Pham Hong Mien, a young teacher
from Vietnam, sees the rapid
changes in the country's most populous
metropolis, Ho Chi Minh City.
She has moved back there only recently,
having left it a few years ago to take
up a job as a teacher in a rural part of Vietnam.
But as it had been getting harder to
make ends meet on that salary, she's now
back in the city where she had spent most
of her adult life.
The buildings are now bigger and taller,
and Pham sees signs of growing affluence
all around her. There are international supermarket
chains, luxury goods stores and
more. Her peers who work in international
banks or in corporations are doing well for
themselves, going on holidays far more often
and buying luxury goods. She does not envy
them but, with a Master's graduate degree in
education, she is raring to join the race.
"I would say that yes, there is more
wealth here now, and inequality is still relatively
low compared with many other countries
in the region. There is a lot of opportunity
too, and I think everyone is ready to
take it [on]," Pham tells The Edge Singapore
over internet voice call — something
that was a rarity less than 10 years ago,
when internet penetration was a mere 31 %
vis-a-vis the 67% today.
Indeed, optimism is high in Vietnam,
mired in war just two generations ago. After
the introduction of economic and political
reform, the Boi Moi, in 1986, the country
grew rapidly, with GDP growth hitting
9.54% in 1995. The Asian Financial Crisis
took its toll, but the country has since
bounced back, and its economy, driven
by the twin engines of export manufacturing
and domestic demand, has grown from
US$36.6 billion in 1987, to US$255 billion
in 2018, with growth at 7.1% last year. Over
the last decade, it made structural reforms
to its economy, including banking reform,
the ongoing privatisation of state companies,
and the relaxation of foreign ownership
restrictions on real estate and business.
"These reforms have helped Vietnam enter
into various free trade agreements," says
Ngo The Trieu, CEO and chief investment officer
of fund manager Eastspring Vietnam.
DBS Group economist Irvin Seah notes
in a recent report, "Simply put, the Vietnam
economy will be bigger than the size
of the Singapore economy in 10 years' time.
And this implies tremendous growth opportunities
for companies and investors looking
to get a slice of the action."
Pundits agree: Vietnam has come of age.
Despite long-standing issues with corruption
and the practical challenges of doing business
in the country, the economic pie is growing,
and everyone is invited to have a slice.
Hungry for success
The World Bank forecasts Vietnam's GDP
growth at a robust 6.6%, a healthy figure
compared with the rest of the region, where
average growth is estimated at 5.1% in 2019.
It also notes that the extreme poverty rate is estimated to have declined to below 3 %.
"Vietnam's medium-term outlook is
broadly favourable, and downside risks
are tied to weak external demand, shifting
trade patterns, global financial volatility,
and incomplete banking and state-owned
enterprises (SOEs) reforms," it added. On
the upside, the World Bank also says that
Vietnam is strongly positioned to benefit
from numerous free trade agreements that
are coming into force now and over the
forecast period. The recently signed free
trade deal with the European Union, for instance,
has given the market a boost, and is
also a driver for the long-term sustainable
development of the economy, says Ngo. He
notes that the EU is Vietnam's third largest
trade partner after the US and China, and
the trade agreement will help Vietnam "diversify
from other trading partners".
Its currency, the dong, has also stabilised
after a decade of steady devaluation.
Less than 10 years ago, experts warned of
Vietnam getting stuck in a cycle of currency
devaluations unless it matches its foreign
exchange measures with policies to bring inflation
under control and effectively limit
the growing trade deficit. In fact, in February
2010, the State Bank of Vietnam was forced
to devalue the dong by 3.25% and impose a
cap on dollar deposit rates, bringing the central
bank's daily reference rate down by a total
of more than 11 % in just over a year.
Still, the rocky past is behind them, and
ISEAS-Yusof Ishak Institute senior fellow
and coordinator of its Vietnam Studies Programme,
Lye Liang Fook, attributes Vietnam's
current success to the psyche of its people.
"The Vietnamese traditionally have always
been extremely hardworking, and they
are hungry for success. They were hungry
for success even before Doi Mai was
launched, and are now very determined to
succeed." This, Lye says, is clear to see for
any long-time observer of Vietnam and the
Vietnamese. "Once they set their minds on
something, they will follow it through. [I
feel] they are hungrier for success compared
with their counterparts [in the region]."
"I was told that when [businesses] go on
investment roadshows, it is not enough to
get [just] one stakeholder to come along,"
Lye adds. "They would have already discussed
among themselves, among the stakeholders
all along the supply chain, on how
best to work together to help each other before
approaching external investors." It may
be anecdotal, but still a reflection of their
commitment to success as a whole. "They
know their investment environment isn't
easy, so they think: What can we do to facilitate
the entry of foreign investors, and what
is our proposal to these investors?"
ASEAN + 3 Macroeconomic Research Office
lead specialist Luke Hong and economist
Jade Vichyanond say that some of the
major advantages in investing in Vietnam
include the government's favourable treatment
of foreign companies, from tax incentives
to land use rights.
