Writer: WITTAYA SUPATANAKUL
For the past decade, Vietnam has been one of the most attractive countries for investment, with its fast-growing economy, large and inexpensive workforce, abundant resources and raw materials, as well as privileges for investors. Despite drawbacks such as lack of infrastructure, the determined government has managed to lure large investors with generous tax benefits and other incentives.
However, in light of a domestic economic crisis in 2007 and the current global slowdown, many wonder whether Vietnam can still work its magic.
The Pho crisis: The mid-2007 shock, named after the national cuisine, was caused by various factors such as high inflation and the trade deficit, a weak currency and exchange-rate speculation, and rising savings interest rates. Its stock market index fell by 68%, from 1,170 to 370 points, while property prices plummeted by 30-50%.
However, with centralised authority under the one-party system and sound decisions by policymakers, Vietnam bounced back impressively. The exchange rate stabilised and interest rates came down to a reasonable 7% for savings and 10.5% for loans from 18-21% earlier.
Increased import taxes on luxury products, such as cars (from 60% to 83%), cut inflation from 23% to 10.27% in just one year. Although slow, property and stocks have been recovering, with the index rising from 370 points in March 2007 to 458 in July this year.
The Hamburger crisis: Not long after suffering its home-brewed crisis, Vietnam was hit hard by the global economic downturn that originated in the United States. The “Hamburger crisis”, however, seems to have caused less damage in Vietnam, even though it derives 70% of its GDP (similar to Thailand) from exports. While the Thai economy contracted by 7.1% in the first quarter, Vietnam’s grew by 3.9% and the government targets 5% for the year.
The Hanoi government is working to alleviate the impact of the crisis. While countries such as Thailand and Taiwan are handing out cash and coupons to consumers to spur spending, Vietnam instead exempted personal income tax for the first six months of 2009, which cost it US$382.7 million.
For the business sector, the government offered industrial SMEs a subsidy of 4% on loan interest to buy raw materials and for working capital for 2009, and subsidised loans to build assets will be extended until 2011. It cut corporate income taxes for SMEs to 30%.
Also helping business has been the managed float of the dong. Each day the central bank sets a rate that commercial banks can adjust up or down by 5%. The bank has lowered the rate by 1-5 dong a day, allowing it to direct the rate to some degree. As result, the dong has weakened 6% against the dollar this year, compared with a 2% gain for the baht.
Investment benefits in Vietnam: The Vietnamese market is a large one, with 86 million people in the country and 3.2 overseas Vietnamese who last year sent US$8 billion back to their relatives at home. Its large workforce of 46.5 million is another significant draw. Hard working and fast learning, Vietnamese workers are considered quality human resources at relatively low wages. Depending on the location, the minimum wages can be $53, $60, or $67 for a 48-hour work week, plus 17% of wages paid to the government for social welfare.
Most importantly, it also offers outstanding tax benefits for foreign entrepreneurs. Public and private companies all pay profit tax of 25%, but the businesses with promotional privileges may pay only 10-20% for up to 15 years. In addition, the entrepreneurs may receive full tax exemption for two to four years, starting from the first year of profit, and another 50% exemption for the next four to nine years.
Investments in undeveloped areas may be exempted from land-lease fees for 11 years, while large projects and certain encouraged businesses, including high-tech, health care and education, may directly request special privileges on case by case basis. Some foreign companies, such as Taiwan’s Formosa Group and the chipmaker Intel, are receiving a tax exemption of 10 years and a low tax rate of 10% for 50 years.
Vietnam seems to have many drawbacks when compared to Thailand. Its lack of infrastructure and supporting domestic industries can increase costs, while laws are often unclear and unreliable due to frequent changes. Businesses also have trouble finding skilled middle and top managers, and face high land and office lease expenses.
However, even with these disadvantages, Vietnam and its incentives have proven irresistible and have secured some large foreign investments. Formosa, for example, is investing in a US$7.9-billion steel smelting plant in the northern province of Ha Tinh, and plans a petrochemical factory that will be worth US$12.4 billion and create 9,000 jobs.
Prospective investors: In general, investors with large projects or businesses encouraged by the government should seriously consider Vietnam. As Thailand is largely discouraging foreign investment in its property sector and China has stopped attracting more SMEs, investors from these two sectors may also find Vietnam a more welcoming place.
Some businesses in labour-intensive industries, such as textiles and apparel, have already moved their production bases from Thailand to Vietnam to enjoy lower costs, while various Thai products, ranging from Red Bull energy drinks to Tiffy flu medicine, have successfully penetrated the Vietnamese market and seem to have a future there as well.
Vietnamese consumers perceive Thai products as having good quality at affordable prices, so Thai producers should not have trouble finding distributors, although they do need a systematic and continuous marketing plan.For more details, investors should consult the Board of Investment or the Thai Business Association of Vietnam at http://www.tbavietnam.org.
Wittaya Supatanakul is a retired general manager of the Vietnam office of Bangkok Bank Plc, where he spent more than 10 years. He and is currently an adviser to the BoI’s CLMV (Cambodia/Laos/Myanmar/Vietnam) projects and an eminent speaker at investment forums regarding Vietnam.