Vietnam’s economic success over the past three decades has been built in no small part on its openness to international trade and investment. It is now among the world’s most open economies, according to the IMF – in the last 15 years alone, its share of world trade has quintupled, with combined imports and exports now equal to around 160-170% of GDP.
Foreign direct investment (FDI) in export-oriented manufacturing in particular has been a boon to the economy, helping drive growth even over the past decade, a difficult one for the global economy. This has linked investment, trade and broader GDP expansion together even more closely than in most markets. FDI now accounts for approximately 70% of exports, according to the IMF.
Along with its location, Vietnam’s political and social stability, and the consistency of its legislation regarding trade, make it a natural base for manufacturers feeding into global supply chains, where reliability of supply is a prerequisite. “There has been an exodus of manufacturing from China, and Vietnam is the obvious choice for relocation,” Anirban Lahiri, senior research manager at investment banking firm Viet Capital Securities, told OBG. “There’s significant labour cost arbitrage, and the location means it’s able to plug into the Chinese supply chain.”
Foreign investment is also expected to play a central role in the next phase of Vietnam’s export-sector development, bringing capital and expertise to expand value-added industries that the country will need to supplement its nimble low-cost sector and flourish in the longer term.
Vietnam became the 150th member of the World Trade Organisation (WTO) in 2007, following 12 years of negotiation and reforms to prepare it for accession. WTO Membership obliged Vietnam to taper down tariffs and subsidies in a range of areas, and agree to ceilings on Customs duties. The WTO continues to work with the country, and encourage reform in a range of areas, including state-owned enterprises (SOEs), non-tariff barriers and regulatory reform. “Some suggest that more important than lowering tariffs is the WTO’s Trade Facilitation Agreement, lowering trade costs from border management issues, non-tariff measures, logistics and port fees,” Sebastian Eckardt, lead economist for the World Bank in Vietnam, told OBG.
A raft of free trade agreements (FTAs) in recent years has helped boost trade and accelerate Vietnam’s integration into the global economy. As of late 2016 the country was part of 10 regional and bilateral FTAs, and was working on membership of six more, Pham Binh Minh, Vietnam’s deputy prime minister and minister of foreign affairs, told OBG.
Key trade pacts include the FTA with Vietnam’s fellow ASEAN members, and that bloc’s agreements with countries including China, Korea, Australia and New Zealand. The country’s bilateral deals include FTAs with Chile and Japan.
Two of the biggest deals in the pipeline are the EU-Vietnam FTA (EVFTA) and the US-led Trans-Pacific Partnership between 12 Pacific Rim countries. While the EVFTA is on track to be ratified in 2018, further strengthening Vietnam’s position as a global exporter (see analysis), TPP’s future is less certain, following the election of US President Donald Trump, an opponent of the deal. However, given the deal’s potential benefits to all parties, there are still hopes that it will be resuscitated in the medium to long term.
Even if TPP does not materialise, the process of pre-accession has already brought some benefits to the country. The reforms implemented to prepare Vietnam for the pact have already strengthened its investment environment. A number of Asian investors have already established or expanded their presence in the country with TPP in mind, and are unlikely to withdraw if the agreement stalls.
Indeed, trade deals, including those afforded as part of WTO membership, have gone hand-in-hand with domestic economic liberalisation and improvements to the administrative and legislative infrastructure. The forthcoming EVFTA, for example, will also include standards on environmental protection, which is a growing concern for many Vietnamese people. “International trade agreements and FTAs have helped Vietnam shape reform and benchmark against global norms and models of best practice,” Virginia B Foote, president and CEO of investment consultancy Bay Global Strategies, told OBG.
Vietnam’s trade volumes continued to grow in 2016, with the pace of export expansion outstripping that of imports, pushing the country back into trade surplus. The latest available data from Vietnam Customs, which monitors cross-border flows, showed total trade from January to mid-December 2016 rising to $333.06bn, an increase of 6.4% on the same period a year earlier. The country’s exports rose 8.5% to $167.83bn, while imports grew by 4.3% to $165.23bn, leading to a healthy trade surplus of $2.59bn. In 2015 slower export growth and rising imports from China in particular – totalling $49.3bn, 29% of all exports – had led to a deficit of $3.2bn, the first in four years.
