VIETNAM may be an interesting country to watch over the next few years. Although it is going through a bad patch now, several factors suggest that the Indo-Chinese state could rebound quickly. This is especially so if a less favourable business environment in China encourages foreign companies there to look for alternative investment locations.
Since beckoning outsiders with great fanfare in the 1990s, Vietnam has given many foreign investors a rough ride. Inflation and foreign exchange weakness in the wake of the global economic downturn have certainly eroded much of the early optimism. Last year, Indochina Capital Advisers decided to liquidate a London- listed Vietnam equity fund that had lost half of its value. And in November, San Francisco-based hedge fund Passport Capital demanded the return of uninvested cash from a fund that bought Vietnamese and Cambodian property.
Indeed, with the country’s trade gap last month rising to $1.85 billion – a 2 per cent increase from February – it is possible the worst may not be over. Pessimists also fret over the possibility that a flood of Chinese imports in the wake of the implementation of the Asean-China free trade agreement could stymie the growth of local industries.
Dwindling foreign reserves, a consequence of the widening trade gap and a sharp decline in foreign direct investment inflows, were the main reason for two recent currency devaluations. The devaluations – 5.4 per cent last November and 3.4 per cent in February this year – failed to improve the trade balance. But they did complicate Hanoi’s efforts to contain inflation.
Those with a more long-term outlook, however, are likely to see things differently. A research note produced by Barclays Capital last month noted that the recent import surge was driven by purchases of petroleum products, cotton and electronics, all of which are intermediate goods used in exports. The economy is also continuing to grow. International Monetary Fund figures show that gross domestic product growth averaged 7.2 per cent between 2000 and last year, making Vietnam the fastest-growing economy in Asia after China and Cambodia.
A widely expected revival in world trade, meanwhile, should see the performance of the country’s labour-intensive and commodity-based exports improve significantly this year. Garments, footwear and fishery products are already beginning to pick up, as are furniture and rubber shipments. The country’s financial situation is already beginning to stabilise. One telling indicator: The difference between the black market foreign exchange rate and the official rate is narrowing.
A survey carried out by the Shanghai American Chamber of Commerce in December revealed that Vietnam is the preferred destination for businesses looking to relocate from China. Once the darling of multinational companies, China is no longer seen quite so positively by foreign investors. Many incentives once offered by Beijing have been either cut back or removed. The recent incidents involving Rio Tinto and Google have also given many pause for thought. At the same time, the price of property in China’s more developed eastern provinces has pushed up the cost of doing business.
Meanwhile, recent free trade pacts signed by Asean with China, Japan, South Korea, Australia and New Zealand have encouraged investors to consider setting up production facilities in South-east Asia in order to take advantage of the expanded market. Vietnam’s low cost of labour and its political stability make it a very attractive candidate, particularly in the light of Thailand’s long-running political turmoil.
Major companies that have already taken the plunge include South Korea-based mobile phone manufacturer Samsung Electronics, which opened a $920 million handset factory outside Hanoi in October last year. Intel, the world’s biggest chipmaker, is scheduled to open a testing facility in Ho Chi Minh City this year that will employ 4,000 people. And last month, Japan’s Kobe Steel announced it had won approval to construct a $1.37 billion plant to produce iron ore.
There are downsides, of course. Transparency International rates corruption in Vietnam as being worse than in China, Thailand and Indonesia. The country also faces the prospect of power shortages as drought threatens production at hydro- electric plants and demand rises in response to economic growth.
But there are compensating attractions. Infrastructure inadequacies are opportunities as well as problems. Strong growth is also expected in the retail sector, thanks to the country’s expanding middle class. Foreign ownership of local banks is still limited to 30 per cent, but liberalisation may not be far off. In 2008, HSBC and Standard Chartered won approval to set up wholly owned units. And while the privatisation of state-owned companies has stalled in recent years, it remains one of the fastest ways for policymakers to improve the efficiency of the economy.
Keep your eye on Vietnam. It could surprise many.
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