Vietnam builds on economic growth
Published: 16 August 2010
Infrastructure a priority for investment
Vietnam began its transition to a market economy in 1986 and joined the World Trade Organization (WTO) in January 2007 after agreeing to open up the country’s economy to foreign investors.
HSBC has been in Vietnam since 1870 and is now the largest foreign bank in the country in terms of investment capital, network, product range, staff and customer base.
Here, Michael Hung, Head of Global Banking, HSBC Vietnam, comments on the latest conditions in the country.
The government … recognises that inflation and the trade deficits could be potential problems ahead and has taken various fiscal and trade measures to combat this.
How do you see the current position in Vietnam?
The population is around 86 million with an average age of 26. People are generally, reasonably well-educated. There is significant urbanisation still to be realised (urbanisation is currently about 30 per cent), political stability and a relatively cheap labour force compared with other neighbouring countries, the attraction of Vietnam is certainly easy to see.
Since Vietnam began its transition to a market-orientated economy in 1986, it has experienced pronounced economic growth, and is now classed as a middle-income country. GDP per capita increased to more than USD1,100 by 2008 from USD190 in 1993.
Investors have remained committed to Vietnam throughout the global financial crisis and although FDI commitments decreased in 2009 to USD21 billion from USD25 billion in 2008, actual disbursements held up remarkably well at USD10 billion compared with USD11 billion in 2008. This shows that investors who had made commitments to Vietnam in previous years followed through with their projects despite the inclement global investment climate. With 2Q 2010 GDP growth expected to be 6.2 to 6.3 per cent, the forecast GDP 2010 growth has recently been revised to exceed 6.5 per cent.
The government here recognises that inflation and the trade deficits could be potential problems ahead and has taken various fiscal and trade measures to combat this.
Is it difficult for Vietnam to source funds for infrastructure projects and are there many under way?
Infrastructure is a major focus for development in Vietnam, especially outside the main urban centres. According to the Organisation for Economic Cooperation and Development, Vietnam has an infrastructure score of 2.8 out of 7 versus the average Asean score of 3.9 and its neighbour Thailand at 4.85. It is clear that there is good scope for infrastructure development in Vietnam.
Moreover, Vietnam has been making noteworthy efforts to attract investments and the government has made infrastructure a priority investment area. Vietnam’s Ministry of Planning and Investments has released a list of 60 urban infrastructure projects to be implemented between 2009 and 2016. The total estimated investment required for the projects is USD12 billion. The projects range from new water and sanitation infrastructure to new roads and traffic systems, and will take place in 15 provinces around the country.
Around 18 of the proposed projects on the list will be funded by official development assistance from Europe, Japan and the Asian Development Bank, while the ministry said that the rest will come from the private sector, through public-private partnerships (PPP). It is important to notice that PPP are gradually emerging in the Vietnamese economy and the role of PPP was ratified in the 10th Party Congress, which reaffirmed a private sector role. To date there has been a limited but increasing participation in water management and treatment services to name one example.
There are many infrastructure projects running in Vietnam currently. Most of the private sector activity is concentrated towards the fledgling maritime sector, especially in the southern regions.
Alongside the development of new maritime hubs, other transport infrastructure, namely road and rail links, are also in the pipeline for construction to buttress the transhipment and moving of goods. Other key projects being discussed at the moment include the Ho Chi Minh City Metro and a new international airport for Ho Chi Minh City.
Vietnam shares many of the advantages that were recognised previously with China.
How much does interest from places such as China push developments in Vietnam?
Vietnam shares many of the advantages that were recognised previously with China, such as a large, young, relatively cheap work force, political stability and numerous efficiencies and opportunities to be unlocked as the respective economies transition from central state control to market-orientated.
Vietnam’s strategic location and shared border to the south of China clearly has benefits for both direct export and proximity for manufacturing businesses. ‘China+1’ is frequently mentioned with the +1 being Vietnam. The country’s young work force is comparatively cheaper than China and manufacturers are increasingly becoming aware of the opportunity to deploy manufacturing needs to Vietnam instead of pushing further west into mainland China. Also recent labour issues in China have not been seen in Vietnam and this provides further opportunity for manufacturers.
What growth areas do you see for HSBC in Vietnam?
HSBC is currently the largest foreign bank in the country in terms of investment capital, network, product range, staff and customer base. Our diversified business model has delivered profits despite the challenges of the markets over the last two years.
