaged 7.5 per cent of gross domestic product (GDP) – the highest in Southeast Asia and higher than China’s 6.8 per cent.

Nonetheless, challenges remain. Vietnam needs approximately USD480 billion through 2020 for infrastructure, including 1,380 kilometers of highways and 11 power plants with a total capacity of 13,200 megawatts.

Addressing social issues
Despite a vigorous economy, Vietnam’s record on political and civil rights remains poor. Basic rights such as freedom of religion, press, association, opinion and speech are restricted. Vietnamese courts remain under the Communist Party.

Future outlook

Vietnam’s entry into the WTO in 2007, a few years after China, was the first step towards Vietnam’s integration into the globalized world economy. Vietnam is now a magnet for international FDI and a manufacturing hub. Foreign investment has helped mobilize the capital needed to transform Vietnam’s economy, shifting it away from agriculture and towards high-tech, high-productivity job creation in fast-growing cities.

As Vietnam’s economy matures, labour costs will inevitably rise, creating pressure on Vietnam to develop a vibrant services sector as well as move manufacturing up the value-added ladder. This evolution will also challenge the financial services sector, the education sector and the government’s economic planners and regulators to “up their game”.

The Vietnam government’s skilful liberalization of the real estate sector has stimulated interest in M&A among international investors. In the next few years, M&A will likely be a major driver of FDI, including opportunities created by the corporatization of SOEs.

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This release was published on openPR.