2016 was a successful year for Vietnam, with it continuing its emergence as both a leading ASEAN economy and a global player. 

Falling commodity and energy prices and severe water shortages early in the year resulted in failure to reach its goal of 6.7 per cent GDP growth, but with 6.2 per cent the country still managed to outpace most of its neighbors. 

For 2017, the government has set a GDP growth target of 6.7 per cent, while growth levels for subsequent years are expected to reach levels of at least 7 per cent. 

This growth will be fueled in large part by increased trade. 

While the Trump presidency resulted in a setback due to the US’s withdrawal from the TPP, Vietnam continues to diversify its economic partners, such as through increased ASEAN integration, the proposed Regional Comprehensive Economic Partnership (RCEP), covering 3.4 billion people and which may emerge as an alternative to the TPP), and the EVFTA. 

The country is becoming increasingly more attractive for foreign investments, as it keeps giving new reasons to invest. 

Here we analyze Vietnam’s trade in 2016 and identify trends and opportunities for foreign investment in 2017. 

FDI in 2016: Numbers and partners 

♦ FDI inflows reach new heights 

As Vietnam becomes increasingly accessible to foreign direct investment (FDI), inflows have seen a steady and strong increase in recent years. 

In 2016, these climbed to $24.4 billion, for 9 per cent growth compared to 2015. 

Of these, $15.1 billion went to 2,556 newly-registered projects, 1,225 existing projects added a total of $5.76 billion to their capital, and foreign investors purchased stakes in 2,547 companies for a total value in excess of $3.4 billion. 

♦ FDI sources: Pan-Asian investments 

South Korea was the main source of FDI in 2016. investing over $7 billion in Vietnam, largely by LG. In total, investors coming from 95 countries capitalized on investment opportunities in Vietnam. 

Most investments came from within Asia; the only non-Asian country in the Top 10 of FDI sources was the British Virgin Islands.  

♦ Trade surplus in 2016: EU, US main export destinations 

Looking at international trade, Vietnam managed to grow its exports by 8.6 per cent in 2016, following an impressive 29 per cent in 2015. Consequently, it turned a trade deficit into a trade surplus, of $2.1 billion; the highest in six years. 

With the increased trade - exports and imports totaled $176.57 billion and $174.47 billion, respectively - the country’s export-to-GDP ratio is currently standing around 90 per cent; one of the highest in the world. 

Top export destinations in the first seven months of 2016 were the US (22 per cent), China (11.2 per cent), ASEAN (9.9 per cent), Japan (8.2 per cent), and South Korea (6.2 per cent), while imports were mainly from China (28.9 per cent), South Korea (18.5 per cent), ASEAN (14 per cent), and Japan (8.6 per cent). 

The EU as a bloc is one of the largest export markets as well. 

Similar to the country’s trade with the US, Vietnam’s trade balance with the EU is highly positive. 

Industries and locations 

2016 saw the further establishment of Vietnam as a main manufacturing hub, with the majority of FDI flowing into the manufacturing and processing sector, at 63.7 per cent of the total ($15.5 billion). Automobile and motorbike wholesale (7.8 per cent) and the real estate sector (6.9 per cent) followed suit. 

Ho Chi Minh City was the main recipient of FDI, accumulating $3.4 billion (14 per cent) of total inflows. Other popular destinations were Hai Phong, Hanoi, Binh Duong, and Dong Nai, which received FDI totaling $3 billion, $2.8 billion, $2.4 billion, and $2.2 billion, respectively. 

2017: Emergence of new opportunities 

Vietnam is poised to continue on its current trajectory in 2017. 

After years of significant growth, GDP per capita reached an estimated $2,215 at the end of 2016, an increase of $106 compared to 2015. 

For 2020, the government has set a target of $3,000 per capita. This follows the general trend within Vietnam, where the middle class is slowly becoming more populous. 

Standing at 16 million in 2014, the population within or above the middle class is expected to double to 33 million by 2020, according to the Boston Consulting Group.

Combining this with a young and large workforce that is increasingly becoming high-skilled, there are no signs of Vietnam slowing down in the foreseeable future. 

Vietnam’s growth pattern shows striking similarities with China’s development a decade ago. 

Similar to China during that time, new opportunities appear as the growing emerging middle class has more disposable income at hand. 

As such, now is a better time than ever to enter the market and capitalize on opportunities arising from increased local consumption. 

With a large demand for foreign expertise, this brings opportunities in several sectors, including education, healthcare, food and beverages, and e-commerce, among many others. 

Having said that, it is important to realize that certain sectors have restrictions in place on FDI, while import and export regulations in Vietnam also vary from other countries. 

Despite increased domestic consumption, there are still many areas requiring large investments, to catch up with regional standards. 

For example, opportunities prevail in the infrastructure sector. Ho Chi Minh City’s congestion is increasingly becoming more problematic and the city is desperate to improve this situation in the coming years. 

Another example is renewable energy, the development of which is expected to lift-off in the years to come. 

These types of projects are frequently open to private investors through public-private partnerships, giving them the opportunity to become involved in public projects through extensive cooperation with public institutions. 

Primarily, however, Vietnam has definitively established itself as a manufacturing hub. 

As wages in China have reached a point where manufacturers are moving elsewhere, Vietnam remains highly competitive, with minimum wage levels ranging from VND2.58 million to VND3.75 million ($113 to $165), depending on the region. What puts Vietnam a few steps ahead of its competitors is its openness. 

Besides the country’s integration with ASEAN and the FTAs resulting from the bloc, it has also signed the EVFTA, deepening its ties with its largest non-Asian trading partner. 

And while the US has pulled out of the TPP, Vietnam has been quick to make sure its growth in global trade will not stagnate, by shifting its focus to the proposed RCEP. 

As such, it is set to see a continued flow of investment coming into the country’s garment and electronics manufacturing, among others. 

Setting up manufacturing facilities in Vietnam requires in-depth information on the various regions in the country. 

With special economic zones in place that often offer incentives to foreign investors, choosing the right location can result in significant tax exemptions. 

For example, export processing enterprises located within export processing zones are exempt from paying customs duties and VAT on exports, while operating in an industrial zone can also lead to various tax incentives. 

Ease of doing business 

The trajectory of Vietnam is highly encouraging. As a result, the country’s ease of doing business - while still leaving room for improvement - is developing. 

According to the World Bank’s “Doing Business in 2017” research, Vietnam ranked 82nd out of 190 countries, up nine positions from 2016. This can largely be attributed to the government’s efforts. 

Besides its involvement in the abovementioned FTAs, it is also actively equitizing its State-owned enterprises (SOEs). 

A recent study by Baker McKenzie estimates that initial public offering (IPO) activity in the coming years will see a surge, steadily rising from $172 million in 2016 to $948 million in 2019. Since 2015, nearly 170 companies have been equitized and this trend will continue in the future. 

For example, Sabeco, a beer maker with an estimated value of $2 billion, is set to be equitized this year and many other large SOEs will follow soon after. 

While this creates many opportunities for foreign investors, one should always be aware of the difficulties in the country and in complying with local laws. 

As Vietnam is undergoing rapid development, regulations are frequently updated and it is key to stay abreast of current regulations. 

That being said, these regulatory updates more often than not encourage, not discourage, more FDI. 

Over recent years, Vietnam has continued to provide investors with good reasons to invest in the country, and there is no reason to expect that it will cease doing so in 2017. 

VN Economic Times