"It also benefits from competitive labour
costs, geographic proximity to key regional
markets and access to global markets
through multiple free trade agreements.
Furthermore, serving the country's domestic
market is fast becoming another key incentive
for investing in Vietnam, in light of
the country's burgeoning middle class and
rising income level," they note.
Indeed, the Vietnamese government welcomes
with open arms foreign investment,
which it credits with having contributed
to the growth of its economy, particularly
the financial services, shipping and tourism
sectors, as well as the education and
healthcare industries.
Enterprise Singapore tells The Edge Singapore
that the outlook for Vietnam is favourable,
especially in several key segments.
Vietnam-based regional directors
Leon Cai and Hong Anh Bui Thi — in Ho
Chi Minh City and the capital Hanoi, respectively
— identify manufacturing as one
of the key growth segments.
"Vietnam's abundant labour, competitive
wages, good network of free trade
agreements and connectivity to global centres
of demand make it a choice location
for manufacturing. It is well connected to
existing consumer and manufacturing hubs
in Asia, making it easy for manufacturers
to integrate Vietnam into existing supply
chains," they say in an email interview. Additionally,
costs in Vietnam are relatively
competitive, making it a viable alternative
for manufacturing activities.
They also see potential in infrastructural
and urban solutions. "Vietnam is rapidly
urbanising and looking to improve the
quality of life for its people. Singaporean
companies can contribute their know-how
in master planning and smart city initiatives,
water treatment, waste treatment and
alternative energy sectors like solar, wind
and liquefied natural gas," they add.
Another segment where they see opportunity
is in the lifestyle and consumer sector.
Vietnam's huge population of 92 million,
much of which is the rising middle
class, translates into big opportunities in
F&B and retail. "The Vietnamese consumer
is increasingly sophisticated and more
open to new and foreign brands," they say.
Unsurprisingly, tech and start-ups are
also hot segments, say Enterprise SG. "The
rapidly growing technology community in
Vietnam has attracted a wave of foreign investors,
including venture capital funds
and co-working space providers. With Vietnam's
rapidly growing start-up ecosystem,
we see room for Singaporean technology
companies and start-ups to tap this vibrant
ecosystem to find partners, co-innovate and
offer their solutions," they say. "Overall, we
see good prospects for Singaporean companies
in these sectors. Singaporean investors'
interests in Vietnam remain high due to its
strong economic growth and inherent economic
fundamentals."
The growing tech scene is especially exciting,
says Justin Nguyen, a Vietnam-based
partner at Southeast Asian early-stage tech
venture capital firm Monk's Hill Ventures.
He saw the signs of growth as early as
2005. "You could see the government was
getting pretty serious about cheap internet
access and smartphones, but the conditions
were not quite right yet," he says.
Things changed about five years ago. "All
that GDP growth has allowed consumption
levels to reach a point where venture-sized returns
are quite honestly possible," Nguyen
says. "That's why it's such an exciting time to
be here now. You now have this large young
population that's mobile-first, that's now starting
to be at an income level where they can
consume [technology]. Now is the right time
for tech start-ups and unicorns in Vietnam."
Not all rosy
However, there are still several challenges for
Vietnam to overcome, not least being the ongoing
US-China trade war. In July, US President
Donald Trump imposed duties of more
than 400 % on steel imports from Vietnam as
a result of accusations that some businesses
in the Southeast Asian country were shipping
goods from there to circumvent the tariffs the
US has imposed on China.
At the same time, officials have been
cracking down on corruption in the country.
But the effects of that are being felt further
afield.
According to Le Hong Hiep, a research
fellow at the ISEAS-Yusof Ishak Institute,
land management has long been identified
as one of the most corruption-prone areas
in Vietnam, and exposing corruption related
to land management has become an
important focus of the country's anti-corruption
campaign since 2016. In fact, news
reports say that in just the first six months
of this year, legal proceedings have been initiated
in 176 cases of corruption, involving
425 people and party committees at all levels,
and inspection committees have issued
disciplinary measures against 123 party organisations
and 7,923 party members, 256
of whom were involved in corruption.
The real estate sector in Vietnam has
been booming, driven by demand from buyers
all over Asia. Real estate consultants
Jones Lang LaSalle (JLL) noted earlier this
year that the real estate race was becoming
"hotter than ever" with the growing attention
of many domestic and foreign investors,
recording a record amount of investment in
recent years. "Hundreds of millions of US
dollars of FDI inflows are ready to be poured
into Vietnam's real estate market," it said.
High-end properties in central Ho Chi
Minh City go for around US$3,000 ($4,125)
to US$6,000 per sq m, which is about half
of what similar properties in Bangkok sell
for, and less than 10% of those in Hong
Kong. Buyers from Mainland China, Taiwan
and Hong Kong account for 25% of Vietnam's
total property sales.
