Foreign indirect investment (FII) will no longer be the main driver of foreign capital attraction in the second half of 2018. Then what will be in place of it?

A high-class product launch by a foreign-invested enterprise in Vietnam. Despite a surplus of US$3.3 billion in the first half of 2018, Vietnam’s trade balance tends to be negative in the later part of the year, when the demand for imports goes up. Thus, FDI is believed to be the most hopeful 

In the first six months of this year, the State Bank of Vietnam (SBV) bought over US$12 billion, enlarging the nation’s foreign exchange reserves to US$63.5 billion, said the central bank’s governor at a teleconference between the central and local governments on July 2 in Hanoi (1). 

The forex reserves could have risen to over US$65 billion by the end of July, as some US$2 billion in forward purchases became mature in July.

The SBV’s net buying of US$11 billion in the first half of 2018 versus only US$13 billion in the whole of 2017 has complicated the local financial market. 

Government bond yields have dropped to a record low, 3% per annum for the five-year term, roughly equal to the U.S. rates. 

The reason is the liquidity of the whole system has been wildly excessive, nearly VND300 trillion at some points. 

The excess comprises the cash banks deposit at the SBV after provisions have been made, that which the State Treasury places at the SBV and commercial banks, and that which the central bank uses to buy treasury bills. 

In addition, the central bank has twice revised down the buying rates since the foreign currency supply has been constantly large. 

The massive inflow of foreign capital brought about a 20% increase in the VN-Index in the first quarter. This coupled with the growth rate of 48% in 2017 makes Vietnam the fastest growing market in the world.

FII as the main driver

The US$11 billion figure is a result of several factors, among which FII is the main driving force. Foreign investors have poured billions of dollars into the offerings by Vietnamese enterprises. 

The most prominent case is the US1.3-billion deal involving Vinhomes on the stock market on May 18. The total value of shares Vinhomes sold to foreigners, both on and off the exchange, was more than US$2 billion, equivalent to 15% of this realty developer’s charter capital. 

Another typical case is that in which foreign investors pay over US$1.3 billion to acquire more than 257 million shares of Techcombank, or a 22% stake. Furthermore, a series of mergers and acquisitions (M&A) have taken place on the real estate market.

Foreign players in the first six months invested US$4.1 billion in Vietnamese firms, up 82.4% over the same period of 2017, according to the General Statistics Office. 

Aside from FII, many other channels continued to lure foreign funds into Vietnam. Foreign direct investment (FDI) amounted to US$8.4 billion, a rise of 8.4% year-on-year. 

The trade balance was positive with surplus worth US$3.3 billion. Another source of foreign capital was tourism when the number of international tourist arrivals surged 27.2%.

What will be the main driver of foreign capital attraction in H2?

The global financial markets have changed dramatically after the Federal Reserve System of the U.S. implied there will be two more rate hikes in 2018. 

Along with that, the Trump Administration has constantly exerted trade pressure on many other countries, particularly China. 

Rising U.S. interest rates, together with fears of sagging economic growth in many developing nations, have prompted global capital flows to move back to the U.S. 

A series of currencies have sharply fallen against the U.S. dollar as investors stepped up the sale of stocks and bonds to obtain the greenback. 

Depreciating domestic currency and surging interest rates have been the case in many countries such as Argentina, Indonesia, the Philippines, Italy and Turkey.

Vietnam is no exception. Foreigners were net sellers on the stock market in May, June and the first half of July. 

Besides, many much-anticipated deals such as the offerings by Genco 3, Binh Son Petrochemical, PVOil or BIDV are unlikely to take place in the near future. That said, FII will no longer be the main driver of foreign capital attraction in the second half of 2018.

What will be the main driver?

To address this question, it is first necessary to examine what the overall balance is made of. It consists of the balance of trade in goods and services, investment (direct and indirect) and remittances. 

Overseas remittances have been stable posting a compound annual growth rate (CAGR) of 6.6% per annum during 2012-2017. Despite the surplus of US$3.3 billion in the first half of 2018, the trade balance tends to be negative in the later part of the year, when the demand for imports goes up. Thus, FDI is believed to be the most hopeful.

And the hope is strengthened as foreigners pledged to invest more than US$7 billion in June alone. 

This is largely attributed to the US$4.1-billion smart city project in Dong Anh (Hanoi) and the South Korean-invested project for developing a polypropylene (PP) factory and an underground liquefied petroleum gas (LPG) storage with registered capital of US$1.2 billion.

However, experts are not absolutely optimistic about such figures. It is because the disbursements will mainly be used to import machinery and equipment for the projects. 

Consequently, no new driving force has emerged, which may help Vietnam attract foreign capital as strongly as in 2017 and the first half of 2018. 

Though the overall balance was positive with surplus worth nearly US$9 billion in the first six months of this year, there is no guarantee that it won’t shift to the negative territory in the second half.

SGT