Vietnam has seen bigger market-share growth in low-end manufacturing than any other country in recent years, according to the IMF, while China has seen its position decline. This has helped shift Vietnam’s export mix towards manufactured goods and reduce its dependence on volatile commodities with little value-added. The focus is not only on lower-value goods, however: the electronics industry has been a particular success, with Vietnam behind only China in terms of its market share gains for final products. “Trade has been in a pretty bad place globally for the past few years, but Vietnam still managed to average 15% export growth over the past five years,” Eckardt told OBG. “It has been remarkably unaffected by the unfavourable global market.”
Commodities continue to play a role in the country’s export mix. Vietnam is the second-biggest coffee exporter in the world by volume, according to the International Coffee Organisation, but value is still relatively low. Most exports are green coffee beans, before they are roasted, and much of the output is low-quality. There are similar issues with other agricultural products, including rice (of which the country is also the second-largest exporter), though efforts to increase farmers’ access to capital and improve rural infrastructure are expected to help boost value over the medium term.
Vietnam’s export markets are diversified, meaning it is not over-reliant on any one region, be they slow-growing developed markets, or less-affluent and more volatile emerging ones. The US, EU and other non-East Asian countries account for around 20% of exports each, with China and Japan taking just under 10% each in recent years.
In the first 11 months of 2016, the US was the single-biggest export market for Vietnamese goods, with exports totalling $34.8bn, up from $30.4bn in the same period of 2015, according to Vietnam Customs. It was followed by China ($19.6bn, up from $14.9bn), Japan ($13.3bn, up from $12.9bn), Korea ($10.4bn, up from $8.2bn), and Hong Kong ($5.5bn, down from $6.4bn). Counting its member states together, the EU was the second-biggest market, with exports worth $30.72m, up 9% on 2015.
Exports from Vietnam to the ASEAN member countries recorded an average growth rate of 17.1% per year between 1995 and 2015. During the first 11 months of 2016 Vietnam’s exports to the bloc totalled $15.65bn, 9.8% of the total, and down 6.4% on the same period of 2015 (see analysis).
As classified by Vietnam Customs, the country’s single-biggest export category, by some margin, is telephones, mobiles and associated parts, with exports of these totalling $31.6bn in the first 11 months of 2016, up 11.1% on the same period of the previous year. Other major exports include textiles and garments ($21.6bn, up 4.6%); computers, electrical products and parts ($16.7bn, up 16.6%); footwear ($11.7bn, up 8.1%); and machines, equipment, tools and instruments ($9.4bn, up 27.4%).
According to some business leaders in the country, the headwinds affecting the global economy in 2017 and the coming years may even enhance Vietnam’s competitive edge as an exporter. A new downturn in developed markets is entirely possible in the coming years, which may drive a so-called Walmart effect in which consumers seek lower-cost goods, such as those made in Vietnam, and manufacturers look to preserve margins by moving facilities to lower-cost jurisdictions – like Vietnam.
Import growth in recent years has been driven both by robust domestic demand and by the country’s deeper integration into global supply chains. Vietnam’s growing exports of finished goods, including in electronics and apparel, are often dependent on imports of foreign components that are then assembled in the country, with some local inputs. The growth of exports has thus also driven the rapid rise of imports of intermediate and investment goods, of which China supplies around one-third, according to the IMF.
In the first 11 months of 2016 China was by some margin the biggest importer, with a total volume of $45.1bn, on a par with the same period of 2015. It was followed by South Korea ($28.9bn, up from $25.5bn), Japan ($13.6bn, up from $13.2bn), Taiwan ($10.2bn, up from $10.1bn) and Thailand ($7.8bn, up from $7.5bn). As a bloc, the EU exported goods worth $10.04bn to Vietnam, up 9.7% on 2015.
The leading import categories in the first 11 months of 2016 were machines, equipment, tools and instruments ($25.2bn, up 0.7% from Jan-Dec 2015); computers, electrical products, and parts ($25.2bn, up 18.5%); textiles, leather and footwear materials ($17.2m, up 0.4%); and telephones, mobiles and associated parts ($9.6bn, down 3.9%).