However, the drive to clean up Vietnam is
apparently putting an unintended dampener
on the sector. According to Savills Vietnam,
the supply of new apartments in Ho Chi
Minh City in 1Q2019 stood at 12,000 units, a
57% y-o-y decline. Trang Le, JLL's head of research
in Vietnam, notes that anti-corruption
efforts have slowed down approval processes
for new and existing development projects.
"This is a key concern for us, and it is a serious
one," she says. "To overcome this, investors
should seek out good local partners with
'clean' landbanks that would facilitate their
development plans."
The corruption crackdown has resulted
in the arrest and prosecution of dozens
of high-ranking officials, including former
ministers, deputy ministers and senior executives
at major SOEs.
"The investigations have delayed the licensing
process for property projects, leading
to a fall in new supply and surging
property prices, as well as declining government
revenue from land fees," ISEAS' Le
noted in his research report, published in
May. "The effects are beginning to be felt,
beginning with property developers."
"For the government, delays in the licensing
process and the fall of new launches
have caused revenue from land fees to
decrease. For example, Ho Chi Minh City's
revenue from land fees declined 22.5% in
2018. The trend, if sustained, will put the
city's fiscal position under pressure, given
that land fees normally account for around
10% of its annual revenue," he added.
However, CapitaLand Vietnam CEO
Chen Lian Pang is still positive about the
real estate industry outlook in Vietnam.
"We see strong demand for vibrant, quality
live-work-play spaces driven by strong
economic growth, rapid urbanisation and
the evolving lifestyles of a young and growing
population," he says. "Increased tourist
arrivals have also led to an increase in demand
for our serviced residences."
As a key beneficiary of the trade war between
the US and China, Vietnam is now in
a bind. In the first five months of 2019, its
exports to the US surged 36% y-o-y. With
US$25 billion in shipped goods through
May, Vietnam has become the eighth biggest
source of US imports, up from 12th
place a year ago. This increase is widely
believed to be a result of Chinese companies
routing their finished goods to Vietnam,
which drew Trump's wrath in June
and triggered the duty hike on steel imports
from Vietnam in the following month.
"For Vietnam, one of its main concerns
is that it does not want to be seen as a
conduit for Chinese enterprises to export
their goods to the US," says ISEAS' Lye. "It
doesn't want to be accused by the US as
providing a convenient platform for Chinese
companies to skirt the tariffs the US
has imposed on China."
But neither can Vietnam reject Chinese
trade outright; hence, it is caught between
a rock and a hard place.
Capitalising on the opportunities
Still, the country's strong economic growth
— with a resilient domestic market — as
well as its relatively open economy make it
attractive to investors and businesses. Singaporean
companies that The Edge Singapore
spoke to are upbeat about Vietnam's
long-term prospects.
For example, the relatively low barriers
to entry plus the maturity of the Vietnamese
market spurred Wilson Teo, managing
director of garment manufacturer Teo Garments,
to expand his manufacturing line
into Vietnam. "It was a natural step for us.
Vietnam ticked the most boxes for us as the
new country that we wanted to venture into.
In the textile industry, we felt Vietnam had
compelling advantages compared with other
countries in the region."
Vietnam also already has a strong supply
chain that the textile industry needs.
"Our manufacturing facility in Vietnam,
which is still in the planning stages, is complementary
to our existing business in
Cambodia as well."
Teo does, however, anticipate challenges
in finding the right workforce. "Because
of how everyone is going into Vietnam, it
will naturally push up competition for the
same limited resources such as labour," he
acknowledges.
For lending tech start-up Finaxar, its
move into Vietnam came as a result of Vietnamese
bank Indovina Bank being receptive
to the idea of providing accessible and
streamlined credit to small and medium-size
enterprises (SMEs) through technology.
The three-year-old Finaxar, which differentiates
itself from SME peer-to-peer lending,
sees its role as plugging the gap in SME
financing in Vietnam. Its founder and director
Tan Sian Wee says, "The World Bank
says Vietnam is ranked 29th of 190 countries
that match the Organisation for Economic
Co-operation and Development standard for
credit access for small businesses. But if you
ask the small businesses in Vietnam, they
will say they don't have financing. The Vietnam
Chamber of Commerce and Industry
also says that only 30% of Vietnamese SMEs
have easy access to credit."
This naturally presents a challenge to any
SME looking to set up shop in Vietnam, Tan
says. He advises such companies to find the
right product fit in the market and good local
partners. "You need to spend time there
in order to evaluate where the market is,
work with very good partners there who are
trustworthy. You need to have that backing
if you're a Singaporean company going in."
Monk's Hill's Nguyen says, ultimately,
Singapore and Vietnam are a good fit.
"There are the usual precautions of going
into a new country and understanding its
local cultures and all that, but I do not see
huge red flags to the point where it outweighs
the benefits."
As the Singapore government agency championing enterprise development, Enterprise Singapore (ESG) works closely with regional governments and business communities to support the entry of Singapore companies into the region through its 8 overseas centres across ASEAN - Bangkok, Hanoi, Ho Chi Minh City, Jakarta, Surabaya, Manila, Kuala Lumpur and Yangon.
Source: The Edge. Reproduced with permission.