Vietnam to enjoy stronger FDI inflows from slow-release trade tensions effects

Top performer

When discussing the economic outlook of Vietnam, economists at Standard Chartered Bank are rather optimistic about its performance, especially when it comes to export amid the slower global growth momentum.

“Take a look at [Vietnam] export data so far, it’s rising about 8-9 per cent year-to-date. It’s a good number but compare it to last year, it’s actually slower. But Vietnam is up performing regional peers quite clearly. Vietnam is now almost the largest exporter in ASEAN,” said Edward Lee, chief economist for ASEAN and South Asia at Standard Chartered Bank Global Research at a media briefing in Hanoi at the beginning of the week.

“So I do think Vietnam is one of the relative winners of the trade war, but not on an absolute basis, because the global growth is slowing, everybody is losing but Vietnam is getting the bigger share of the export pie, or even FDI as the country continues to attract very strong FDI,” he added.

At HSBC’s annual ‘Step into the future’ event held in Hanoi on September 25, Joseph Incalcaterra, chief ASEAN economist at HSBC Global Research, shared the same thoughts, noting that ASEAN, led by Vietnam, is gaining the market share in the US. Vietnam, in particular, has been enjoying a steep rise in the share of US phone and phone equipment imports in the past six months.

Vietnam Customs has released its data for the total export value by mid September, which has surged to $181.72, an increase of 7.7 per cent or $12.99 billion on-year.

Meanwhile, statistics by the US Census Bureau showed that in the first quarter of the year, Vietnam’s export to the US rose some 40 per cent year-on-year and the US continued to be the biggest importer of local goods, including $4.42 billion worth of garments and textiles, $2 billion in footwear, $1.3 billion of machinery, equipment and spare parts and $1.42 billion of wood and timber products. The last two categories in fact witnessed a whooping increase of 54 per cent and 35 per cent on-year, respectively.

The country has not only enjoyed a growing export but also a stronger flow of FDI.

Lee of Standard Chartered Bank stressed that Vietnam has attracted more FDI than what it obtained some five years ago over multi-year average.

According to the General Statistics Office of Vietnam (GSO), by August 20, Vietnam granted licenses to 2,406 FDI projects, up 25.4 per cent on-year. The corresponding registered capital totalled $9.12 billion, a down of 32.3 per cent on-year. Taking into account the additional capital injected into existing licensed projects, the total value of FDI projects by the given date mounted up to some $13.12 billion, a decrease of 31.2 per cent on-year.

Manufacturing and processing was the very sector that attracted the largest FDI inflow, with the registered capital of newly licensed projects reaching $6.8 billion, accounting for 74.6 per cent of the total newly registered capital. Real estate sector, meanwhile, secured some $852.3 million of FDI funding, accounting for 9.3 per cent of the total registered capital.

China is currently the largest FDI investor in Vietnam. By the cut-off date, the country pledged to inject $1.87 billion into 425 projects here, representing nearly 21 per cent of the total newly registered capital. South Korea, Japan and Hong Kong followed suit, with $1.72 billion of newly registered capital in 710 projects, $1.18 billion in 285 project and $1.10 billion in 178 project, respectively.

Room for more FDI

Facts and figures might point to a stout flow of FDI, yet according to Standard Chartered’s Lee, a lot of the data is a reflection of previous momentum rather than current development of the trade tensions between Washington and Beijing.

Previously, FDI coming to Vietnam was largely due to the cost concern, in which China was becoming too expensive for manufacturing and Vietnam has emerged as an alternative stop for cheap labour.

On a survey carried out earlier on, Standard Chartered Bank asked about 300 manufacturers based in China about their probability of moving their capacity out of the country as a result of the trade war. For those who did not think of moving out in the previous year, they have now had a second thought on that.

“The trade war has now increased the impetus for FDI companies that was previously not thinking of moving out of China to now thinking moving out of China,” said Lee. “This is a reflection of what corporates are thinking now, that the US-China trade war is going to be protracted.”

“So whatever FDI data we’re seeing now is still more of the cost, this year we should be starting to see those because of the trade war,” he said.

Over the next few years, the FDI inflow into Vietnam will be a mixed result of cost and the US-China trade war as manufacturers have to look for an alternative production base, according to Lee.

According to Michael Kokalari, chief economist at VinaCapital, the trade war has prompted several companies to announce their intentions to move to Vietnam or to explore moving to Vietnam, and it has led to a four-fold surge in newly registered FDI from Chinese companies to Vietnam in the first half of this year to $1.7 billion in the first half of the year.

As per Standard Chartered Bank’s survey, about 70 per cent of the Chinese manufacturers are considering moving production out of China as a result of the US-China trade war, and Vietnam is their most preferred destination.

FDI companies that already moved a part of their production from China to Vietnam include those in the fields of electronics, healthcare equipment, garment and footwear, autoparts and others. A few of them to name are Yokowo, Techtronic Industries, Hanwa Aero Engine, Man Wah Holdings, and so on.

According to VinaCapital, Vietnam has what it takes to welcome the incoming FDI. The amount of industrial land currently available in Vietnam is sufficient for FDI companies to nearly double their investments in the country.

In addition, the country’s seaports and airports still have 20-25 per cent spare capacity, and are in the process boosting capacity by another 25-50 per cent. And last but not least, less than 10 per cent of Vietnam’s workforce is currently employed in the FDI sector

“For FDI, we should be expecting something between $15-17 billion in the longer term. The bulk of it is going into manufacturing, of 60-70 per cent. Investment coming is slightly different as it moves up the value chain,” said Lee.

“Capacity may be facing some constraint. When we asked our audience the question “Are you starting to face capacity constraint, be it logistics or labour?”, a majority of them say yes but it’s still manageable.”

While demographic is a supportive factor, it is also a reminder for Vietnam that continued investment in soft and hard infrastructure is still required to cater to the upcoming tide of investments and the country rising’s middle income class.

Lee also warned that Vietnam should be careful of not turning itself into being the victim of its own success for being over-invested. This will be done by choosing the right kind of FDI to attract and making sure the supply side is capable of supporting such FDI inflows.