BUSINESS IN BRIEF 25/3

Ho Chi Minh City to deliver swift improvement to FIEs

Japan keen to recruit more Vietnamese, PM approves adjustments to electricity plan, Agri-investment still beset by difficulties, Real estate continues to catch foreign attention, Why Viet Nam invited to join TPP? 

Ho Chi Minh City’s foreign direct investment (FDI) capital reportedly made a sharp decrease of 55.5 per cent on-year.

According to the Ho Chi Minh City Department of Planning and Investment’s statistics, in the first two month of 2016, the city attracted $234 million in FDI, comprising $155 million of 90 newly-registered projects and $79 million added capital to 25 exiting projects.

The decrease in FDI inflows to Ho Chi Minh City was said due to the fact that the vast majority of recently invested projects in the city were small-scale projects, worth tens of millions of dollars only. Two outstanding projects are Malaysia-based United More Sdn. Bhd.’s $21 million Aureumaex Precious Plastic Vietnam, producing plastic parts for Samsung LCD and LED TV panels and the $25.6 million sauce and spice production project invested by a joint venture between Saigon Union of Trading Co-operatives (Saigon Co.op) and Singaporean Wilmar International Limited.

Furthermore, with the exception of Hong Kong’s Worldon Vietnam Co. Ltd.’s $160 million expansion to its $140 million exiting project in 2015, there have been no large-scale projects in the textile and garment sector, which is considered one of the most appealing areas in attracting FDI to Ho Chi Minh City to take advantage of the upcoming implementation of the Trans-Pacific Partnership (TPP).

At the meeting themed “Listening and Reforming” between the city’s leaders and foreign invested enterprises based in Ho Chi Minh City, organised in Ho Chi Minh City on March 16, more than 200 attending FIEs raised concerns over the policies regulating the import of used equipment, taxation, and customs, bemoaning the complication of the Vietnamese legal framework.

Notably, heavy criticism was laid out against the Ministry of Science and Technology’s Circular 23, which will come into effect on July 1, 2016, arguing that it would create many hurdles for FIEs, forcing them to change their investment strategies in Vietnam.

Speaking at the meeting, Secretary of the Ho Chi Minh City Party Committee Dinh La Thang said that the city was implementing seven strategic programmes, aiming to provide the most preferential conditions for FIEs.

In addition, Thang asked FIEs to propose solutions to effectively remove hurdles and facilitate smooth investment procedures in Vietnam.

Agriculture credit meeting demand

Mr. Tran Van Tan, Head of the Credit Office at the State Bank of Vietnam’s ‘s Credit Department, told the “Towards Sustainable Agri-Finance in Vietnam – From the Case of Lam Dong Province” conference held by the Japan International Cooperation Agency (JICA) and the Vietnam Academy of Social Sciences (VASS) in Hanoi on March 18 that agriculture plays an important role in Vietnam’s economic structure and though it accounts for only around 17.4 per cent of GDP it employs over 50 per cent of the country’s workforce, ensures national food security, and contributes to export turnover.

Agriculture, forestry and fishery exports earned $30.45 billion in 2015, accounting for 18.8 per cent of Vietnam’s export turnover. During the global economic crisis from 2008 to 2013 agriculture was a pillar of Vietnam’s economy and the main factor in stabilizing the rural economy.

Recognizing the role of agriculture, the conference of the 10th Party Central Committee issued Resolution No. 26 on August 5, 2008, strengthening social mobilization, including using bank credit. The government also promulgated Resolution No. 24 on October 28, 2008, introducing a plan of action to implement the resolution on agriculture, farmers, and rural areas set out at the conference of the 7th Party Central Committee.

The State Bank of Vietnam (SBV) has determined that agriculture is one of five sectors to enjoy priorities and has directed credit institutions to balance their budgets and meet the sector’s demand for capital in a timely manner. At the same time the central bank has applied a credit policy and monetary policy tools to assist the sector.

Related provisions include the ceiling on short-term interest rates applied to the agriculture sector being 1 to 2 per cent lower than other sectors, the promulgation of Circular No. 20 on reducing reserve requirements for credit institutions that have 40 per cent of loans to the agriculture sector, and the giving of priority in refinancing to credit institutions that meet difficulties in loans but have 40 per cent of loans to the agriculture sector.

Outstanding credit for agriculture has increased steadily over recent years. Growth in the 2011-2015 period averaged 17.39 per cent; higher than the average credit growth of 13.51 per cent.

As at the end of 2015, outstanding credit for agriculture stood at $37.85 billion, up 13.32 per cent against 2014 and accounting for 18.12 per cent of total credit.

The proportion of bad debts in agriculture as at the end of 2015 was 1.54 per cent, down from 2.28 per cent at the beginning of the year. The proportion is often less than the average.

The results show that credit policies for agriculture and rural areas have been suitable and have met people’s demand.

Japan keen to recruit more Vietnamese

Japanese enterprises have been and will continue to recruit Vietnamese trainees and students, Mr. Hayashi Motoo, Minister of Economy, Trade and Industry (METI), said at the Japan Alumni Connect Party held by the Embassy of Japan in Vietnam, the Japan Association for the Promotion of Internalization (JAPI), and the Japan Alumni of Vietnam (JAV). Mr. Motoo, who is on a working visit to Vietnam, added that about 30,000 Vietnamese are now studying in Japan.