With strong FDI flowing into the country and going to more diversified areas and sectors, the wealth of the nation increasing, the need for more sophisticated wealth management growing, and Vietnamese companies also looking to expand overseas, the opportunities for HSBC in Vietnam are very healthy. For our Global Banking and Markets, Commercial Banking and Personal Financial Services customer groups, there is high optimism on the prospects ahead. Only around 17 per cent of the population have bank accounts. With the strong Global Banking and Commercial Banking client base and the largest retail outlets of the foreign banks, our ability to unlock the cross-sell opportunities among our client base holds our key driver for future growth.
How was Vietnam affected by the global slowdown of 2008-09?
Vietnam has coped with the financial crisis well compared to some of its neighbours in the region. As much as two-thirds of Vietnam’s GDP can be attributed to private consumption, second only to the Philippines. This large share of domestic consumption helped insulate Vietnam from the worst of the financial crisis.
The government deployed a number of major policies to help weather the financial storm including subsidised interest rates for certain borrowers, caps on deposit rates, forced sale of foreign currency by state-owned corporations and the removal of income tax in the first half of 2009. These stimulus policies helped propel Vietnam out of the downturn relatively quickly, with the largest turnaround noted in the construction sector, which has recorded strong double-digit gains over the last few quarters compared to pronounced contractions in 2008. The construction sector has benefited from government projects and now contributes about 9 per cent of the overall economy. Retail sales have also helped the recovery and continue to grow at 40 per cent year-on-year.
Trade deficits and inflation are certainly matters that potential investors will think about. However, they will be heartened to know that … the government here is not afraid to take tough measures.
Is inflation in Vietnam likely to be a major influence on foreign investors and what are its major selling points to potential investors?
Inflation in 2010 is expected to peak at low double-digit levels. The official inflation target has been raised from seven per cent to eight per cent (announced by Prime Minister Nguyen Tan Dung on 7 May 2010) and the government has stated that one of its key challenges for the year is to control inflation.
One key driver of inflation is food prices, which contribute about 40 per cent of the country’s consumption basket. Vietnam is becoming increasingly self-reliant in terms of food. Trade deficits and inflation are certainly matters that potential investors will think about. However, they will be heartened to know that historically, the government here is not afraid to take tough measures before something goes out of control. We had seen this in 2008 when inflation went over 20 per cent for a brief period.
The advantages of investing in Vietnam are numerous. Political stability is a key advantage as well is the strategic location which allows links to China to the north and also to the rest of Southeast Asia. Similar to the advantages previously found in China, Vietnam is a transforming economy embracing market-led policies with all the associated efficiencies to be unlocked and opportunities to be gained. Vietnam has joined the WTO and integrated itself into the global economic system which allows another level of connectivity and potential to be realised.
What are the most common misconceptions people have about investing or doing business in the country?
Vietnam is ranked 93 out of 183 countries with regard the ‘Ease of Doing Business’. This indicator does in some way reflect the initial difficulties of doing business here. However it is equally true that many businesses that are already here would not want to be anywhere else. The legal framework can do with further refinement but the government here is willing to listen to foreigners and other interest groups. Decision-making in Vietnam is generally through consensus building and so for many westerners, this is slightly different from their usual training.
What changes do you expect to see in Vietnam over the next half-dozen years?
Over the next five years, Vietnam will focus on developing human resources, building infrastructure and implementing administrative reforms towards making a major breakthrough in socio-economic development.
Vietnam has favourable demographics with a population that is expected to grow from around 86 million currently to 110 million by 2035 with around half the population under 35. This will naturally mean high levels of entrepreneurship, technological awareness and openness to new ideas.
The main challenge will no longer be to simply manufacture quality products at low cost but also to move up the value curve. This will require higher education, importing of foreign skills and technology and improvement of social services to sustain growth.
Disbursed FDI capital of USD4.5 billion in the first five months of 2010 proved that Vietnam is an attractive destination for foreign investors and we will see priority given to projects on urban development: industrial parks, hospitals, universities, highways and other infrastructure.
Besides that, we will gradually see the further development of the Vietnamese equities and debt markets and this will lead to further investment opportunities from overseas.
Vietnam should start seeing more of the upside effects of its growing international recognition.
Michael Hung
Michael Hung is the Global Banking Director for HSBC Vietnam. He is responsible for developing the bank's Global Banking business. Prior to Vietnam, Michael ran the Bank's Multinationals business in Taiwan.
He joined HSBC as an International Manager in 1996 from Standard Chartered Bank. He has worked for HSBC in Indonesia, Taiwan, the US and the UK, in a variety of business areas, including Personal Financial Services, Custody and Clearing, Credit Risk Management and for the last three years, Global Banking.
Mr Hung is a qualified Chartered Accountant and had previously worked for KPMG London. He has Bachelor of Arts (Hons) in Economics and Social Studies from the Victoria University of Manchester in United Kingdom.
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