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Investors cautious but not fleeing Vietnam’s economic woes
Despite high inflation and a widening trade gap, overseas backers still call Vietnam a “world factory” as political stability trumps the natural economic slowdown.
Plans for millions of dollars in foreign investment in Vietnam have been paused amid economic turbulence, but investors plan to stay the course while miracle growth comes back down to earth.
Record-high commodities prices are eating away at some of the economic gains Vietnam has made since a raft of tax and other incentives over the past 20 years pulled in more than US$90 billion in foreign investment, led by South Korea, Singapore and Taiwan.
Vietnam’s economic earthquake has seen the first-half 2008 trade deficit nearly triple from a year earlier and inflation shoot higher to almost 27 percent.
The country’s base interest rate – which guides bank lending and deposits – has jumped to 14 percent from 8.25 percent this year.
Offshore forwards markets are pricing in a 25 percent fall in the dong currency in a year – all adding up to much greater risks for foreign investors largely lured by low costs.
Taiwanese tile maker Taicera Enterprises had plans to spend as much as $10 million to expand its operations in Vietnam.
But General Manager Raymond Chen said the firm was now in no hurry to do so due to the current economic turmoil and high Vietnamese interest rates.
“We don’t have to do it now as it’s not the best time because investment costs are just too high,” Chen told Reuters by phone from Hanoi.
United Engineers Ltd, Singapore’s biggest builder with a market value of more than S$700 million (US$535 million), is taking a similar wait-and see approach.
These foreign investors don’t plan to withdraw from the country, but are putting plans on hold for now while Vietnam deals with its economic difficulties.
For its part, the government has ordered domestic state-run firms to cut spending as well.
Foreign investment is key for Vietnam to help offset pressure on the balance of payments and the currency owing to sharply rising import costs and inflation.
The Ministry of Planning and Investment has said that foreign direct investment pledges in the first half of the year rose nearly fourfold to $31.6 billion from a year earlier.
Struggle to mend
Some of Asia’s top companies, including South Korean steel giant POSCO and Taiwan’s biggest electronics firm Hon Hai have promised to invest billions of dollars in Vietnam, lured by the booming economy, cheap labor and generous incentives.
Vietnam has benefited from investment spilling over from its giant neighbor China.
Many firms lured to China have also put investment into another low-cost Asian location as a hedge in a strategy described as the China plus-one strategy.
Over the past 20 years, South Korea has poured $14.7 billion into Vietnam, Singapore $11.9 billion and
Taiwan $10.9 billion, data from the Taipei representative office in Vietnam shows.
Until this year, macro-economic stability had been taken for granted in Vietnam with growth racing along at an average of 7.5 percent since 2000.
But eight consecutive months of double-digit inflation and a ballooning trade deficit have rung alarm bells.
Hundreds of thousands of workers have gone on strike to demand higher wages and the stock market this year has slumped close to 60 percent.
In a nod to the currency pressures, authorities effectively devalued the currency by 2 percent this month.
“The biggest trouble for [direct] investors there is the sharply increased interest rates, because many companies need financing either in their home country or in Vietnam,” said Sohn Seung-ho, director of the Asia team at the state-run Export-Import Bank of Korea (KEXIM).
Staying put
The foreign investors said they had no plans to withdraw from the country despite the current economic concerns.
For one thing, the political stability of the government gives the country an edge over some other low-cost destinations.
Thailand, for example, has been tainted by a military coup in 2006 and political uncertainty is raising concerns in Malaysia.
“Vietnam will still remain one of the world’s factories despite all the inflation problems they have now,” said Chen Yo-kuei, chairman of The Council of Taiwanese Chamber of Commerce in Vietnam.
Big investors such as POSCO and Hon Hai take a similar view.
“We basically view the turmoil as a process through which ‘bubbles’ will eventually be removed,” an official at POSCO said.
Thanhnien
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