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Black or White   2008-12-22 - VIR

Vietnam has some ground to make up if it wants to maintain its reputation as an FDI darling.

The global financial turmoil has slowed two years’ massive influx of foreign direct investment capital (FDI) into Vietnam. Will the foreign community’s confidence in Vietnam’s economic prospects remain strong and lead to an expected upswing of FDI inflows beyond 2009? 

Japan’s Canon Group had decided to build its fourth manufacturing facility at the cost of $63.4 million in Vietnam to produce electronic parts for its global factories from the middle of next year.

The new investment is an impressive addition to Canon’s reported portfolio of $300 million which it has injected in three manufacturing facilities to produce ink-jet and laser printers and scanners in Vietnam since 2003.

Although Canon’s decision in Vietnam underscores the group’s strong commitment to develop the nation’s supporting industry, Canon Vietnam’s general director Sachio Kageyama said the current global economic turmoil would delay scheduled expansion plans of Canon’s existing manufacturing facilities in Vietnam.

“We have received notices of sales reductions from our distribution network worldwide in an aftermath of the global crisis. This has consequently forced us to review our production schedules in our factories until next year,” Kageyama told VIR.
“In the beginning, we had a road map to expand our production in existing facilities in Hanoi and Bac Ninh next year. But, in the current circumstances, the expansion plans will be pulled back for a while,” he added. Japanese ambassador to Vietnam Mitsuo Sakaba shared the concern.

“It is true that the Japanese economy is affected by the global economic crisis. As a result, Japanese investment in Vietnam may slowdown a little bit in the coming years, but it will not be a dramatic drop,” Sakaba said. “On the whole, such slowdowns do not mean that Japanese investors are losing interest in Vietnam,” he said.

According to an analysis of the London-based Business Monitor International (BMI), which specialises in analysing emerging markets for senior executives in more than 125 countries, a large share of pledged FDI come from export-dependent East Asian economies including Singapore, South Korea and Taiwan where companies are likely to be severely affected by constricted credit conditions, which will impair financing for larger investment projects.

Moreover, the analysis, BMI’s latest Vietnamese economic development report, indicated by looking at a sectoral breakdown of FDI figures, FDI in Vietnam remained heavily weighted towards the industrial and petroleum sector (45 per cent of the total registered FDI capital) and the construction sector (30 per cent), two sectors with very bleak short term prospects.

The former is likely to be affected by rapidly deteriorating demand conditions for the low value-added consumer products that dominate the Vietnamese manufacturing sector, while the sharp fall in the global price of crude has dramatically altered the revenue projections for investments in the oil sector.

The residential construction industry will be affected by tighter domestic lending conditions and the slump in the real estate market – property prices in Hanoi and Ho Chi Minh City have fallen by up to 30 per cent in 2008, which has put many investment projects on hold.

A representative of a Malaysia-backed property giant, which is carrying out large-scale property projects in Vietnam, shared similar predictions with BMI’s analysis. “In the context of financial crisis, everybody is very careful and worried about their activities. People will stop to wait and see,” the representative, who declined to be identified, said.
“Our strategy now in this situation is to reschedule our plan. We do not stop our business, but do continue to do at a slow pace,” he said.

Figures talk

The global financial turmoil has broken Vietnam’s massive pledged FDI capital growth since Vietnam adopted the new Investment Law in 2006 and the nation became the 150th World Trade Organization member later that year.
The Ministry of Planning and Investment’s (MPI) Foreign Investment Agency (FIA) reported that Vietnam’s newly registered and expanded FDI capital doubled to $12 billion in 2006 from 2005. The fund climbed to $21.3 billion in 2007 and roughly $57.1 billion in nine months of 2008.

The FIA’s latest report signalled a slowdown in Vietnam’s newly-licenced FDI projects in the last two months. Accordingly, newly-licenced FDI projects in November registered $726 million in investment capital – a sharp drop from $2.02 billion in October and roughly $9.9 billion in September, when the financial crisis broke out in the US.