Vietnam’s accession to the WTO in January 2007 helped catalyse FDI growth, with average annual inflows leaping from $2.5bn in 2000-05 to $8.4bn in 2008-14, according to the IMF. As of November 2016 the total FDI stock was $293bn, with a total of 22,280 projects from investors from a remarkable 114 countries, according to the Foreign Investment Agency (FIA).
FDI accounted for 25% of investment in Vietnam between 2011 and 2015, and contributed 20.1% of GDP in 2015. This has also made FDI a major generator of employment, with 3.5m direct and 4m indirect jobs created by foreign investors. Foreign investment-driven companies accounted for 70.5% of export earnings and contributed approximately $5.8bn to the state budget, 14.48% of the total. Foreign investment has been a central driver of industrialisation, with 58.4% of FDI capital going to the manufacturing and processing industries. In turn, this has helped lift the technological capacity of Vietnamese industry.
While healthy FDI inflows are expected to continue in 2017, barring a global downturn or other significant shock, analysts warn that the country will need to continue pushing reform forward, particularly in education and privatisation, if it is to maintain momentum in the longer run. “If labour and electricity costs continue to rise, then Vietnam will need 2-3% annual productivity growth to remain competitive,” said Lahiri. “In five years’ time its cost arbitrage is likely to narrow, while there’s the short- to medium-term challenge from slowing global trade. The textiles sector is already losing out to Cambodia and Bangladesh.”
Vietnam has a close relationship with South Korea, home to home electronics giant Samsung and the biggest foreign investor in the country. Samsung currently makes upwards of 40% of its mobile handsets in the country. There had been concerns about the impact on Vietnam of the widely-publicised safety issues faced by the Samsung Galaxy Note7, which was subject to a global product recall in October 2016. However, the debacle has had negligible impact on the economy, as Samsung’s product range manufactured in Vietnam is wide, and the company has been able to expand the production of other lines in the place of Note7.
Other major Korean investments in Vietnam include the Hyundai Vinashin Shipyard joint venture between the Korean industrial group and Vietnam’s state-owned shipbuilder, which generates around $400m in export earnings annually.
As of November 2016 Korean FDI in Vietnam totalled $51.6bn, Hwang Soon Sung, counsellor at the Embassy of Republic of Korea in Hanoi, told OBG. South Korean investors have been drawn to the country for the same reasons as others – low labour costs, political and social stability and a solid skills base – but a degree of common cultural understanding also helps Korean companies do business in Vietnam, Hwang said.
Japan is the second-biggest investor in Vietnam, according to the Japanese Embassy in Hanoi. Japanese companies have moved to Vietnam to establish manufacturing as part of their global supply chains. Major players include electronics giant Panasonic, tyre manufacturer Bridgestone, which operates a $1.2bn plant in Hai Phong, in north-eastern Vietnam, and Idemitsu Kosan and Mitsui Chemicals, which have stakes in the $9bn Nghi Son oil refinery.
Trade takes place under the Japan-Vietnam Joint Initiative (JVJI), which was first established in 2003 and is now in its sixth phase. Vietnam’s imports from Japan include consumer goods such as processed food, while Vietnam exports primary products including pepper and coffee to Japan. There is a two-way trade in electronics. Japanese automotive manufacturers also have a strong presence in Vietnam, to the extent that they have a substantial chunk of the vehicle car market.
With a long-established presence in Vietnam, the composition of Japanese investment in the country is changing. Many major companies are already active, but now Japanese small and medium-sized enterprises (SMEs) are showing interest in the country, including in the service sector and logistics, as are Japanese individual investors. Japanese companies are in turn increasingly engaging Vietnamese SMEs as suppliers and service providers.
Japan is also a major provider of development loans to the country, lending approximately $2bn a year. Japanese institutions extend both conventional loans and Special Terms for Economic Partnership loans, which encourage the use of Japanese technology and thus aid in technology transfer. Interest rates for these loans can be as low as 0.1%, while the average repayment tenure is 40 years.
