2015 has been a tough year for the Asian region. With the dark cloud of China’s economic recession hanging over emerging ASEAN markets, one remaining source of light seemed to be Vietnam. However, even within this beacon of growth, not all has been upbeat. In reality, many sectors of the Vietnamese economy remain highly exposed to regional market fluctuations and have suffered as a result of shifts in Chinese demand.
In spite of emergent challenges, Vietnam offers investors amazing opportunities for investment. The key to leveraging these openings lies in the development and maintenance of a firm understanding of Vietnamese market conditions, allowing investments to be structured in a manner that taps national advantages while avoiding the uncertainties associated with Chinese demand.
Helping investors to monitor sentiment within Vietnam, the Business Optimism Index (BOI) – produced by Dun & Bradstreet on a quarterly basis – takes a look at business confidence across the ASEAN region. Measuring investor optimism based on changes in net profit, sales volume, new orders, selling price, inventory and employment, Dun & Bradstreet’s BOI provides investors with the tools necessary to evaluate optimal entry strategies to the Vietnamese marketplace.
In this article, we highlight findings from the latest BOI update, released Q1 of 2016.
Business Optimism in Vietnam: Finding Fire in the Eye of the Tiger
Although being the star performer of the ASEAN region in Q4 2015, Vietnam has struggled to retain its top position in Q1 2016 and is the only country in the region with six confidence indicators falling across all sectors monitored. As a result, this quarter’s BOI shows the Vietnamese composite score slashed in half – falling from 45 percent to 22 percent.
The Decline of Manufacturing and Raw materials
Net profits, which saw the largest declines on a quarter-to-quarter basis, registered particularly hard hits in the construction and manufacturing sectors – which fell from 90 percent to 30 percent and 70 percent to 20 respectively. Mining also struggled, with net profits decreasing from 70 percent in Q4 percent to just five percent in Q1.
Consequently, the volume of sales within these sectors show similar drops. For the construction industry, volume of sales fell to just 20 percent – down from a high of 90 percent in Q4. Manufacturing and mining posted sale volumes of 25 and seven percent respectively – down from 70 percent and 64 percent in Q4.
In conjunction with declines in net profits and sale volumes, BOI figures show the selling price of manufacturing and mining output declining as reduced demand increased competition among existing producers. A comparison between Q4 and Q1 shows exact figures on selling prices declining from 16 percent to -4 percent and 2 percent to -7 percent in manufacturing and mining respectively.
Emerging Opportunities in Services, Finance, and Wholesale
Contrary to the high levels of risk and gloomy outlook projected for manufacturers selling to the Chinese market, many sectors within Vietnam have avoided substantial declines and provide lucrative opportunities for investment.
Service sector net profits – dependent upon a rapidly increasing consumer base – faced little strain in Q1 and will likely remain protected from immediate changes in external demand into the near future. With commitments to liberalization under the TPP and a strengthening domestic sector, the finance industry also fared well, posting modest declines compared to more exposed sectors.
While services and finance present safe bets, the star of Q1 in Vietnam was the wholesale sector. Unlike their counterparts, wholesalers have seen their selling price increase from two percent in Q4 to approximately 12 percent in Q1. Having posted the highest selling price increase among all tracked sectors, wholesalers are likely to have benefited from the increasing purchasing power of the Vietnamese population which has shown a tendency towards high levels of spending in recent years.
Future outlook: A Return to Growth for 2016
Despite its dependence on China, the severity of Vietnam’s current conditions show signs of overstatement. Although pronounced, the BOI’s downturn in Q1 largely follows cyclical corrections found during the first quarter. With this in mind, its is projected that the BOI will regain a position of strength in the months ahead.
Adding to its momentum, successful conclusion of free trade agreements during Q4 of 2015 will allow Vietnam to supplement falling Chinese demand with support from TPP and AEC member states in the near future. Signatories to these agreements are likely to find attractive investment opportunities in the rapidly improving investment climate within the communist state.
In the last year alone, adoption of the new investment and enterprise law, as well as the opening of the Vietnamese real estate sector, are likely to compound the impact of increasing integration into world trade. For more risk averse investors, the announcement of plans to create a local derivatives market paves a clear way for investors to reduce their risk.
Source: Vietnam Briefing
Key words: Dun & Bradstreet, Understanding Vietnam’s Investment Climate, 2016