He noted that many senior officials at Vietnamese government agencies, especially in the research, industry and trade sectors, have studied in Japan.

He also expressed his belief that as relations between the two countries become even stronger there will be more Vietnamese interns in Japan. The historic visit to Japan by State President Truong Tan Sang in 2013 and the signing of the TPP will help bolster the relationship, he added, and he expects more success stories from Vietnamese interns in Japan.

“Vietnamese students and interns play an important role in developing the relationship between Vietnam and Japan,” Associate Professor Ngo Minh Thuy, Chairwoman of JAV and Vice President of the University of Languages and International Studies, told the gathering.

As representatives of Vietnam’s youth, they will use the expertise gained from Japan to develop their own country, becoming a bridge between the two peoples in the process and a factor in strengthening relations.

PM approves adjustments to electricity plan

Prime Minister Nguyen Tan Dung has approved adjustments to the national electricity plan in the 2011-2020 period and vision to 2030.

The adjustments are targeted at supplying sufficient electricity to meet domestic demand and facilitate Vietnam’s socio-economic target of GDP growth of 7 per cent annually in the 2016-2030 period.

Alternative energy is to be developed, such as wind energy, solar energy, and biomass power, with the proportion of generation from alternative sources to rise.

Multi-function hydroelectric power projects will be prioritized, which can not only produce electricity but also supply water and control flooding. These will be researched to ensure they are suitable with the national electricity grid and enhance efficiency.

By 2020 the total capacity of hydroelectric projects, including small and medium hydro power plants and multi-function hydroelectric plants is to be 21,600 MW and will increase to 24,600 MW by 2025 and 27,800 MW by 2030.

Hydroelectricity will account for about 29.5 per cent of generated electricity by 2020, 20.5 per cent by 2025, and 15.5 per cent by 2030.

The current capacity of wind power is 140 MW and is to rise by 800 MW by 2020, by 2,000 MW by 2025, and by about 6,000 MW by 2030.

The tiny existing capacity of solar energy will be increased to 850 MW by 2020, 4,000 MW by 2025, and about 12,000 MW by 2030 and account for 0.5 per cent of generation by 2020, about 1.6 per cent by 2025, and about 3.3 per cent by 2030.

Regarding thermal power, domestic coal will be prioritized for northern thermal power plants. Total capacity by 2020 will be 26,000 MW, contributing 49.3 per cent to total generation and using about 63 million tonnes of coal. By 2050 generation will be 45,800 MW, accounting for 55 per cent and using 95 million tonnes of coal.

Due to a shortage of coal, thermal power plants will be constructed in Long An province and provinces along the nearby Song Hau River in the Mekong Delta, where transport allows for easy delivery.

Nuclear power will be also developed, with the first plants to be operational by 2028. By 2030 nuclear power will have a capacity of 4,600 MW and account for 5.7 per cent of generation.

In the 2016-2020 period the total investment to develop electricity resources and the national grid, excluding BOT contracts, will be $148 billion.  

Piaggio launches scooters for men

Piaggio Vietnam has introduced the Medley ABS, the first of its new line of scooters for men, costing from VND71.5 million ($3,200) to VND72.5 million ($3,250).

There are two versions: the ABS classical version at $3,207 and the sporty version at $3,252.

General Director of Piaggio Vietnam, Mr. Costantino Sambuy, said the localization rate of the new scooter is 60 per cent and is not only being produced to meet domestic demand but also for export.

The Medley ABS has large wheels and a compact design that allows for easy city riding.

It boasts an LCD screen, electronic fuel injection system, immobilizer (an electronic security device that prevents the engine from running unless the correct key is used), and an anti-lock brake system (ABS).

In the storage compartment under the saddle is a USB port to recharge smartphones and sufficient space to store two helmets.

The air filter and oil filter will be replaced by Piaggio after the vehicle has traveled 10,000 kilometers.

Agri-investment still beset by difficulties

Vietnam is an ideal destination for Japanese investors in agriculture but there are still a host of barriers relating to land, financial support, and administrative procedures that have made it difficult for investors over recent years.

This was the general assessment of many agriculture experts from Japan attending the “Towards Sustainable Agri-Finance in Vietnam – From the Case of Lam Dong province” conference held by the Japan International Cooperation Agency (JICA) and the Vietnam Academy of Social Sciences (VASS) in Hanoi on March 18.

A representative from the Dream Incubator Vietnam JSC, which specializes in strategic consulting for Japanese investors in agriculture in Vietnam, said that in 2014 there were some 34 Japanese enterprises seeking investment opportunities in the sector and the number rose to 100 in 2015. “This shows that Vietnam has the potential to attract investment in the agriculture sector,” he told the gathering.

Issues relating to land, financial support, and administrative procedures remain the greatest barriers for agriculture investors in Vietnam to overcome. Mr. Mori Mutsuya, Chief Representative of JICA Vietnam, said there is a Japanese investor investing in onions in Lam Dong province to export to Japan and other provinces such as Binh Duong and Ho Chi Minh City as well as to supply the AEON supermarket chain. The investor can afford to invest in modern machinery and equipment for large-scale production but cannot secure a large enough land plot for large-scale production.

