Vietnam has witnessed strong growth in the first half of 2015, driven by buoyant private consumption and foreign direct investment (FDI). These are the elements that are expected to continue to underpin growth in the second half, according to the Asian Development Bank (ADB).
The improvement, associated with several propitious changes in the investment laws, has made Vietnam one of the most attractive investment destinations in the world, said Aaron Batten, country economist in Vietnam for the Manila-based bank. Batten is part of ADB’s Vietnam Resident Mission team to compile the country chapter for the bank’s Asian Development Outlook Update 2015.
DEALSTREETASIA spoke to Batten to get his views on the investment scene in Vietnam. Edited Excerpts.
How do you see the Vietnamese economic development in recent years? What is your forecast for the economy?
Overall, ADB sees the performance of the Vietnam economy exceeding our regional expectation for 2015. We have revised upward our growth forecast from 6.1 per cent to 6.5 per cent in 2015 and 6.6 per cent in 2016. This improved growth performance is driven by three main factors. One is continuing very high level of foreign direct investment in Vietnam. More than 70 per cent of the FDI is being directed into the manufacturing sector. So we have seen very strong growth in construction as new plants are built and also in export as many manufacturing plants are accelerating new exports internationally. We’ve also seen significant improvement in consumer spending as market confidence has been rebuilt in the country, and also an uptick in bank lending. So far this year credit growth has been increasing by 17 per cent, which exceeds the target of 15 per cent.
In addition to that, we’ve also seen really good policies over the last couple of years. The government has maintained sensible pro-growth monetary and fiscal policies and, at the same time, undertaking measures to liberalise important sectors of the economy. They have opened up access for foreign investment in the share market and in the property market. They are also aggressively pursuing new free trade agreements, which is opening up new markets for Vietnamese businesses.
In total, all these factors play a very big role in boosting investor and business confidence in the economy.
What is the competitiveness of the Vietnam economy in comparison with others in Southeast Asia?
Vietnam remains as a major destination for foreign investment. It finds itself in a very favourable location, close to major global markets. Also, the recent improvement in business environment in the infrastructure quality, I think, is making it a very attractive destination for foreign investment. And those firms that are coming in through foreign investment are competing very well globally. They have been the major source of growth in Vietnam’s export, for example.
The ability of local firms to integrate into global value chain, however, has been less and they have not performed as well as foreign firms. The share of exports being produced by foreign firms increased from 50 per cent to 70 per cent over the last five years. We place a really big focus on the need to undertake structural reform that will allow local firms to innovate, grow and compete on an equal footing. For this win, we point to continuing improvement in state-owned enterprise reform and strengthening the financial sector in particular.
Can you make clear your view on the progress that Vietnam is making, especially for foreign investment?
There have been some important policy movements in the first half of this year that have made Vietnam more open to foreign investment.
In particular, the relaxing of restriction in the share market would be an important step in being able to attract new investors into Vietnam business, because it provides not just capital but also expertise and knowledge, which can help improve the competitiveness of the existing businesses.
Also, the relaxation of restriction on property investment could provide a major boost to that sector as people seek to benefit from the increasing growth of the Vietnam economy.
Coupled with this, I think, is a clearer action path of the government to continue to open the economy and to liberalise Vietnam as a major partner in ASEAN Economic Community. They have been pursuing progress on the Trans-Pacific Partnership and recently concluded discussion on an EU free trade agreement. All of these agreements and policy measures are creating a very favourable environment for foreign investors into Vietnam at the moment.
Is it favourable enough? What do you think international investors would want from Vietnam?
More progress can always be made, the government is laying a very clear path to continue strengthening the environment. On attracting foreign investment into SOE equitisation, the priority needs to be placed on not just the number of equitisation but the quality.
By selling larger stakes in SOEs, the government can attract more foreign investors, as they can bring in their own expertise and skills to reform the companies and improve their performance.
So I think recent moves to increase the scale and depth of equitisation are positive. Foreign investors above all want predictability and stability, so ensuring that the regulatory framework is in place to protect foreign investors’ rights could play a big role in strengthening the desire of the investors for the economy.
What do you think about the current status of Vietnamese companies? What should they do to attract more investors, not just into SOEs?
Vietnam […] has a lot of growth potential and is integrating into the global market. A key challenge for attracting foreign investors is by giving them confidence in what they are investing in.
There is the need to improve the standard of corporate governance in Vietnam. This relates not just to improving the financial disclosure and the quality of auditing, but also making up predictable and transparent decision making process within companies.
I think the recent legal reforms strengthening corporate governance are very important. More can be done to enforce the new laws and ensure that they are effectively implemented, because implementation is what that will drive improved confidence.
Regarding the recent policy to scrap the foreign ownership limits in public companies, depending on each sector. What do you think are the sectors that investors would want to capitalise on the most?
Certainly the biggest source of FDI at the moment is into manufacturing. Vietnam is globally competitive in textile and footwear. Increasingly, it is able to compete globally in hi-tech manufacturing. So I would expect those sectors to be very attractive to foreign investors.
Looking forward, Vietnam has huge potential in other sectors, too. The agriculture sector here has room for major improvement to its performance, to industry restructuring and improving the competitiveness, both to supply the local market and to provide goods to the global value chain. So I would say that is a really large growth potential for the economy.
original source: http://www.dealstreetasia.com/stories/vietnam-is-one-of-the-most-attractive-investment-destinations-aaron-batten-adb-13200/