The Industrial Production Index reported growth of 4.8% in 2012 and 5.9% in 2013 (industrial growth picked up in the last quarter of 2013 to 8.0%)
According to the World Bank, further positive signs were seen with regard to Vietnam’s exports. Total export value grew 14% during the first 7 months of 2013. The foreign invested sector makes up two-thirds of Vietnam’s total exports.
HSBC also said that, “We expect exports to rise 20% in 2014 from an increase of 15.4% in 2013. This will help GDP expand 5.6% in 2014, up from 5.4% in 2013.”
According to Vietnam’s General Statistics Office, foreign direct investment (FDI) inflows have reached US$19.2 billion in 2013, an increase of 65.5% over the previous year’s foreign investments. In the final quarter of 2013, the Vietnamese economy has surpassed the government’s target of US$13-14 billion in annual FDI contributions. Among 50 nations and territories with new investment licenses in Vietnam, Korea was the biggest investor with over US$3.7 billion, making up 26.3% of the total. Singapore came next with over US$3 billion, China nearly US$2.3 billion, Japan nearly US$1.3 billion and Russia US$1 billion. Manufacturing and processing proposals have received the greatest share of interest from foreign investors and represents 77 percent of contributed capital.
The October 2013 record showed the greatest inflow of FDI due to the approval of two large projects - the first is a 1,200MW thermal power plant worth US$2 billion sponsored by the China Southern Power Grid Company and China Power International Holdings, which will share a 95%t ownership stake in the project; and the second is a US$1.2 billion dollar integrated circuit project funded through FDI contributions from Samsung, reported the Vietnam News. Samsung, which already has operations in Vietnam, is expected to begin production at its USD 2 billion manufacturing facility in February 2014. This facility will be manufacturing Samsung mobile phones and it is estimated that Vietnam will account for 40% of Samsung's mobile phone production by 2015.
Vietnam’s government also increased efforts this year to attract foreign investment after concerns over poor infrastructure development contributed to the country’s lower-than-expect ranking on the World Business Forum’s Global Competitiveness Report, which ranked the country 90th out of 142 countries.
Vietnam’s inflation decreased from 23% in 2011 to just 7.3% by July of 2013 and posted an inflation rate of 6% in December. HSBC said, “we expect inflation to accelerate slightly in 2014 due to higher energy and food prices..." It predicted that inflation would accelerate in 2014 to 7.9% (average). This improved inflation rate is the lowest level in the past 10 years, the government said at the end of the year to the paper. Bui Quang Vinh, minister of planning and investment, said the 5.4% growth in this figure was reasonable considering the government's priority to contain inflation.
According to Vietnam News, HSBC’s December Purchasing Managers’ Index (PMI) for Vietnam shows an acceleration of output for the manufacturing sector. It rose to 51.8, the highest level since April, 2011. What is positive about the PMI reading is the strength of the sub-indices, especially new orders and employment - the most positive news from the PMI is the sharp rise of the employment sub-index. This reflects the country’s competitiveness in labor-intensive manufacturing, which attracted high inflows of foreign investment in 2013.
Vietnam Has Fastest-Growing Middle Class in South East Asia
Vietnam has been cited as having the fastest-growing middle class in the Southeast Asian region, according to the latest survey conducted by the Boston Consulting Group (BCG). The middle class is expected to rise to 33 million by 2020, almost triple the 12 million in 2012, and average per capita income is projected to increase by US$3,400 each year, reported Vietnam News.
The BCG survey also shows that Vietnamese customers are the most optimistic in the world with more than 90% believing their living conditions are higher than their parents and that the quality of life will continue to rise. Additionally, despite short term global economic problems, 70% said Vietnam’s economy is improving and stated they intend to increase their purchases in the future.
Vietnam has become an attractive destination for foreign investors in recent years. Samsung was licensed to build a US$1.2 billion factory while Nestle recently inaugurated its US$240 million processing factory to serve the Southeast Asia market.
Retail giants, like McDonald’s, KFC, Starbucks, Pizza Hut or Burger King also penetrated the Vietnamese market.
Companies investing in Vietnam have opportunities to brand their trademarks and get on a pathway to economic growth. However, they can only gain success if they master an understanding of customers and their demands, cautioned Douglas Jackson, BCG Vietnam managing director..
