Vietnam’s economic growth slowed to 5.4 percent in the first quarter of the year compared to 7 percent from the previous quarter, but the slow-down was a result of two unavoidable factors unrepresentative of any declining economic trend: an ongoing drought that has affected agriculture production and February’s lengthy lunar holiday that often makes Vietnam’s first quarter the slowest of the year. The main drivers of economic growth in the quarter were industrial production and construction (rising nearly 7 percent) and the service sector (rising just over 6 percent). Foreign Direct Invest (FDI) continued to rise, with FDI pledges in the quarter more than doubling from a year earlier to US$4 billion. Access Asia expects FDI to hit records numbers again in 2016 with key sectors attracting foreign investment being manufacturing, IT, logistics and real estate.
Real estate sector:
The country’s real estate sector grew 3.4 percent in the first quarter, its highest growth rate since 2012. Over the past year, real estate has become one of the most attractive sectors for foreign investment and Access Asia believes this trend will continue due to a range of positive factors including favourable socio-economic conditions (such as a rapidly growing middle class, rising income levels, urbanization, increased consumption, and soaring foreign investment) and favourable domestic policy developments including a liberalization of the country’s property laws to allow foreign ownership.
Although foreign investment in Vietnam’s property sector is on the rise, the sector remains dominated by domestic players such as Vingroup, Bitexco, Hoang Anh Gia Lai and Novaland, the latter of which is planning for an IPO later this year. One way for foreign investors to enter the market quickly is through a partnership with a local developer, yet this route should only be undertaken after extensive due diligence as local property firms can be susceptible to practices that pose regulatory and reputational risks for a foreign investor, particularly from the West. Without a local partner, key challenges for foreign developers include typically slower approval times and navigating the complex regulatory environment.
Agriculture sector:
An ongoing drought – the worst in 90 years – has been the main factor for negative growth in the country’s important agriculture sector in the first quarter of 2016, which contracted 2.69 percent from a year earlier, while rice production in the Mekong Delta (the rice bowl of the country) dropped 6.2 percent from the same period last year. However, the sector has seen growing foreign investment interest, particularly for high-tech agriculture, and growth in the sector remains promising. The government has been prioritizing the sector – including adding incentives for foreign investors – and significant opportunities are arising from upcoming free trade agreements. In March, Australia’s 4 Ways partnered with domestic firm KPA for a project to transfer high-tech seed production techniques in the Central Highlands province of Kon Tum, while Japan’s Fujitsu has partnered with domestic IT firm FPT to run the FPT-Fujitsu Akisai Farm and Vegetable Project, which applies cloud computing technology to develop smart agriculture. This joint venture represents the first time in which an IT solution from Japan has been applied in Vietnam’s agriculture sector.
Access Asia has also seen a growing trend for large Vietnamese companies to shift or expand investments in the country’s agriculture sector, particularly to meet a growing market demand for the production of more hygienic products. Companies that are doing this include real estate developer Vingroup, electronics retailer Mobile World Group, and steal producer Hoa Phat Group.
Banking sector:
A report released in March by Moody’s Investor Services entitled Banks – Vietnam: FY2015 noted that Vietnamese banks enhanced transparency in 2015 but pressure on profitability and capital has been rising. The report said greater transparency on asset risks was the result of two regulatory developments: the acceleration and recognition of bad loans as reflected in an increase in banks’ holdings in the government’s bad debt bank, the Vietnam Assets Management Company (VAMC), and a tightening in the regulatory guidance on Non-Performing Loans.
As credit growth rose to about 18 percent last year and bad debts being substantially reduced from over ten percent of loans in 2012 to around 2.9 percent at the end of 2015, a key flashpoint of macro-economic risk appears to have been abated. Access Asia believes this healthier banking situation will be a key harbinger of economic growth for 2016 and beyond, particularly for the real estate and small to medium enterprise sectors. Nevertheless, the sector remains relatively unattractive to foreign investment, mainly due to foreign ownership caps of banks at 30 percent. Many foreign lenders see little incentive in attaining a minority share with limited control of Vietnamese banks that are going through a period of restructuring and recapitalisation. Three key banks actively seeking a foreign strategic partner, Bank for Investment and Development of Viet Nam (BIDV), Military Bank, and VP Bank, have all yet to make any deal.
Political developments:
Following decisions made at the Communist Party of Vietnam’s 12th National Congress held in January, the country’s outgoing National Assembly has just voted in the new Chairperson of the National Assembly, Ms Nguyen Thi Kim Ngan, and the country’s new President, outgoing Minister of Public Security Tran Dai Quang. Ngan is the first woman to take one of the top four posts in the government (which are Secretary General of the Communist Party of Vietnam, Prime Minister, President and National Assembly Chair) and is regarded as a political neutral not aligned with any factional divide within the Party. While Quang is also considered a political neutral in terms of his stance within the Party, he is also viewed as a hardliner opposed to any form of dissent or government opposition.
Although January’s National Congress ascended the conservative old guard of the Communist Party of Vietnam (CPV), the development has – and will continue to have – little impact on government policy-making and the reforms overseen by outgoing Prime Minister Nguyen Tan Dung. Moreover, several reformists make up the new 19-member Politburo including Nguyen Van Binh (State Bank Governor) Pham Binh Minh (a US-educated Minister of Foreign Affairs and a Deputy Prime Minister) and Dinh La Thang (a media-savvy Minister of Transport). Access Asia believes that the new leadership structure that emerged from the 12th National Congress will not present any significant setback to foreign investment and will maintain the hallmark attribute of the CPV’s decades-long rule: stability.
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Access Asia Consulting Company is a boutique risk management firm specializing in corporate investigations, due diligence, and security-related services. For further information or enquiries about our services, please contact [email protected].
