News 05 Aug 2019 Updated 13 Aug 2019 Vietnam - Asia's next top model of growth The Edge Pauline Wong Share: 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.