Foreign investment prospects in good shape with tech focus
Foreign investment prospects in good shape with tech focus
Economists are upbeat about the outlook of Vietnam to bring foreign capital inflows to new heights after more than three decades of reforms.
Activity regarding some of the world’s biggest tech firms in Vietnam has ramped up like never before in recent weeks, spearheaded by the visit to the country by Apple CEO Tim Cook and following several developments involving Nvidia.
Vietnam is already the world’s fourth-largest host of Apple suppliers. As of the end of the fiscal year 2023, there were 35 Apple suppliers in the nation, up from 25 the previous year, according to the 2023 Apple Supplier List.
In his trip to Vietnam, Cook pledged to buy more components and accessories for its devices from Vietnam’s suppliers. The company has so far invested over $16 billion in the country through its local supply chain partners since 2019.
As for Nvidia, the US chipmaker and FPT Corporation entered a strategic partnership to harness the power of AI across sectors. FPT plans to build a $200 million AI factory using Nvidia’s graphics chips and software (see Pages 4-5).
Khoon Goh, head of Asia Research at ANZ, said these developments, along with the latest distinct foreign direct investment (FDI) wave, has moved Vietnam increasingly into higher-value industries.
“This is reflected in the shift in Vietnam’s export composition over the years,” Goh said. “In 2010, the top two export categories were textiles and garments and footwear, accounting for almost a quarter of the country’s total exports. In 2023, the top two categories were computers and parts, and phones and parts, making up 31 per cent of total exports.”
The government is committed to ensuring that the country’s move up the value-added chain continues by promoting more high-tech investment, formulating a strategy to develop the semiconductor industry, and establishing the National Innovation Centre and high-tech parks with incentives to draw in investors.
Over the past 35 years, Vietnam has effectively attracted significant foreign-invested projects. Notably, Samsung’s export turnover reached an impressive $65 billion in 2022, representing nearly 9 per cent of Vietnam’s total exports.
It is anticipated that foreign investment will surge in 2024, especially in technology, electronics, and semiconductors, according to a KPMG report released in March.
Vietnam’s success in attracting FDI goes beyond the amount of registered capital or disbursements, the report said. It also hinges on efforts to improve the investment climate, and the government has actively issued resolutions and action plans to fulfill its commitment to enhancing the business environment for investors.
Thanks to these efforts, Vietnam’s economy has frequently received an upgrade for its credit rating. “We have upgraded Vietnam’s rating three times since 2014, with the most frequent upgrade in December 2023 to BB+ from BB, which factors in our view of robust development of the economy overtime,” said Sagarika Chandra, a director at Fitch Ratings’ Asia-Pacific Sovereigns team.
“The outlook on Vietnam’s rating is stable. Sustained high growth, which reduces the GDP per capita gap with rating peers, particularly if it is accompanied by an improved and more transparent macroeconomic policy framework, could be the most likely trigger for a further upgrade,” Chandra added.
Yun Liu, ASEAN economist at HSBC Global Research, is also upbeat about Vietnam’s long-term FDI prospects. “Greenfield FDI rose almost 60 per cent on-year in the first quarter of 2024, 65 per cent of which is concentrated in the pillar manufacturing sector and the rest in real estate. Regarding the source of investors, Singapore has regained the crown as Vietnam’s largest provider, with a share of 50 per cent,” Liu said.
ANZ’s Goh said that what makes Vietnam an FDI magnet is well known – a skilled labour force, conducive business climate, good infrastructure, and free trade deals that provide access to global markets.
“Given the ongoing US-China tensions, multinationals will continue to pursue a China+1 strategy to diversify their production. There has also been a noticeable rise in Chinese companies investing outside of China for the same reasons. This is where Vietnam stands to benefit, given last year’s upgraded relations between Vietnam and the US to a comprehensive strategic partnership,” Goh said.
Vietnam now has comprehensive strategic partnerships with five countries, and is looking to elevate its relationship with Australia as well, Goh said, adding that it cements Vietnam’s strategic role as a key link in global supply chains.
The next wave of FDI could play a vital role in helping Vietnam become a developed nation with a high-income level by 2045. To achieve this goal, the World Bank said that the economy would have to grow at an annual average rate of about 6 per cent per person for the next 25 years. Meanwhile, with demographics on its side, it seems plausible that Vietnam may achieve its stated goal of becoming a high-income country by 2045, according to the Centre for Economics and Business Research.
“We expect favourable medium-term macroeconomic prospects and views policy buffers to be sufficient to manage near-term risks such as economic headwinds from property-sector stresses, weak external demand, and delays in policy implementation owing to a corruption crackdown,” Fitch’s Chandra said.
There are, however, structural challenges that could limit upward rating momentum, and Vietnam’s reliance on credit growth targets to drive economic activity is likely to remain a risk to overall macro stability.
“Recent stresses in real estate highlight underlying limitations in Vietnam’s overall macro policy and regulatory framework, causing challenges in effectively managing emerging complexities in the economy,” Chandra added.