Experts at the conference also pointed out the important role of agri-finance, which is considered a key for agriculture development and is in line with current policies of the government encouraging private sector investments in agriculture restructuring and rural development.

Deputy Governor of the State Bank of Vietnam (SBV) Nguyen Dong Tien said that rural agriculture is one of five priority areas of the banking sector. Government and SBV credit policies for the sector are increasingly suitable to the aspirations and needs of the people.

In order to ensure the final goal of “Enhancing the whole value chain of agricultural produce”, JICA proposes a comprehensive support framework that addresses current bottlenecks in agricultural promotion, such as non-preferential loan terms, strict collateral requirements, poor business planning, and/or huge upfront investment burdens.

The JICA agriculture finance promotion program will be piloted in the central highlands’ Lam Dong province and if successful will be widely adopted in other provinces. Under its support framework, in addition to concessional funding in ODA loans, JICA will also provide technical assistance to enhance banks’ capacity for loan appraisal and the proactive monitoring of business assets. For farmers and agricultural enterprises, technical assistance to strengthen their capacity for business planning in a financially feasible manner will be provided to improve access to bank loans with higher concessions and relaxed security requirements. Additional policy measures such as credit guarantees and alliance with installment credit providers are also expected to lower collateral requirements and ease the upfront investment burden.

Real estate continues to catch foreign attention

Vietnam continues to be an ideal destination for Asian investors, Mr. Alex Crane, General Manager of Cushman & Wakefield (C&W) Vietnam, said in its “Record High Global Capital Targeting Commercial Real Estate” report.

Demand from overseas investors at the institutional level remains and this will continue through 2016, he believes.

The number of mergers and acquisitions (M&A) increased dramatically last year, by about 20 per cent compared to 2014, with real estate accounting for 10 per cent of total foreign direct investment (FDI) into Vietnam.  

“We haven’t yet seen much uptake at the individual level, especially in the residential sector, but Asian corporations in particular are aggressively active in Vietnam,” Mr. Crane said. “The market is becoming more competitive with local and foreign groups vying for the best sites and investments.”

One of the challenges for foreign developers and investors, despite how well funded they are, is obtaining land. Mr. Crane therefore suggested joint ventures between foreign investors and domestic companies as a solution in accessing the land necessary to develop projects.

The C&W report also showed that growth in available capital was recorded in Europe, the Middle East and Africa (EMEA), the Americas, and Asia Pacific, with the latter leading the charge with an 8 per cent increase to $131 billion, bolstered by the closing of a number of funds during the course of 2015. Despite this increase, however, the region attracted the least capital. While EMEA and the Americas saw capital expand by less than 2 per cent, across EMEA there was $143 billion in new capital with the Americas still attracting the greatest amount, at $169 billion.

The weight of cross-border flows continues to transform real estate markets around the globe. Most notably, more than 40 per cent of capital targeting both Asia Pacific and EMEA is from outside of their respective regions, with North American-sourced capital dominating, according to C&W’s Director of Capital Markets Research, Mr. Nigel Almond.

Why Viet Nam invited to join TPP?

Viet Nam was invited to join first eight countries in Trans-Pacific Partnership talks as it has been serious in implementing its international commitments, said Deputy Minister of Industry and Trade Tran Quoc Khanh.

Viet Nam is the only country that has free trade relations with all the biggest markets in the world, ranging from ASEAN, the US, the European Union, China, Japan, Canada, Australia and to Russia, the TPP chief negotiator said.

In addition, the country’s population exceeded 80 million, thus the purchasing power is huge.

The aforesaid reasons explained why foreign investors become more interested in the Southeast Asian market after member countries concluded the TPP talks.

Mr. Khanh said both the Government and businesses will face competition pressure with an active spirit.

The Government will focus on stabilizing macro-economy, controlling inflation, public debt and budget while improving national governance capacity to perform its role as a development facilitator.

This is a significant change as the Government will seek ways to facilitate development instead of strict control, highlighted the Deputy Minister of Industry and Trade.

Mr. Khanh said the TPP would be an opportunity for Viet Nam to further attract foreign investment, spur exports and withdraw management experience and practices to improve the level of national governance capacity and policy environment.

The TPP was signed on February 4, 2016 by 12 countries, namely Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Viet Nam, representing 40% of global GDP and 30% of global trade. This is a new-generation free trade agreement (FTA) which is expected to become a model for regional and international trade development with higher standards in the context of fast production force development, increasingly deep and wide international integration.

Viet Nam’s signing of the TPP was not merely the outcome of the five-year persevering negotiations under the spirit of both cooperation and struggle, based on the top objective of national interest.

More profoundly, this is the fruit of the 30-year renovation, in which economic integration is a vital component which has been strongly asserted and clearly interpreted in the resolutions of the Party.

This is also experience withdrawn from the country’s international integration realities following the signing and implementation of the Viet Nam-US bilateral trade agreement; the participation in the ASEAN free trade area, FTAs between ASEAN and its partners, and the accession to the World Trade Organization.

