Last year, Vietnam chalked up a record $21.3bn in FDI pledges, of which perhaps 30% was actually disbursed. In the first quarter of 2008, Vietnam licensed $5.4bn in new FDI, and aims to see $6bn disbursed this year. According to the Foreign Investment Agency, April alone saw $1.4bn in FDI disbursed – a new record.

On the surface, Vietnam’s FDI prospects appear to remain rosy. But a number of new challenges confront policy-makers, leaving little room for complacency. The first is a substantial rise in the country’s perennial trade deficit, of about 65% year-on-year. This is one reason why Standard & Poors’ lowered its outlook for the country, from stable to negative, in early-May, citing “widespread economic and financial distress”.

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Foreign-invested projects are Vietnam’s main producer of exports and the country is traditionally perceived as an attractive platform for fairly basic export-oriented manufacturing and assembly. But with the global economy cooling, there are limits to how many shoes, garments, furniture and other goods Vietnam’s FDI community can feasibly generate for export.

Benefits of liberalisation

 

Thankfully, however, Vietnam’s accession to the WTO and its rapidly expanding domestic market is attracting a new wave of foreign investors, this time eyeing increasingly affluent urban consumers. Liberalisation of various service sectors that were previously off limits to foreign investors is catalysing new FDI inflows.

The second challenge is inflation, which was at 21% in April. Inputs of most kinds have risen markedly over the past six months, affecting foreign-owned and domestic businesses alike. It has also triggered a rise in labour unrest, particularly at some foreign-owned manufacturing enterprises in the south of the country. One response from the government has been to threaten to impose fines against workers that enact wildcat strikes – quite a radical step for this avowedly socialist republic.

But there is not much that Hanoi can do, given that some inflationary forces are being imported from outside, and domestic inflation is most apparent in areas such as food and other staples.

Part of Vietnam’s success in attracting FDI has been a function of its relationship with neighbouring China. Approximately seven years behind China in pursuing gradual economic reform, Vietnam has been able to tuck itself in China’s slipstream. Numerous Asian transnationals, eager not to have all their investment eggs in the China basket, have opted to diversify some of their operations to Vietnam – the Guangdong ‘lite’ option.

But there is considerably more that Vietnam could do to leverage its proximity to China. Until now, Hanoi has generally been quite reticent to allow foreign firms into the minerals and commodities sector, with the notable exception of offshore oil exploration and production. However, with the trade deficit widening, policy-makers may have little choice but to attract greater foreign investment into onshore mining and extraction, with neighbouring China as the end consumer.

Fighting inflation

In January, for the first time in many years, Vietnam became a net importer of oil as the rise in domestic demand for petroleum products outpaced its production of crude. That too may prompt Hanoi to release more offshore acreage to foreign oil firms, especially as its first oil refinery nears completion.

Some other domestic mega-investment projects are destined to be put on hold as part of the monetary battle to contain inflation. The problem is, Vietnam needs such projects to overcome an increasingly evident weakness in its host country allure – an inadequate infrastructure. Failure to address power outages, congested ports and dilapidated roads creates the risk that FDI inflows will migrate elsewhere.

COUNTRY PROFILE

VIETNAM

Population:

86.1 million

Pop growth rate: 0.99%

Area: 325,360 sq km

Real GDP growth: 8.5%

Largest sector Industry (% of GDP): 42.3%

Labour force: 45.73 million

Unemployment rate: 5.1%

Source: CIA World Factbook, 2008