The US had strong ties with South Vietnam, and official US government figures published at the time of then-President Barack Obama’s 2016 visit to the country suggest that the stock of US FDI in Vietnam grew to $1.5bn in 2014, up from $1.1bn in 2012. However, the actual figure is likely to be higher, with some US investors channelling their investments in Vietnam via offshore locations such as the Virgin Islands. Major investors include Nike, which employs around 320,000 people directly and indirectly and produces more than 40% of its running shoes in Vietnam. Meanwhile, in 2010 computer chip maker Intel opened a $1bn testing and assembly plant in Ho Chi Minh City, its biggest such facility anywhere in the world.
Vietnam’s 2005 Law on Investment (LoI) and Law on Enterprise (LoE), introduced early in the term of then-Prime Minister Nguyen Tan Dung, are credited with having made far-reaching improvements in the business environment, thus helping boost growth significantly over the following years. However, with new challenges and opportunities from a growing range of trade agreements signed and in the pipeline, and with a desire to boost private-sector growth and address the issues revealed in the 2012 banking crunch, in November 2014 the National Assembly passed a new LoI and LoE, while the government issued Decree 60 on foreign ownership in public companies.
The new laws came into effect in July 2015, and form the principle legal framework for foreign investors operating in Vietnam. The legislation revises and clarifies the definition of foreign investor, introducing the concept of a foreign invested economic organisation (FIEO), an entity in which a foreign investor is a member or shareholder. Only if the shareholding is 51% or more in the hands of foreign-controlled entities or individuals is it subject to rules governing foreign investors. Otherwise it is treated as a domestic enterprise.
The new laws also streamlined registration procedures, cut the number of business lines prohibited to foreign investment from 51 to six and those restricted from 386 to 287, broadened eligibility for investment incentives, and enforced deposits of 1-3% of project value for project implementation where state land has been allocated or leased.
One characteristic of Vietnam’s development since the Doi Moi era is that reforms have steadily rolled forward, with the government continuing to look for ways to improve the investment environment as part of its programme of incremental economic liberalisation. The period following the implementation of the 2015 LoI and LoE is no different, with the new government already drawing up further changes to strengthen the business environment and allow the private sector to take a larger role in driving growth.
The FIA told OBG it has identified five key areas for reform. The first is expanding the legal framework for the operation of a market economy, including by institutionalising the constitutional principle of business freedom. A second area is continuing to review areas in which private investment is prohibited or restricted in order to lower barriers to entry and broaden the market to new participants. Third, FIA aims to complete legal provisions to remove incentives and support for SOEs, as well as improving oversight mechanisms and corporate transparency, as part of a programme of promoting equitisation (the process of turning an SOE into a joint-stock company, often as a prelude to privatisation or part-privatisation). A fourth priority is improving incentives and policies supportive of investment in order to boost the development of domestic enterprises, particularly SMEs. This would also create a legal framework to mobilise private resources, and domestic and foreign sponsors to help the government support SMEs. The fifth and last reform is laying the groundwork for the establishment of mechanisms to resolve international investment disputes, including through better implementation of court rulings and overseas arbitration.
Vietnam’s progress on reform is reflected in its shift up the World Bank’s Doing Business rankings for 2017, rising nine places to 82nd in the world, from 91st. The country ranks particularly well on dealing with construction permits (24th) and getting credit (32nd), though some in Vietnam have expressed puzzlement over the latter, given the long-acknowledged problems that SMEs face in accessing bank loans.
The country performs less well in other areas, including ease of paying taxes (167th, though up 11 places on 2016), resolving insolvency (125th) and starting a business (121st). It leapt 31 places to 87th for protecting minority investors in 2017, a positive sign for many operating under the new FIEO rules. “Vietnam is moving up the Doing Business rankings, and the government has made it a clear priority to level the playing field for foreign and domestic investors,” the World Bank’s Eckardt told OBG. “There’s a lot of emphasis and progress on Customs and border management. There’s some progress on tax administration, though there’s still some way to go before Vietnam reaches the level of the ASEAN4 [Indonesia, Malaysia, the Philippines and Thailand].”