Investor sentiment seen improving

Investor sentiment is expected to improve following a portfolio rebalancing by exchange traded funds (ETF) FTSE and VNM, but the equity market still lacks support to surpass the 580-point resistance level, Bao Viet Securities Company said in a report released last Friday.

The brokerage advised investors to practice caution while waiting for directional cues on the market.

Last week saw the VN-Index of the HCMC bourse inching down 0.25% from a week earlier at 575.82 points, while the HNX-Index on the Hanoi market ended the week up 0.66% at 80.59 points. The average matched volume rose by 7% each on both markets, reaching 142.6 million shares per session on the southern bourse and 48 million shares per session on the Hanoi market.

Profit taking pressure built up during last week, especially on blue-chips. A selloff hit these stocks last Tuesday, sending the main index down.  

As selling eased and large caps GAS, PVD, BVH and VIC attracted investors, the market recovered in the following two sessions. Notably, FLC took the lead in terms of volume, backed by news about the realty developer’s project in Halong, Quang Ninh Province, while smaller speculative stocks in the mining sector had high trading volumes.

Vietnam’s equity market opened in the green last Friday, buoyed by positive sentiment from the U.S. stock market, according to Viet Capital Securities Company. The U.S. Federal Reserve’s decision to slow down its rate hike plan led the greenback to depreciate by 1.2% against the Vietnam dong, which in turn drew investors back to stock markets and other investment vehicles.

Oil and gas stocks were main drivers of the market in the morning session, helping the VN-Index rise to an intraday high of 580.8 points. However, strong selling pressure, together with trader concerns over ETFs’ portfolio reviews, pushed the index down below 580 points.

Foreign investors were net sellers on the HCMC exchange, offloading VND14 billion worth of shares. They sold VIC shares worth VND220 billion, HSG shares worth VND168 billion and PPC shares worth VND121 billion, while they spent VND329 billion on SBT shares, VND129 billion on ASM shares and VND76 billion on HQC shares.

Foreigners stayed on the buying side on the Hanoi market and their net purchases stood at VND66 billion. They acquired PVS, SCR and IVS, and sold VND and HUT.

Ho Tram Strip unveils Gallery Villas project

The Ho Tram Project Company is offering homes in Gallery Villas project as part of the multi-billion-dollar integrated resort complex Ho Tram Strip in the southern province of Ba Ria-Vung Tau.

The developer of the Ho Tram Strip said in a statement released over the weekend that 60 three-bedroom villas join Vietnam’s major entertainment destination, The Grand Ho Tram Strip and the 18-hole golf course The Bluffs Ho Tram Strip designed by the world’s renowned golfer Greg Norman. The villas are woven seamlessly into the golf course’s rolling dunescape.

The villas measure 800-1,700 square meters each and are set over two floors, with each blending indoor and outdoor living spaces on both levels, including terraces and private swimming pools for owners. The interiors of the villas feature a contemporary luxury seaside lifestyle.

Michael Kelly, executive chairman of Ho Tram Strip, said the company has built the resort The Grand and the golf course The Bluffs, and now opens the doors on Vietnam’s premier residences with the Gallery Villas.

Kelly said the average price of the villas designed by architecture company DWP is more than US$1 million each and all owners can benefit from many facilities at the resort complex, including residential golf memberships at The Bluffs.

Other facilities of the resort are swimming pools, kid’s center, gym, a spa, restaurants as well as the 2.2 kilometer private beach of the project.

The Gallery Villas project is the latest residential announcement from the company under Asian Coast Development (Canada) Ltd after the announcement of the development of a time share condominium tower on the company’s 164 hectare beachfront site more than three months ago.

In early December last year, the company and local construction firm Coteccons signed a memorandum of understanding to develop new residential towers, including a multi-tower development of 700-900 condominiums.

Kelly said new facilities will be in operation in the coming time at the around the 541-room Grand Ho Tram Strip to make the integrated resort an accessible destination for local and foreign investors.

The new facilities include an area for sport and electronics games, a 3D cinema, four karaoke parlors for families, water slides, luxury retail shops, and food and beverage outlets.

Kelly said around US$1 billion has been invested in the integrated resort.

The Grand Ho Tram Strip, which is the first phase of development at Ho Tram Strip, was inaugurated in 2013 and comprises a 541-room five-star hotel, a casino, restaurants, meeting and convention space, three swimming pools, luxury retail shops, as well as a variety of beach-front recreation activities. Once completed, the second tower at The Grand will bring the integrated resort’s rooms to 1,100 and add entertainment amenities to The Grand Ho Tram Strip.

Unemployment down in Q4

Vietnam’s jobless rate dropped to 2.18% in the fourth quarter of 2015 from 2.35% in quarter three and 2.42% in quarter two of the same year, according to a new report on labor released last week by the Ministry of Labor, Invalids and Social Affairs.

Nguyen Thi Lan Huong, head of the report editing division and former director of the Institute of Labor Science and Social Affairs, said at a press conference held to announce the report in Hanoi that 1.05 million  people of working age were unemployed in quarter four of 2015, with those aged 15 to 24 accounting for over half.

