“Vietnam is an attractive market for foreign investment in 2023, despite the threat of a recession.” Dr. Daniel Borer, Lecturer in Economics, RMIT University Vietnam shares his positive prediction in the conversation with the author.
The Asian Development Bank (ADB) has raised its growth forecast for Vietnam for this year from 6.5% to 7.5%, despite several economic challenges. This puts behind fears of a recession in the country in recent months and the country can expect more foreign direct investment in the coming year and ex has agreedperts.
Dr. Daniel Borer, Lecturer in Economics, RMIT University Vietnam
However, foreign investors are looking at Vietnam with hope and caution. Inflation in Vietnam was 4.3% in October and 4.37% in November, above the government’s original target of 4% for this year. Next year inflation of 7-8% can be expected.
This would have dramatic consequences for interest rates, which could well exceed 10%. To avoid such inflationary surges, the SBV began to follow the example of other countries in a race to raise interest rates. On 25 October it raised the refinancing rate by 100 basis points to 6%. These rapid rises in interest rates will discourage economic activity, increasing the risk of an economic slowdown.
One aspect that can influence investment decisions is the exchange rate development, which has been fluctuating a lot lately and it seems unclear how it will develop further.
Unfortunately, this isn’t the only bad news looming on the horizon. Dr. Borer pointed out that the outlook for next year looks even more daunting. The largest export market for Vietnamese goods is the United States. But the US is most likely to face a deep recession next year as the economy suffers from the current dramatic rate hikes imposed by the Fed.
At the end of November, Vietnam was exporting USD 101 billion worth of goods to the US, a year-over-year increase of 17.7%. In the first 10 months of the year alone, exports of electronic computers and components to the US totaled $13.23 billion, up 26.4% over the same period, according to GSO. But exports fell in November for the first time since October last year as global demand weakened. According to the World Bank report, exports fell by 8.4% year-on-year and imports by 7.2%.
Despite these negativity, Dr. Borer still believes that the Vietnamese market will still be attractive to foreign investors as it is a manufacturing center of the region due to its independence from the economic condition of the domestic economy.
In the FDI sector, this closing year was clearly positive for Vietnam. FDI to Vietnam rose 82%, the second highest growth rate in Asia Pacific, in the first 10 months of 2022, according to Investment Monitor.
The impending recession could even boost investment, as labor market pressures could prevent wages from rising substantially and allow Vietnam to maintain its labor cost advantage over other countries.
When deciding which projects to prioritize, two things should be taken into account: country of investment and type of project. Dr. Borer recommends prioritizing FDI from countries in the region. A policy recommendation is to reorient trade from overseas to regional partners within ASEAN and the RCEP. The tariff advantages in combination with the geographical proximity are strong arguments for strengthening regional trade.
Overdependence on the US for trade, which is currently Vietnam’s largest export partner, could be risky in the future. Markets such as Australia, New Zealand or India should receive more attention. Showing how easily transoceanic supply chains can collapse, the pandemic has shifted global trade from global to more regional, says Dr. Borer.
The emphasis on projects up the value chain makes sense and will help the country attract higher quality foreign direct investment. Still, the inherently rich resources Vietnam has in the agricultural sector, particularly in the coffee and fish sectors, should not be forgotten and can be further enhanced by foreign FDI.
Another important aspect that is being implemented to some extent but needs to be further strengthened is the achievement of environmentally friendly FDIs, to encourage foreign investors to invest in Vietnam. Foreign consumers are particularly sensitive to knowing where and how the products they consume have been produced.
Products shipped all the way from Southeast Asia will not be viewed favorably by European and American consumers in the future. And discovering that most of the energy to make their product comes from coal-fired power plants, for example, will not help Vietnam become the attractive destination we want it to be.
In the stock market, investors withdrew money from Vietnam early this year after central banks in the US and other countries hiked interest rates. Accordingly, Vietnam has seen the sharpest stock market decline this year.
Vietnamese stocks hit, but the implementation of Decree 65, which aims to bring more structure to the Vietnamese bond market, is a step in the right direction, strengthening the market and making it more transparent. This will ultimately make the Vietnamese market more attractive to foreign investors. But the implementation will bring some disruptions in the short term until investors adapt to the new measures.
The bond market is currently under pressure due to interest rate rises and limited liquidity. Therefore, postponing the implementation of the measures from January 1, 2023 to January 1, 2024 makes sense, so as not to put an additional burden on the market at this time and to give more time to prepare for those changes. This should not undermine confidence in the Vietnamese markets. Investors are well able to deal with different market structures.
Nevertheless, adding transparency, having clear and reliable assessments and facilitating trading is an ongoing effort that still needs to be done. The HCMC Stock Exchange is still small compared to other stock markets in the region and has great growth potential if the investment climate can be further improved.