The process of opening SOEs to private investment is an increasingly important contributor to Vietnam’s investment proposition. It may become a central driver of foreign investment in the coming years, with several major companies being lined up for equitisation.
The government has made equitisation a priority to ease the burden on the state budget and encourage private enterprise in key sectors. As well as raising money for the exchequer, privatisation can have broader economic benefits. In some cases, privatisation goes hand-in-hand with the opening up of sectors to private investment competition. By bringing new capital and expertise, it can additionally boost broader productivity by raising that of leading companies, some of which currently perform well below the standards of their international peers.
Private investors, particularly SMEs, regularly complain that the economic playing field is not always even, with SOEs having preferential access to resources such as land and capital. Shifting the companies to the private sector and further from conflicts of interest can help alleviate this.
In all, since the beginning of economic liberalisation, Vietnam has restructured 5950 state enterprises, equitising 4460 of them. Privatisation has generated VND36.5trn ($1.6bn) through the sale of companies with book value of VND26.2trn ($1.2bn). In the most recent completed phase of restructuring, between 2011 and 2015, the government restructured 591 businesses, equitising 499 of them.
Further reforms are in the pipeline that will make restructuring and potentially privatisation more straightforward. The Ministry of Planning and Investment aims to replace existing legislation from 2014 with a new law that will accelerate the restructuring process, reduce administrative procedures, and increase transparency and efficiency.
The FIA is expected to equitise a total of 143 companies between 2016 and 2020. Enterprises on the list include power utility EVN and breweries Sabeco (based in Ho Chi Minh City) and Habeco (based in Hanoi). Economic sectors that have been earmarked for liberalisation include infrastructure ( particularly airports), natural resources (including oil and mineral extraction) and the financial industry. For example, an estimated $200bn is required to build new roads, bridges, ports, water sanitation, power, and other infrastructure to sustain growth between now and 2020, according to USAID. However, to create a geographical balance and development opportunities, the state intends to retain an 100% stake in enterprises in sectors including defence and security, and a “natural monopoly” in areas such as power transmission and railway management.
Further investment opportunities may come from public-private partnerships (PPPs). The government forecasts that over the next 10 years, Vietnam will require around $400m of capital investment in its essential infrastructure alone, of which the government will be able to meet just 40-50%.
A Central Party Committee decree in 2012 urged the implementation of PPPs as a means of mobilising funds for infrastructure development. Government decrees in 2015 moved forward the PPP framework, passing better guarantees for investors and project partners, strengthening HR capacity for delivering PPPs and prioritising good project selection and preparation. A recommendation was made to construct financial instruments and risk-guarantee instruments for investors, according to the FIA.
However, progress on implementing PPPs has been patchy. The FIA makes it clear that PPPs are not seen as the only way to develop infrastructure, but a means of harnessing the different advantages of public and private sector. “There are questions both about the legal framework surrounding PPPs and how to make them commercially viable while keeping prices acceptable for consumers,” Lahiri said.
Corruption is widely perceived as a serious problem in Vietnam. The country ranks 112nd out of 168 countries on Transparency International’s Corruption Perceptions Index, and the issue is highlighted by diplomats, international media and some businesses. The government is aware of the challenge, and in December 2016, Nguyen Phu Trong, general secretary of the Communist Party, highlighted shortcomings of anti-corruption efforts, including the slow process of investigation, prosecution and trial of corruption cases, cover-ups by state agencies and a poor ratio of asset recovery. A wave of arrests has followed scandals in the banking sector, but low-level graft remains an issue.
Over the past three decades Vietnam has gone from a near-standing start to become one of the world’s most open economies, a magnet for international FDI and a global export champion. Even with global uncertainty on the rise, and the potential boon of TPP on ice at best, the process of integration into the global economy and ongoing improvements to the investment environment look set to continue. Opportunities are likely to be created by new trade deals, equitisation of major companies and the lengthening of in-country value chains. The government is already eyeing the next wave of reform, with the knowledge that Vietnam must stay ahead to retain its competitive edge as an exporter and an investment destination.