Letters from Vietnam: autumn 2020 edition

Vietnam’s economy has not escaped the coronavirus crisis completely unscathed, of course. But it has recorded a high level of growth. So which sectors could now be attractive for foreign investors?

Every four months, Huong Thi Hoang, director of our local Bremeninvest office, reports to us from Ho Chi Minh City on trends, opportunities and new developments.

Our topics in September:

Coronavirus update from Vietnam

Like other countries, Vietnam has been increasingly relaxing its coronavirus restrictions in recent weeks. In some regions, bar and discos are reopening, hotels are welcoming guests again and festivals are taking place. However, the country is continuing to impose strict entry conditions that require a period of quarantine and repeated testing for the virus. There are also considerable restrictions on air travel, although these could also be relaxed soon.

The World Bank anticipates that Vietnam’s economy will grow by just under 3 per cent in 2020. This is some way off the rate of nearly 7 per cent recorded in recent years, but still higher than in many other countries. One reason for this expansion is foreign investment, particularly from China, where companies are increasingly opting to move production facilities to Vietnam.

Many Vietnamese firms have mothballed their expansion plans and are restructuring their businesses. Around 34,000 companies have had to close down; many others are being forced to change their business models. Some 1.3 million Vietnamese people have lost their jobs, and a further 30 million (around half of the country’s workforce) could be affected by restructuring measures in the future.
Nevertheless, the economic slump could also present opportunities for thriving companies to expand or to become more cost-efficient. Indeed in several areas, Vietnam is already benefiting from global trends and developments:

EU-Vietnam Free Trade Agreement (EVFTA)

The free trade agreement between the European Union and Vietnam (as we reported) came into force on 1 August 2020. The agreement has not only put an end to numerous customs tariffs and trade restrictions, but also increased investment security by improving intellectual property rights, liberalising markets and recognising international regulations such as those set forth by the International Labour Organization. It therefore has the potential to provide a further boost to Vietnam’s growing economy and open up new markets for European companies.

Renewable energies – investment opportunity and growth market

Vietnam’s energy needs are growing rapidly: consumption has risen by 10 per cent annually over the past five years. Experts estimate that the country will have to invest around US$ 150 billion by 2030 to keep pace with demand. For Vietnam too, renewables now represent one of the cheapest forms of energy generation, so the bulk of this expansion will be met by wind and solar power.

This has opened up a potentially lucrative market for foreign investors. And the government has made various efforts in recent years to make this market even more attractive. One example is the establishment of feed-in tariffs for electricity, although these are only locked in on a long-term basis until 31 December 2020. From 2021, the tariffs will be renegotiated on an annual basis. The creation of a new power purchase agreement constitutes a further liberalisation. The agreement has paved the way for energy producers to supply end users with electricity directly for the first time, instead of via the state utility companies.

Despite these initial moves to liberalise the market, foreign investors still have some significant hurdles to overcome. McKinsey, for example, has criticised the still very restrictive power supply contracts and therefore the high financing costs, as well as the opaque tendering process. There is also a danger that the expansion of the grid will not keep pace with demand, leading to bottlenecks in the supply of electricity.
But at the same time, a whole host of foreign investment projects for wind and solar farms are in the pipeline, including some that involve German companies (e.g. Enercon).

Industrial and logistics real estate market

The market for industrial real estate in Vietnam has exploded thanks to the combination of the coronavirus crisis and the trade dispute. The low prices being asked for industrial land and the low level of taxation and wages – which makes Vietnam an attractive place to manufacture goods – are also a factor. The US-Chinese dispute has made the country an appealing prospect for investors that are looking to protect their products from punitive tariffs (as we reported). In the past few months, this surge in demand has been reflected in a rapid increase in online seminars that enable customers to find out about attractive commercial sites.

As in many other cities around the world, land in the major conurbations of Vietnam is becoming scarce. This is why commercial premises are increasingly popping up in B-cities, such as in the region immediately outside Ho Chi Minh City (HCMC), in areas like Binh Phuoc, Long An, Binh Duong and Dong Nai.

Projects with foreign investors are also in the offing in these places, such as a partnership between Belgian and Dutch firms in the coastal region Vũng Tàu near HCMC, where a port logistics complex is to be built for almost US$ 1 billion. The total volume of inward investment in the first half of 2020 was comparable with the equivalent period of the prior year, which is quite an achievement given the havoc wreaked by the coronavirus pandemic.

E-commerce is booming in Vietnam due to coronavirus, as it is in many other regions of the world. According to new plans published by the government, the sector is expected to grow by 25 per cent annually. This growth is having a positive impact on the logistics industry and the real estate market and in the coming years is likely to further drive up demand and prices for logistics sites.