Among the ASEAN economies, Vietnam is one to watch in the near term. Despite global economic uncertainty, foreign investors remain optimistic about the ASEAN region's prospects; and within ASEAN, Vietnam has proven an attractive destination for direct investment (FDI) in recent years because of its strong growth and young population. As more foreign manufacturers move their manufacturing hubs to Vietnam because of affordable labour costs compared to Thailand or China, this is a window of opportunity for the country to attract a bigger slice of the global manufacturing pie. To keep the momentum going, economic, banking and state-owned enterprise (SOE) reforms will be needed to instill greater confidence among both local and overseas investors.
FDI on the rise in Vietnam
After slower than expected growth in recent years, the prospects for FDI in Vietnam appear more positive for 2015. Foreign investors seem to be looking more aggressively for investment opportunities in Vietnam, reflected in PwC's2014 APEC CEO Survey which carries insights from CEOs with operations in the Asian Pacific Economic Cooperation (APEC) region. The survey highlighted that a majority of business leaders planned to increase their investment in Vietnam over the next twelve months. In addition, those CEOs ranked Vietnam 7th out of 21 countries as a possible investment destination in the near future, ahead of Malaysia and Thailand, and just behind Hong Kong, Singapore and the Philippines. This optimism was also reflected in PwC's recent 18th Annual Global CEO surveywhere Vietnam was ranked as one of the top non-BRIC growth markets by CEOs in the coming year, just behind Indonesia, Mexico, Colombia, Thailand and Korea.
In terms of FDI inflow, the largest share of inflows into Vietnam have mostly come from South Korea, China, Singapore, and Japan in 2014, and channeled into in manufacturing, real estate and construction. The total foreign direct investment (FDI) registered in the country topped US$20.23 billion in 2014, according to Vietnam's Ministry of Planning and Investment's Foreign Investment Agency.
Optimism by foreign investors has been fuelled by various drivers:
New trade deals
Firstly, regarding the prospects for signing new trade agreements during 2015 - negotiations on the Trans-Pacific Partnership (TPP) will resume in early 2015 while discussions on the Free Trade Agreement (FTA) with the European Union are ongoing (the 11th round of negotiations was held in January and the next round is scheduled for March 2015). The TPP is a regional FTA among 12 countries across three continents (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, USA and Vietnam). If the TPP is signed, it should have a substantially positive impact on FDI in Vietnam. The reduction in tariffs on goods exported from Vietnam to its critical export destination countries such as USA and Japan is expected to strongly drive investment growth in manufacturing industries such as textiles, which account for approximately 70% of total FDI.
Stabilising inflation
Secondly, the government's commitment to maintain a stable and positive macroeconomic environment which is critical for foreign investors. After several years of double digit inflation rates, inflation has been reduced to 5.2% in 2014; and the government has set an objective to maintain and control the inflation at below 5.0% in the coming years.
A young and dynamic population
The very favorable demographics of the country are another significant factor. Vietnam provides a unique combination of a young and highly-educated population (Population in 2013 was an estimated 89 million, while 43% are under the age of 25) with still low annual wages. While the emergence of a young middle class makes Vietnam a very attractive destination for international retailers and producers of consumer products, the abundance of low cost labour remains a key factor in attracting many foreign investors, notably those looking at alternatives to investing in China. The government has raised minimum monthly wages this year to VND2.15 million–VND3.1 million (US$101.4-$146.2), depending on the location. In comparison with China, India and the larger ASEAN economies, Vietnam's labour costs remain competitive and will give the country an edge in the short term.
Lastly, Vietnam continues to benefit from the "China Plus One" strategy where foreign investors balance their risks concerning reliance on Chinese investments by building factories in nearby countries such as Vietnam.
By Nguyen Luong Hien, Associate Director, Deals - Strategy and Stephen Gaskill, Partner – Advisory, PwC Vietnam.
Source: www.pwc.com
Keywords: Vietnam, ASEAN, foreign investor, trade deal, steady star
