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FDI Opportunities in Vietnam in 2018

By Koushan Das, Vietnam Briefing, Dezan Shira & Associates
Posted: 5th February 2018 08:17
Fuelled by rapid growth and increased FDI, 2017 emerged as one of the strongest years for Vietnam. With the GDP growing at 6.81 percent, record high FDI, and trade figures reaching an all-time high of US$400 billion, Vietnam will continue to remain a priority for investors in 2018. Opportunities not only exist in the traditional sectors such as garments, footwear, and electronics but also in renewable energy projects, high-tech agriculture, and other high-tech industries.

GDP – six-year high
Vietnam witnessed a six-year high GDP growth rate at 6.81 percent in 2017, driven by the agriculture, industrial, and services sectors. The GDP grew exponentially from Q1 to Q4 at 5.15, 6.28, 7.46, and 7.65 percent respectively.

The 2017 nominal GDP stood at VND5,008 trillion ($221 billion), with GDP per capita increasing by US$170 to US$2,385.

Sector contribution
In 2017, the services sector contributed the highest to the GDP, accounting for 41.32 percent, followed by industry and constructionat 33.34 percent, and agriculture, forestry, and fisheries at 15.34 percent.

FDI – 10-year high
FDI, driven by investments from Japan, South Korea, and Singapore, reached US$35.6 billion, highest since 2009. The disbursed capital hit US$17.5 billion, a 10-year high. The registered FDI capital and disbursed FDI grew by 44.4 percent and 10.8 percent respectively, compared with 2016.

FDI sources
Similar to previous years, Vietnam continues to attract the majority of its FDI from Asian countries. In 2017, there were 115 foreign investors in Vietnam, with Japan and South Korea alone accounting for almost half of the total

Japan’s investment capital stood at US$9.11 billion, accounting for 25.4 percent of the total FDI. Most of the investment was into two BOT thermopower projects in Thanh Hoa and Khanh Hoa, accounting for US$ 5.37 billion. South Korea contribution stood at 23.7 percent with investments reaching US$8.49 billion, Singapore invested US$5.3 billion, accounting for 14.8 percent.

This year surprisingly China emerges as the fourth largest investor in Vietnam. It committed investments worth US$ 2.17 billion.

Industries in focus
Manufacturing and processing continue to be a major attractor of FDI, with 2017 FDI reaching US$15.87 billion, accounting for 44.2 percent of the total FDI. Power production and distribution followed second with US$8.37 billion, accounting for 23.3 percent, followed by real estate at US$3.05 billion, or 8.5 percent.

FDI destinations
Ho Chi Minh City continues to lead amongst all cities and provinces, followed by the northern province of Bac Ninh and the central province of Thanh Hoa. Other major FDI destinations include Nam Dinh, Binh Duong, Kien Giang, and Hanoi.

Major sectors
The industry and construction sector grew the fastest at 8 percent, followed by services at 7.44 percent and agriculture, forestry and fishery at 2.90 percent.

Agriculture, forestry, and fishery
In this sector, the fishery sector grew the fastest at 5.54 percent, followed by forestry and agricultureat 5.14 percent and 2.07 percent respectively.

Industry and construction
In the industrial and construction sector, the industry sector grew at 7.85 percent, higher than 2016’s growth rate of 7.06 percent. Manufacturing, the major sector in the industry, grew by 14.4 percent; its highest in seven years. On the contrary, mining decreased by 7.1 percent, mainly due to a reduction in crude oil and coal output.
One of the most attractive sectors for 2018 investors, the construction sector continued its growth in 2017 at 8.7 percent.

Within the services sector, the accommodation and catering services grew the fastest at 8.98 percent, much higher when compared to its 6.7 percent growth in 2016. The wholesale and retail sales grew by 8.36 percent in 2017 driven by a growing urban population and increase in income.

Other sectors such as the financial, banking, and insurance activities witnessed its highest growth in the last seven years, at 8.14 percent while real estate business, another attractive sector for 2018 investors, grew by 4.07 percent, its highest since 2011.

Import-export turnover– highest ever
Vietnam’s total import-export turnover in 2017 reached a record high of US$400 billion, with a trade surplus of US$2.7 billion. FDI sector was the major contributor to the country’s trade with a trade surplus of US$28.8 billion, while the domestic sector had a trade deficit of US$26.1 billion.
In 2017, exports and imports witnessed double-digit growths at 21.1 and 20.8 percent respectively. Trade between Vietnam and Africa, Asia, and Oceania grew the fastest at 27.6, 25.7, and 24.5 percent respectively, while trade with EU and Americas grew by 13.8 and 10.8 percent respectively.