Unemployment among college and university graduates fell by 78,000 people to 417,300, making up 39.7% of the total. Accordingly, 155,500 university graduates were jobless in the final quarter of last year, down by 70,000 people compared to the previous quarter.

The number of jobless people with technical expertise certificates of less than three months totaled 26,230 and graduates of vocational schools at 3,540, up from the previous quarter. Deputy Minister of Labor, Invalids and Social Affairs Doan Mau Diep attributed the increases in the jobless rates among people with technical expertise certificates of less than three months and graduates of vocational schools to an upsurge in graduates from these schools.  

Diep said that employers need to recruit technicians who can use modern machines and equipment, while people with technical expertise certificates of three months to less than one year do not meet the requirements of businesses.

According to the report, the unemployment rate among college graduates registered the highest percentage, 8.16%, followed by vocational college graduates with 3.44%, vocational school graduates with 3.32% and university graduates with 3.3%.

Meanwhile, the average wage offered by State-owned enterprises dropped sharply in the fourth quarter while salaries at private companies inched up in the period.

The report showed that laborers at State-run businesses earned the highest average salary of VND5.5 million per month in quarter four, down by VND664,000 versus quarter three.

The collective economy sector saw the average monthly wage rising by VND509,000 against quarter three to VND3.49 million. Laborers’ average income from main jobs stood at VND4.66 million per month.

Senior executives had the highest average wage of VND7.8 million per month, followed by those having technical expertise with VND6.6 million per month and normal workers with VND3.19 million.  

Overall, monthly average wages of laborers edged up across the board versus the third quarter, with the highest increase of VND441,000 reported for agricultural technical workers and the lowest of VND15,000 for laborers with strong technical expertise. Meanwhile, the average salary of workers with medium technical expertise dipped by VND30,000 per month.

Investor ups toll to make ends meet

The toll level on National Highway 5, one of Vietnam’s most modern expressways connecting the cities of Hanoi and Haiphong, will climb soon, helping the investor ensure the project’s financial viability, and raise capital for road quality maintenance and improvement.

From April 1, 2016 the toll at two stations on National Highway 5 will be revised as per the Ministry of Finance’s (MoF) Circular No.153/2015/TT-BTC dated October 2015. The new toll level for vehicles of under 12 seats, trucks of below two tonnes, and public buses will increase to VND45,000 ($2), up from VND30,000 (14 cents) applied from December 1, 2015 to March 31, 2016. Meanwhile, the highest toll level applied to trucks of above 18 tonnes will jump to VND200,000 ($9), up from VND160,000 ($7.3) also applied from December 1, 2015 to March 31, 2016.

This is the second toll increase in the past five months.

Acknowledging that such a toll hike could increase the burden on transportation firms operating on this route, Vietnam Infrastructure Development and Financial Investment Corporation (Vidifi), assigned by the government to manage toll collection on National Highway 5, said that the move was crucial to help ensure financial feasibility of the build-operate-transfer (BOT) Hanoi-Haiphong expressway project in which they acted as the developer.

The 105 kilometre long Hanoi-Haiphong expressway was opened to traffic in early December 2015 after more than seven years of construction. To help the BOT developer recoup its investment capital of $2.08 billion, the government has permitted Vidifi to collect the toll on National Highway 5. In the initial period after the expressway was put into use, the developer was reported to bear daily interest payments of VND8 billion ($366,000). The developer estimated that only after 16 years of use, the toll collection on National Highway 5 would balance the interest payments. Meanwhile, it would take an estimated 30 years to recover the investment capital.

According to Vidifi, the project’s recently-approved financial plan would fail if Vidifi was not allowed to raise the toll level on National Highway 5. In addition, the toll revision aims to make good on Vidifi’s promise with an undisclosed business partner who will be involved in the transfer of part of the BOT expressway contract.

Lower tariffs raise Korean investment

Many South Korean firms are boosting their investments into Vietnam, and raising their imports thanks to tariff slashes under the Vietnam-South Korea Free Trade Agreement.

Since its establishment early this month, the Vietnam- South Korea FTA Support Centre in Hanoi has already helped several South Korean firms set up businesses here to benefit from the Vietnam-South Korea Free Trade Agreement’s (VKFTA) import tariff cuts.

“South Korean firms are coming to Vietnam in great numbers, and are interested in various projects here using materials imported from South Korea,” said Choi Dae Kyu, a tax specialist from the centre.

Park Juno, marketing director of home appliance maker Happy Cook, said that the VKFTA would enable this firm to import more goods from South Korea into Vietnam at much cheaper prices.

For instance, the import tariff of electric cookers would be 0 per cent over the next eight years, instead of 16 per cent as it is now.

In another case, Cuckoo Electronics, which is one of South Korea’s leading businesses in home appliances, began preparations for seizing the VKFTA opportunities by opening its first store in Ho Chi Minh City in July 2014. The firm opened a second store in Hanoi later that year, and had plans to open more outlets nationwide to import more goods from South Korea into Vietnam.

Vu Ba Phu, director of the Ministry of Industry and Trade’s Planning Department, said that since early this year, the number of South Korean firms entering Vietnam rose 18 per cent year-on-year.

