Former Deputy Chairman of the State Commission for Cooperation and Investment (now the Ministry of Planning and Investment) Professor Nguyen Mai digs into foreign direct investment flows in the country so far this year as well as points out factors which may affect the country’s FDI landscape in the second half of 2012 and in forthcoming years.
According to General Statistics Office figures, from January 1 to June 20, 2012 Vietnam attracted 452 foreign direct investment (FDI) projects worth $4.762 billion in total committed capital and $1.621 billion in expanded capital from 12 existing FDI projects.
In total this brings Vietnam’s total pledged FDI amount to $6.384 billion in the first half of this year, or 72.3 per cent of that during the same period in 2011. Of that colossal amount, manufacturing and processing industries took the lead with $4.021 billion, occupying around 70 per cent of total. Among foreign investors, Japan came first with $3.536 billion in newly pledged capital or 74.3 per cent of total, then Hong Kong $406.7 million with 8.5 per cent, South Korea $272.9 million with 5.7 per cent, Singapore $146.7 million equal to 3.1 per cent and the Netherlands $106 million or 2.2 per cent.
FDI flows into Vietnam in 2012’s first half saw downward momentum after reaching a peak in 2008 when $71 billion in FDI made its way into Vietnam whereas the United Nations Conference on Trade and Development (UNCTAD) forecast FDI could climb to $1.6-2 trillion globally this year, surging 20 per cent on-year. Thereby, finding the real causes for such a decline, from there suitable remedies to resume growth are urgent.
Notwithstanding, registered FDI is just nominal and we should not take it as a foundation to judge FDI movements. For instance, committed FDI capital into real estate projects often far exceeds disbursed figures as foreign investors pump a certain sum into site clearance and building technical infrastructure then sell the space to secondary investors or homebuyers via capital contribution contracts or order placements. As a result, actual capital these foreign investors bring to Vietnam may account for 20-25 per cent of their total registered capital amount only.
During January 1 to June 20, disbursed FDI amount came to $5.4 billion, surging 1.9 per cent on-year and could serve as a factor to appraise the issues associated with FDI activities.
Of VND431 trillion ($20.7 billion) worth in total development investment capital in the first six months of 2012 foreign investment amounted to VND110 trillion ($5.28 billion) tantamount to 25.5 per cent. That rate is rational since the capital demand to satisfy requirements for social and technical development and economic restructuring pursuant to modern growth pattern is tremendous.
So alongside making the most of copious capital sources in the country it is essential to attract investment from external sources, including officail development assistance (ODA), FDI and foreign indirect investment (FII).
International trade is the FDI bright spot. When Vietnam’s economy just expanded 4.38 per cent in 2012’s first six months, lower by 1.25 per cent on-year, the country’s export value shot up 22.2 per cent - an impressive growth. Unlike the first six months in 2011 when higher export value mostly emanated from higher prices, in the past six months a bigger export volume was the leading factor. In the first half of this year, foreign invested enterprises (FIEs) contributed $32.6 billion, representing 61.5 per cent of Vietnam’s total export value and up 6.8 per cent on-year.
Vietnam’s total import value reached $53.8 billion in the first six months of 2012, up 6.9 per cent on-year. If price hikes were excluded, total import value just expanded 3.6 per cent on-year, the lowest level since 2009 which was a year of economic recession.
A calmer trade deficit reportedly came from the government’s commitment to drive down the imports of some luxurious items and sinking domestic consumption such as imports of automobiles $1 billion, plunging 34 per cent with $285 million coming from import of completely built units (CBUs), down 54.7 per cent on-year. Simultaneously, positive signs were witnessed in the first six months’ import structure against the same period in 2011. The proportion of imported machinery, equipment and parts hiked from 27.8 to 32.9 per cent and that of materials and fuel slid from 64.8 to 60.6 per cent and of consumer goods from 7.4 to 6.5 per cent.
The trade deficit mainly came from Vietnam’s trade relations with China as exports to this market generated $6.3 billion in 2012’s first half while import value from China hit $13.2 billion, up almost 17 per cent, leading to a $6.9 billion trade deficit. This bottleneck needs to be tackled for the country to achieve trade balance status, gradually striving for trade surplus which parallel to other external economic activities like tourism and services would pave the way for Vietnam to firmly achieve current account balance of payments.
When the Ministry of Planning and Investment, central and local state agencies in charge of FDI management are mulling over crafting new directions in attracting FDI the following factors relevant to FDI activities in the late six months and in 2013 need to be taken into account.
In respect to external economic relations, Vietnam is confronting a great deal of new opportunities as ASEAN is closing its goal of becoming an economic community with a common market for commodities and services, and sharing a common investment area. Following the strategic partnership agreement with Japan from 2010 the relations between Japan and Vietnam grew quickly politically and economically. Japan is currently a leading ODA donor to Vietnam and tops the FDI investment list. The two countries highlight cooperation in hi-tech, modern services and supporting industries.
Vietnam and EU usher into a new period of development through the signing of the Partnership and Cooperation Agreement in late June 2012 when negotiations on a free trade agreement are underway, paving the way to facilitate two-way trade. The Vietnam-US relations have been increasingly improved and two-way trade value rose sharply and scores of investor groups from US’ diverse states have landed on Vietnam to source investment opportunities.
Through leveraging on these opportunities and by taking suitable measure packages to each partner group, Vietnam can attract more quality FDI to help it revive GDP growth targets.
However, the country is facing unsettled problems associated with investment climate, partly driven by on-going economic slump but the major cause was inefficient approach in tackling macroeconomic management weaknesses.
According to a HSBC Vietnam recent survey, the Manufacturing Purchasing Managers’ Index (PMI) continued its downward momentum, sliding from 48.3 points in May to 46.6 points in June, showcasing worsening production sector business conditions. This was the third straight year and also the sharpest decline since the survey debut in April, 2012.
The United Nations Industrial Development Organisation and the MPI has just finalised “Vietnam Industrial Investment Report 2011” based on their survey on nearly 1,500 businesses (57 per cent were FIEs). The report read FIEs posted around 7.6 per cent pretax profit rate against their expected 9 per cent .
On a positive side, the report showed FIEs were delighted with Vietnam’s improvements in infrastructure quality, economy stability as well as business supportive services.