Import of goods
Vietnam’s import turnover of goods in 2017 reached US$211.1 billion, with the FDI sector and domestic sector growing by 23.4 and 17 percent respectively. In numbers, the FDI sector was responsible for US$126.4 billion of import turnover, while the domestic sector accounted for US$84.7 billion.
Export of goods

Vietnam’s export turnover of goods in 2017 reached US$213.77 billion, with the FDI sector and domestic sector growing by 23 and 16.2 percent respectively. In numbers, the FDI sector was responsible for US$155.24 billion of export turnover, while the domestic sector accounted for US$58.53 billion.

Business environments
In the last few years, Vietnam has implemented numerous reforms to improve its business environment for foreign investors. Although there is still scope for further reforms, the business environment as reflected by numerous studies, improved substantially in 2017.

According to the World Bank’s Doing Business 2018 report, Vietnam ranked 68th among 190 economies, a jump of 14 ranks against 2017 and 30 ranks against 2012. Similarly, as per the World Economic Forum’s (WEF) Global Competitiveness Report 2017-2018, Vietnam ranked 55th amongst 137 economies, a jump of 5 places from the previous year.

In the recent Global Innovation Index 2017, Vietnam jumped 12 places to 47th among 127 economies, its highest ranking in the last 10 years. Vietnam also led the group of 27 lower-middle-income economies.

2018 outlook
For 2018, the government is targeting a growth of 6.7 percent, which based on 2017 figures seems achievable. In addition, 2017’s record high registered FDI is expected to lead to a high disbursed FDI in 2018.

Industries in focus
Investors will continue to find traditional export-oriented sectors such as electronics, garments, and footwear to be attractive. In addition to the export-oriented sectors, the domestic market also provides an opportunity for investors. With growing urbanization and rising incomes, industries such as education, real estate, retail, food & beverages, e-commerce, and FMCG will continue to grow in 2018.

The aforementioned industries will continue to be a priority for the government in the short term. For the long-term, the government is shifting its focus on high-tech and environmentally friendly investments and projects such as renewable energy and high-tech agriculture. Recently, with the assistance of the World Bank, Vietnam’s Ministry of Planning and Investment has drafted their FDI strategy for 2018-2023, focusing on priority sectors and quality of investments, rather than quantity. The draft aims to incentivize and make it easier for investors to invest in high-tech industries. The initial focus is on four major sectors: manufacturing, services, agriculture, and travel.

Regions such as Hanoi, Ho Chi Minh City, Haiphong, and Bac Ninh continue to remain as major FDI destinations, mainly due to developed infrastructure and connectivity. However, investors should take note of Vietnam’s SEZ– of which Industrial Zones (IZs) are the most common. In deciding which zone to locate operations in Vietnam, there are several factors that must be considered; including geographic location, land, labor, infrastructure, industry, business environment and incentives.

In addition, investors should also be on the lookout for the law on special administrative-economic zones, which is expected to be passed in 2018. In October 2017, the government had proposed new incentives for special administrative zones in Van Don (Quang Ninh Province), North Van Phong (Khanh Hoa Province) and Phu Quoc Island (Kien Giang Province) to attract foreign investments.
Effect of FTAs

Vietnam’s growth in the last decade has largely been attributed to its numerous bilateral and multilateral free trade agreements, which expanded its market access and increased its exports.

With the US backing out of the Trans-Pacific Partnership (TPP) in 2017, the remaining members reaffirmed their commitment to the agreement in November 2017, now called as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). CPTPP will not only contribute to the country’s economy and trade but will also lead to numerous policy reforms, favorable for foreign investors. In addition, domestic firms will have access to new markets such as Canada, Mexico, and Peru with whom it does not have a trade agreement.

In addition to CPTPP, Vietnam as an ASEAN member already has FTAs with the member states of ASEAN, China, Japan, South Korea, India, Australia, New Zealand, and Hong Kong. Bilateral FTAs include Chile, Japan, South Korea, and the Eurasia Economic Union (EAEU). Also in the pipeline is an FTA with the European Union (EU), which is currently under ratification.

In 2018, apart from its focus on the traditional sectors, Vietnam will also prioritize the quality of investments rather than quantity to increase the investment efficiency and productivity. The overall outlook for Vietnam continues to remain positive, mostly due to a robust global economy, domestic reforms, trade, and a shift towards high-tech industries.
This article was first published on Vietnam Briefing.

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