Under the VKFTA, officially signed in May 2015 and taking effect last December, Vietnam pledged to reduce import duties by 92.4 per cent for many South Korean products such as textiles, garments, plastic materials, electronic spare parts, and vehicle components (see table for example). Crucially, this import duty reduction will be carried out over a 15-year period.

“Many South Korean firms have and will continue investing in Vietnam, in many sectors covered in this VKFTA,” Hong Sun, general secretary of the Korea Chamber of Business in Vietnam, told VIR. “It is also because Vietnam’s production and labour costs are lower than in other nations. Vietnam’s workers are also skillful.”

Early this month, the Mekong Delta city of Can Tho Export Processing and Industrial Zones Management Authority licensed South Korea’s Tae Kwang Industrial for a $172 million project at the city’s Hung Phu 2B industrial park. This 62-hectare, 50-year-long project will develop the park’s infrastructure works and build a factory to produce sports shoes. This project will begin the first-stage construction during 2016-2019, with operations starting next year.

Also early this month, the southern province of Binh Duong People’s Committee licensed South Korea’s Lumens Vina for a $30 million project to manufacture light-emitting diode lamp bulbs.

However, Kyu said that in order to benefit from the VKFTA, enterprises from both sides would have to meet strict requirements on product origins, meaning products exported to Vietnam must have materials made in South Korea, and vice versa.

Regulations slow liberalisation plans

Interest rate liberalisation is an important part of financial reform, promoting safer and more efficient financial markets. It has three components: the introduction of market-driven, competitive deposit rates; the establishment of a legal structure that allows banks to default; and a deposit insurance scheme.

Allowing weak credit institutions (CIs) to go bankrupt would remove the implicit government guarantee on CIs, thereby creating for depositors a need for more accurate and insightful counterparty risk analysis, in addition to the details of benefits offered. As a counterbalance, a deposit insurance scheme would protect the interests of depositors, contribute to ensuring national financial system stability, and build a fair market for financial institutions of different scales and levels of development, so as to strengthen public confidence in the CI system.

In our article last week in the Vietnam Investment Review, we highlighted a number of benefits to scrapping deposit interest rate caps. In this article, we review the other two components of interest rate liberalisation, as they would apply in Vietnam.

The 2014 Bankruptcy Law replaced the 2004 Bankruptcy Law and 2010’s Decree 05 on the law’s application to CIs, and was enacted to overcome the shortcomings that became apparent in the course of implementing the previous regulations, while also creating new mechanisms to process bankruptcy more efficiently and better protect the rights and legitimate interests of the parties concerned. Fundamental points of the new 2014 Bankruptcy Law included provisions on the bankruptcy of CIs, which set up mechanisms that were suitable for handling such bankruptcies, covering the full range of content needed to conduct CI bankruptcy proceedings.

More recently, earlier this year, leaders of the State Bank stated that it would consider implementing bankruptcy procedures against weak finance companies and credit funds to create norms for the market, as well as to warn bankers regarding the responsibilities of their operations. The current Deposit Insurance Law was passed by Congress in 2012, and came into effect from 2013. Deposit Insurance of Vietnam (DIV), however, had been in operation since 2000, and remains the only organisation in Vietnam engaged in deposit insurance.

Under current regulations, only deposits in VND are covered, and the maximum insurance coverage for every person or organisation is VND50 million ($2,290) should a bank fail. This raises some significant issues. First, the payment limit of the current insurance scheme is considered too low. International practice places the optimal payment limit in a range from 2.5 to 5 times the per capita GDP in order to fully cover 80 per cent of deposit accounts. These limits are calculated in line with the objectives for, capacity of, and requirements imposed on deposit insurance organisations. As of June 30, 2011, Vietnam’s limit of VND50 million would fully cover only 10.23 per cent of deposit accounts, and in 2015 it represents only 1.1 times the per capita GDP.

Second, the deposit insurance charges are currently equal for all insured banks, at 0.15 per cent of insured balances, regardless of the stability or operational safety of the bank. Equal deposit insurance premium rates create dependence, discouraging banks from operating more securely to enjoy lower-cost deposit insurance, and promoting an appetite for higher risks in banking operations. In many developed countries, deposit insurance fees include two components – a fixed charge and a charge based on risk assessment. The risk-based charges have the advantage of equal treatment between CIs, and contributing to limiting risk – especially moral hazard – in banks. This needs to be implemented soon.

In short, in addition to the current policy of the authorities, there are two further issues related to deposit insurance that need to be solved before Vietnam can completely liberalise interest rates.

Domestic developers look for financial alternatives

Threatened by the government’s initiative to introduce lending limits, real estate developers are seeking new financial sources for their projects instead of depending on bank loans or deposits from buyers.

Steven Chu Chee Kwang, CEO of Nam Long Corp, a company that specialises in raising financing from foreign partners, said that Vietnam’s capital market must be better developed in order to support the country’s economic development, especially that of the real estate sector, which normally needs to have medium- to-long-term financing.

According to Chu, most financing still relies on the banking system, and fund-raising via the stock market is not significant.

Moreover, if the State Bank’s draft to replace Decree 36 on credit tightening is approved, it could have a detrimental effect on the real estate sector, increasing the risk index to 150-250 per cent, and might cause the maximum ratio of short-term funds used for medium- and long-term loans to drop from 60 to 40 per cent.

