Longer-term FDI strategy in need of situational tweaks
The pandemic is forcing a number of factories to either stop operations or pare down capacity, which has increased pessimism about the short-term outlook of Vietnam’s business environment.
Vietnam needs to adjust its FDI strategy to position itself for success.
The current disruption to supply chains has created disadvantages for attracting foreign direct investment (FDI) and executing projects, and the downward trend in investment attraction was noted by the Ministry of Planning and Investment (MPI) in a recent report to the legislature.
The report highlighted declines in both registered disbursed capital and the number of projects. Both are important indicators for a needed adjustment in the upcoming FDI attraction strategy. During January-August 20, total FDI, including newly-registered and newly-added capital, and capital contributions and share purchases, hit $19.12 billion, equal to 97.9 per cent against last year. Among that, 1,135 newly-registered projects held over $11.3 billion, down 37 per cent in the number of projects but up 16.3 per cent in capital, according to the MPI’s latest figures.
“If COVID-19 lasts longer, it will reduce the domestic purchasing power, weaken the domestic supply chain and labour recruitment, while increasing investment costs and lowering the prospects of investors,” said Tran Toan Thang, an economic expert at the National Centre for Socio-Economic Information and Forecast under the MPI.
The Organisation for Economic Cooperation and Development’s (OECD) FDI analysis released in April showed that global FDI flows plummeted to $846 billion in 2020, a 38 per cent decrease compared to 2019. The pandemic led to the decline of global FDI flows to their lowest levels since 2005.
“Even in countries that have the financial capacity to vaccinate, the rate of vaccinations remains low. Travel restrictions are expected to remain in place throughout the year and even longer in many places,” the OECD stated.
Mary Tarnowka, executive director of the American Chamber of Commerce in Vietnam, said, “We appreciate the government’s prioritisation of workers in industrial zones and the vaccination efforts in the zones. However, more needs to be done to ensure that production and delivery of essential products and services can be maintained.”
She added the stay-at-work model has been useful as an interim mechanism, but is not sustainable from a health, safety, cost, and practical standpoint. “We urge the higher prioritisation of unvaccinated workers operating in these models since they are at extremely high risk.”
The latest wave has also led to increased pessimism about the short-term outlook of Vietnam’s business environment. Just one-fifth of the members of the European Chamber of Commerce (EuroCham) believed that the economy will stabilise and improve in the next quarter – down from almost two-thirds (61 per cent) in the first quarter.
However, CEO of YouGov Vietnam Thue Quist Thomasen said in EuroCham’s recent report on its Business Climate Index, “Despite the short-term shock of this wave, Vietnam’s long-term prospects remain positive. European business leaders are aiming to maintain or increase their staff and investment plans – even in the midst of this current outbreak – which demonstrates a continued confidence in Vietnam’s trade environment.”
Asian countries are competing strongly to attract FDI, and the fear of this capital flow leaving Vietnam is not a new one. Dau Anh Tuan, director general of the Legal Department under the Vietnam Chamber of Commerce and Industry, said that controlling the pandemic will promote the recovery of FDI attraction and the economy. It would also demonstrate the governance capacity of the government and send a positive signal to investors.
“Vietnam remains an attractive destination for investment thanks to its advantages such as political stability, a range of free trade agreements, and high labour skills. However, in the short term, we need a flexible policy and support,” Tuan said.
Alain Cany, chairman of EuroCham, said, “There is no route out of this wave without an ambitious and accelerated mass vaccination programme which will enable normal life to resume. European companies are prepared to cover the cost of protecting their own staff – this will help to speed up vaccinations while also reducing the financial and administrative burden on the state.”
Tarnowka added, “We welcome an opportunity to develop a roadmap for economic recovery and a safe reopening. Vaccines will be key for an exit strategy and recovery. Tax relieves and reductions in utilities, as well as the availability of low-interest loans, will be critical to help hard-hit sectors and small businesses.”
However, Tarnowka also added that it is necessary to streamline procedures to facilitate approval and travel of foreign experts to Vietnam, including adjusting the requirements to reflect international practices and eliminating the need for legalised and notarised documents. “This will help both maintain existing manufacturing operations and facilitate additional investment,” she said.
Earlier, Vietnam set a strategy for its new landmark FDI attraction towards 2030. Under that, it targets luring in up to $200 billion worth of total registered FDI by 2025, or $30-40 billion a year. In this period, disbursed FDI is targeted at $100-150 billion, or $20-30 billion annually.
The government’s establishment of a task force to resolve challenges revolving around the disbursement of registered capital for large-scale foreign-invested projects is expected to help problematic ventures push forward in implementation.