New FDI projects put total FDI capital in the country between January and November this year at almost $59 billion - a little higher compared to $58.3 billion during the January-October. Corporate expansion is also a growing concern. According to the Vietnam Business Forum’s 2008 survey, given the unfavourable economic conditions, the percentage of enterprises that reported having no plans for expansion in Vietnam over the next three years has more than doubled the 2007 survey at 10 per cent of the total respondent enterprises.

“This is obviously indicative of the recent difficult economic conditions and their impacts on business perspectives,” the survey said. Meanwhile, FIA figures show that expanded FDI projects numbered 242, adding $1.08 billion to the nation’s new FDI funds between January and November this year.

However, the expanded FDI capital amount for 11 months this year dropped roughly 60 per cent from the corresponding period last year. On the whole, expanded FDI capital reportedly declined from $2.9 billion in 2006 to $2.6 billion in 2007. FIA forecasts put the expanded capital at around $1.2 billion across this year and $1 billion next year.

FIA chief Phan Huu Thang said at the MPI’s final annual review meeting last month that the recent reduction in new FDI projects had led the ministry to shrink 2009’s FDI target. “It would be a hard job for attaining $30 billion fund of newly-licenced FDI projects next year, a reduction of 50 per cent from this year,” Thang said.

In regard to the disbursed FDI capital, the FIA will strive for $9-10 billion in 2009 to contribute to attaining 6-6.5 per cent GDP growth approved by the National Assembly. However, the target will also be lower than the projected $12 billion in disbursed FDI capital across 2008.

“The Asian financial crisis broke out in 1997 and 1998 led to a sharp decline in FDI inflows in Vietnam until 2003. In the context of the global turmoil possibly creating impacts on countries worldwide on a large scale, Vietnam’s FDI inflows would face greater drops in the next few years,” Thang said.

Optimistic picture

Despite apparently gloomy figures, Thang painted a brighter picture for the country’s FDI inflows if Vietnam could maintain strong macroeconomic fundamentals. Thang referred to FIA’s calculations of more than 50 FDI projects with an estimated investment capital of $100 billion whose foreign investors were in negotiations over investment terms to be located across Vietnam.

“Although Vietnam will be unable to maintain the 2007 and 2008’s strong newly registered growth in the next two years, more importantly Vietnam could still deploy the undisbursed FDI fund during the 2006-2008 [roughly $70 billion] by immediately responding foreign investors’ constraints in doing business in Vietnam,” Thang said.

Besides that, wider access to Vietnam’s attractive distribution, banking and finance, transport, post and telecom, healthcare, education and training sectors will help to draw new FDI inflows in the country beyond 2009 when Vietnam starts to implement its WTO commitments.

On the foreign community side, Vietnam remains a cherished investment destination due to its stable political status, abundant labour force and optimistic economic outlook in the medium and long-terms. According to the BMI report, looking beyond 2009, FDI inflows should remain robust on the back of Vietnam’s solid macroeconomic fundamentals and continued attractiveness as an alternative to China for manufacturing operations.

The relocation of laptop manufacturer Compal, IT manufacturer Foxconn, electronic producer Sanyo and others from China to Vietnam proved BMI’s concept. Additionally, BMI forecasts that FDI disbursement in infrastructure in Vietnam will remain strong in 2009 as foreign investors are interested in building ports and power plants in Vietnam.

Japan Bank for International Cooperation (JBIC) recently ranked Vietnam the third most attractive investment destination of Japanese investors for three consecutive years, after China and India. “Five reasons for Vietnam’s great promise are inexpensive labour cost, growth potential of the market, risk diversification, excellent human resources and supply base for assemblers,” the JBIC survey reported.

“We believe that Japanese companies’ interests in Vietnam continues to be robust if the government keeps on removing our hindrances in doing business here, including under-development of infrastructure, rising labour costs and weak supporting industries,” said the JBIC survey.

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