“The government needs to facilitate foreign investment into the real estate market by increasing access to the land bank without the burden of complex land clearance issues. It also needs to address concerns over quality speculation and state property policies,” Chu suggested.

Vo Sy Nhan, general director of real estate fund Gaw NP Capital, said that the financial arrangement for projects was the primary factor which every developer must be aware of.

“Vietnamese developers must research and investigate how to raise funds and diversify financial resources for their projects, instead of depending mostly on bank loans and the mobilisation of buyers,” Nhan said at the Ho Chi Minh City conference on finding financial resouces for the real estate market on March 9.

Financial flows to the projects would be strongly impacted by banking policy changes, Nhan said, adding that 80-90 per cent of current developers were depending on bank loans.

In Vietnam, real estate projects are now depending on three main sources: buyers, IPOs of developers, and calling on other investors to join the investment.

However, Nhan said that as a source IPOs were largely dependent upon the prestige and transparency of developers, while outside sources remain comparatively small.

“Domestic developers are less advanced because they have restricted access to foreign financial resources, which are abundant elsewhere in the world. Clearly, the most important thing is to find suitable resources for their own projects,” Nhan said.

Nhan suggested that developers should source capital reserve funds of governments, or from large-scale international financial institutions.

He added that one of the major disadvantages for projects here was that they are typically implemented over many years, while the majority of fund managers were only looking for short term investments. “They jump in and out very fast,” Nhan said.

Su Ngoc Khuong, investment director from Savills Vietnam, agreed with Nhan, noting that instead of using bank loans and buyer credit, many developers were diversifying their financial resources by co-operating with foreign investment funds to share experience as well as financing costs.

“The range of mergers and acquisitions in the Vietnamese real estate market has proved this trend,” Khuong said.

The real estate business is the most capital intensive investment—up to billions of US dollars over a long term period—therefore, developers must have a long-term financial plan in order to develop sustainably, Khuong said.

The experts also mentioned a type of fund raising which has recently been initiated in Vietnam for real estate projects—the Real Estate Investment Trust (REITS).

Loose monetary policy needed to reduce interest rates

Experts have suggested the central bank should further loosen its monetary policy to reduce lending interest rates in a move to support businesses.

After hitting a two-year high of 8.35 per cent per year recently, the interest rate still shows no sign of cooling down, undermining the country’s efforts to help the economy recover over the past year.

Experts from HSBC and Vietcombank’s Securities Co have forecast that the lending interest rate will increase by some 50 basis points this year.

Lê Xuân Nghĩa, director of the Business Development Institute, was concerned, saying if the interest rate increases again, all the country’s efforts to restore the economy could fail.

Former central bank governor Lê Đức Thúy also said hikes in interest rates may limit businesses in Việt Nam from expanding this year. Interest rates went up at the end of 2015, and this trend is continuing into 2016 as banks face liquidity troubles.

Rates continue to climb, possibly by 1-2 per cent this year compared with the average in 2015. Thus, it is obvious that enterprises cannot expand operations normally as they did last year, Thúy said.

Thúy estimated that increases in deposit rates could raise the average long-term lending rate to 11 per cent per year, while a number of loans could bear higher rates as well.

Commercial banks have so far attributed the interest rate hike to anticipated increases in inflation, higher capital demands and the review of Circular 36, which may reduce the percentage of short-term capital used for medium- and long-term lending to 40 per cent from the current 60 per cent.

However, experts identified G-bonds as the main cause of the interest rate hike.

According to Nghĩa, the market’s interest rate curve depends on the interest rate of G-bonds.

Other interest rates cannot go down when the interest on G-bonds goes up, Nghĩa said, adding that commercial banks have poured more money into G-bonds, which have a high interest rate and zero risk. Currently, banks hold some 80 per cent of the total outstanding G-bonds.

Bùi Quốc Dũng, director of the Monetary Policy Department under the State Bank of Việtnam, also named G-bonds as one of the major factors that exert pressure on interest rates.

According to Dũng, the yields of five-year G-bonds last year soared to nearly 7 per cent per year from 5.5 per cent earlier, coupled with a higher issuance volume this year. This will weigh heavily on medium- and long-term interest rates.

To reduce interest rates, Nghĩa suggested the central bank should loosen its monetary policy by reducing the compulsory reserve ratio and restricting the issue of bills to withdraw money.

The central bank should also actively take part in the inter-bank market to stabilise the market’s interest rate, Nghĩa said.

Besides, Nghĩa said, the government should adopt strict measures to reduce the budget deficit, which will help reduce mobilisation through G-bonds.

However, if the monetary policy is further loosened, money must be controlled to flow into the right industries to help the economy further recover, while successfully controlling inflation, Nghĩa said.

Experts also expected the Circular 36 draft to reduce pressure on capital and interest rates for domestic commercial banks as the regulation could allow joint venture and wholly foreign-owned banks in Việt Nam to use up to 35 per cent of their short-term funding to buy G-bonds, a considerable rise from the current 15 per cent.

Da Nang warns about risks of new malware

The central city’s information and communications department has issued an alert over a computer virus called Ransomwar, after new viruses affected personal computers of several businesses early this month.

The department said a hacker would send a fake email attached with the virus to users through an agency’s email system. The virus then decodes all information of the computer users on the database, blocking their access to the database.

The department said users should not open suspect and strange emails and messages, and should regularly update their anti-virus software programmes.

Experts also said cyber attacks would increase and affect security and business activities, and aid crimes via emails.

The central city has been developing a cyber security programme for more than 600 information technology businesses and 5,000 staff.

Last October, the website of the city’s education and training department was hacked. The department needed a week to regain control over its website.

Da Nang launched the city’s e-government system in 2014, including a Metropolitan Area Network (MAN), wireless Internet, data centre and a centre for human resource training and research on IT applications, with 1,196 online administrative procedures.

The city is ready to implement 4G LTE (long-term evolution) and the Internet of Things by 2018.

According to IT experts, only a third of the agencies and enterprises in Viet Nam have set regulations for information security, while 57 per cent of the corporations didn’t have funding for their information security programme upgrade or development.

Made in Vietnam electronics, telephones sought after in EU

The EU was the biggest importer of telephones and electronics made in Vietnam in the first two months of this year, accounting for 32.1% of their total export revenue.

The General Department of Vietnam Customs reported the EU imported US$1.51 billion worth of telephones and components and US$2.31 billion worth of computers and electronics from Vietnam in the period.

The United Arab Emirates ranked second among importers of telephones and components made in Vietnam with a value of US$639 million, trailed after by the US (US$547 million) and the Republic of Korea (nearly US$295 million).

The country’s telephone and component exports grew by 7.6% to US$2.44 billion in February while imports rose 13% to US$4.71 billion in the first two months of this year.

Meanwhile exports of computers, electronics and components reached US$1.05 billion in February, down 16.4% against the previous month, bringing the total export value in two months to US$2.31 billion, up 4.4% over the same period last year.

Regulations slow liberalisation plans

Interest rate liberalisation is an important part of financial reform, promoting safer and more efficient financial markets. It has three components: the introduction of market-driven, competitive deposit rates; the establishment of a legal structure that allows banks to default; and a deposit insurance scheme.

Allowing weak credit institutions (CIs) to go bankrupt would remove the implicit government guarantee on CIs, thereby creating for depositors a need for more accurate and insightful counterparty risk analysis, in addition to the details of benefits offered. As a counterbalance, a deposit insurance scheme would protect the interests of depositors, contribute to ensuring national financial system stability, and build a fair market for financial institutions of different scales and levels of development, so as to strengthen public confidence in the CI system.

In our article last week in the Vietnam Investment Review, we highlighted a number of benefits to scrapping deposit interest rate caps. In this article, we review the other two components of interest rate liberalisation, as they would apply in Vietnam.

The 2014 Bankruptcy Law replaced the 2004 Bankruptcy Law and 2010’s Decree 05 on the law’s application to CIs, and was enacted to overcome the shortcomings that became apparent in the course of implementing the previous regulations, while also creating new mechanisms to process bankruptcy more efficiently and better protect the rights and legitimate interests of the parties concerned. Fundamental points of the new 2014 Bankruptcy Law included provisions on the bankruptcy of CIs, which set up mechanisms that were suitable for handling such bankruptcies, covering the full range of content needed to conduct CI bankruptcy proceedings.

More recently, earlier this year, leaders of the State Bank stated that it would consider implementing bankruptcy procedures against weak finance companies and credit funds to create norms for the market, as well as to warn bankers regarding the responsibilities of their operations. The current Deposit Insurance Law was passed by Congress in 2012, and came into effect from 2013. Deposit Insurance of Vietnam (DIV), however, had been in operation since 2000, and remains the only organisation in Vietnam engaged in deposit insurance.

Under current regulations, only deposits in VND are covered, and the maximum insurance coverage for every person or organisation is VND50 million ($2,290) should a bank fail. This raises some significant issues. First, the payment limit of the current insurance scheme is considered too low. International practice places the optimal payment limit in a range from 2.5 to 5 times the per capita GDP in order to fully cover 80 per cent of deposit accounts. These limits are calculated in line with the objectives for, capacity of, and requirements imposed on deposit insurance organisations. As of June 30, 2011, Vietnam’s limit of VND50 million would fully cover only 10.23 per cent of deposit accounts, and in 2015 it represents only 1.1 times the per capita GDP.

Second, the deposit insurance charges are currently equal for all insured banks, at 0.15 per cent of insured balances, regardless of the stability or operational safety of the bank. Equal deposit insurance premium rates create dependence, discouraging banks from operating more securely to enjoy lower-cost deposit insurance, and promoting an appetite for higher risks in banking operations. In many developed countries, deposit insurance fees include two components – a fixed charge and a charge based on risk assessment. The risk-based charges have the advantage of equal treatment between CIs, and contributing to limiting risk – especially moral hazard – in banks. This needs to be implemented soon.

In short, in addition to the current policy of the authorities, there are two further issues related to deposit insurance that need to be solved before Vietnam can completely liberalise interest rates.

VEF/VNA/VNS/VOV/SGT/SGGP/Dantri/VET/VIR

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