Areas of Concerns:
- Price hikes
There are still areas of concern within the economy. While the prices of water, electricity, gas, and petrol have all seen their prices increase, salaries have remained flat. During 2013, petrol prices increased 4.48 percent while gas prices saw a seven-fold increase. According to the The Ministry of Planning and Investment’s National Centre for Socio-Economic Information and Forecasting (NCSEIF), in 2014, the Vietnamese government is expected to increase power prices by 11% and another 11% in 2015. These numbers are based on the government’s average power retail price framework for 2013-2015 which was enacted last month. The NCSEIF has also predicted a 20 percent increase in the price of medicine and medical services for 2014 and again in 2015. As a result, the country’s consumer price index (CPI) is expected to rise 0.71 percent.
- Power Shortages continue
Vietnam’s success in attracting investment, generating growth and adding jobs is under threat from looming shortages of what keeps modern economies running: electricity. The risk of shortages took a turn for the worse at the end of 2013 when state-owned Vietnam Oil & Gas Group said talks with Chevron Corp to develop a natural gas field had failed due to price disputes, which will delay supply of the fuel to electricity generators. Consultant IHS Energy said in Dec. 2013 that demand in the country may exceed gas supply by 2015, reported the Vietnam News.
“The main problem is that Vietnam has a cumbersome consensus-based decision-making system that slows down the whole process of getting new power projects up and running,” said Graham Tyler, the Singapore-based manager of Southeast Asian gas and power at energy consultant Wood Mackenzie, cited the paper. While the government is raising electricity prices to make power projects a more attractive investment, they may not be in time to prevent shortages in southern Vietnam. Part of the problem is retail electricity prices are not attractive enough to draw investors to the power industry, said Minister of Planning and Investment Bui Quang Vinh. Vietnam is looking to foreign investment to help revive the country’s US$153 billion economy.
Despite these concerns, we continue to feel that Vietnam offers an attractive investment location whose attractions have risen still further because of the continuing political impasse in Thailand and rising costs of all kind in China. Vietnam is currently in our view the most attractive location in Southeast Asia for companies looking for a factory producing goods to service the region. Due diligence is still in order but we believe that good opportunities exist in Vietnam for the careful and cautious investor.
"... Vietnam is currently in our view the most attractive location in Southeast Asia for companies looking for a factory producing goods to service the region...."
While exports helped improve the country’s macro stability, it also exposes the weakness of Vietnam’s domestic demand. Domestic demand will likely stay lackluster due to the overhang of bad debts over the economy. The State Bank of Vietnam (SBV) established the asset management company to address bad debt but the bulk of financial sector reforms remain largely unaddressed. While a positive step, further reforms are necessary to address non-performing loans and reduce the stress in the financial system. HSBC’s economist Trinh Nguyen said to the Vietnam News that without reforms to address its bottlenecks, Vietnam will continue to perform below potential, with domestic firms affected by a frozen financial system in an increasingly competitive market. Banking sector reforms, infrastructure investment, and supply chain restructuring and human resource development are some of the reforms needed to kick the economy into high gear.
In the past year, according to the World Bank, Vietnam has seen improvements to its macroeconomic performance despite such growth being tempered by structural problems in the banking and state-owned enterprise (SOE) sectors. Further, the World Bank predicts that over the medium-term, growth will remain moderate if there are no major changes to the country’s financial and SOE sectors, said the Asia Briefing.
Also, according to Vietnam News on January 11, 2014, HSBC Bank released a report titled "2014: the Year of Exporters" which noted that the improved demand from the European Union (EU) and the U.S. would lift Vietnam’s exports in 2014, such as apparel and electronics, with exports projected to grow at 20% in 2014.
Despite the positive outlook, Vietnam’s GDP growth has declined over the past few years - in the second quarter of 2013, the country saw a growth rate of 5%. It is predicted that the country will see a GDP growth of closer to 5.3% for the entire year.
In 2013, Vietnam faced a 10.5% increase in the number of businesses that were reported to have to either close, liquidate or temporarily suspend their operations. The government started to cut interest rates and reduce tax rates, among other steps to solve the problem.
About the Author:
Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School. He served as Deputy General Counsel of President Gerald Ford’s Presidential Clemency Board. Mr. Runckel is the principal and founder of Runckel & Associates, a Portland, Oregon based consulting company that assists businesses expand business opportunities in Asia. (www.business-in-asia.com)
Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China. Mr. Runckel lived and worked in Thailand for over six years. He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War. In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations.