Vietnam has seen a boost from investment moving out of China, significantly increasing its foreign direct investment levels. Peter Janssen (The Banker) looks at how international and domestic banks are grabbing a share of this growing business.
Shinhan Bank Vietnam finds itself in an enviable position. The South Korean bank was one of the first to open a representative office in Vietnam, in 1993, following in the footsteps of one of its main corporate clients, Taekwang Group, which had the previous year relocated some of its shoe production from Busan to Ho Chi Minh City to supply Nike.
“That was a big decision,” says Shinhan head of risk management Ryu Je Eun. “That’s why we are here, but we didn’t expect the very strong development of Vietnam you see now. How could we foresee the current situation?”
After seeing the country’s stock market crash by 80% in 2008 to 2009, the dong plummet 25% between 2010 and 2012, and property prices tumble in 2011 leading to a non-performing loans crisis, Vietnam now seems poised to soar. Gross domestic product (GDP) growth averaged 6.5% between 2013 and 2017, jumped to 7.1% in 2018 and is expected to grow by at least 6.8% in 2019, strengthened by domestic consumption and manufacturing, much of it controlled by foreign direct investment (FDI). Inflation was about 2.7% in the first quarter of 2019. Foreign exchange reserves in the first quarter of 2019 reached $65bn, equivalent to three months of imports.
FDI finds Vietnam
Vietnam is currently the hot topic in south-east Asian FDI. In the first five months of 2019, FDI projects disbursed $7.3bn into the economy, up 7.8% year on year. Total disbursements in 2019 are expected to reach $15bn. New FDI projects approvals hit $6.5bn in the same period (up 38.7% year on year), helped in part by spillover from the US-China trade tussle.
The tensions are forcing foreign investors, especially from Japan, South Korea and Taiwan, to seek alternative production bases to China. Even Chinese firms are moving to Vietnam, with Chinese projects accounting for $1.6bn in approvals in Vietnam during the first five months of 2019. But this trend was arguably under way even before US president Donald Trump played his tariff hike card with Beijing.
“The Japanese, South Korean and Taiwanese, with the encouragement of their own authorities, are all looking in the direction of south-east Asia and that’s primarily because their domestic markets are facing very low levels of growth,” says Jonathan Cornish, head of bank ratings, Asia-Pacific, at Fitch Ratings. South Korean companies, whose collective registered capital FDI is the highest in Vietnam, making up $64.8bn (accounting for 18.5% of the total investment capital), have been betting on Vietnam for decades, and look likely to increase their commitments in the coming years. South Korean electronics giant Samsung accounts for nearly 25% of Vietnam’s total exports.
“Korean companies were coming here even before the trade war, due to rising labour costs in China and the discrimination against South Korean companies in China,” says Shinhan’s Mr Eun. “They are reducing their China business as there is no more motivation to stay in China. In south-east Asia, Myanmar is too early, Cambodia is not ready, Indonesia is politically unstable and Thailand is too expensive, so I think Vietnam is the favourite destination for South Korean companies.”
Vietnam’s factory workers’ salary rate is one-third that of China’s, about half of Thailand’s and is still lower than in Indonesia or the Philippines. Unlike countries such as Thailand, faced with a rapidly ageing population, about 75% of Vietnam’s 97 million population are under the age of 54, and 75% of the workforce is still employed in agriculture, suggesting a huge untapped rural workforce to lure into the manufacturing sector.
Benefiting from trade
There are already repercussions from the US-China trade dispute spillover. According to US trade data, imports from Vietnam surpassed $25bn in the first five months of 2019, up 36% year on year, much of it accounted for by new FDI-avoiding tariffs on Chinese imports. Vietnam ranks eighth in exports to the US market and has already drawn Washington’s attention. In an interview with the Fox Networks, Mr Trump singled out Vietnam as “almost the single worst abuser of everybody…Vietnam takes advantage of us worse than China”. So could times be tough for Vietnamese exports to the US in the Trump era of trade friction?
“All the investment that is coming into Vietnam is only likely to increase the bilateral trade surplus with the US and put it in the firing line,” said Stephen Schwartz, head of Asia-Pacific sovereigns at Fitch Ratings, speaking at a Fitch-hosted conference in Hanoi. Mr Trump has to be factored into Fitch’s sovereign ratings in the current environment. “One of the risks we apply to sovereigns is the very erratic and unpredictable nature of policy-making under the current US administration,” said Mr Schwartz. “US trade policy is at the top of our worry list. Vietnam’s trade surplus with the US ranks sixth globally.”
That said, Vietnam has diversified its export markets both in terms of products and geography. The country joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPATPP), which rose out of the ashes of the Trans-Pacific Partnership initiated by former US president Barrack Obama, but was ditched by Mr Trump. The CPATPP will reduce import tariffs on Vietnamese goods in important markets such as Australia, Canada and Japan. On June 30, Hanoi signed the EU-Vietnam Free Trade Agreement, which will reduce tariffs on 71% of Vietnamese products over a seven-year period, while reducing tariffs on 65% of European imports. During 2018, the EU accounted for 19% of Vietnamese exports, while North America received 21.8%.
Such trade agreements, along with Vietnam’s membership of the Association of South-East Asian Nations Free Trade Agreement, will allow participants to benefit from the impending uplift in Vietnam’s domestic market, which is arguably at a tipping point. Vietnam’s GDP per capita per annum now stands at $2500, close to the $3000 level that economists look out for. “For some reason in emerging markets the $3000 figure seems to be some sort of magic level where everything starts accelerating and feeding on itself,” says Michael Kokalari, chief economist for VinaCapital, a leading private equity fund in Vietnam.
Foreign bank opportunities
Vietnamese banks are already tapping the vast potential of retail banking in Vietnam but foreign banks are also keen to jump in. “I think the FDI sector and small and medium-sized enterprise [SME] sector are growing faster than the average GDP, because the state-owned enterprise sector is not growing fast,” says Nirukt Sapru, CEO of Standard Chartered Bank (Vietnam).
Standard Chartered is one of nine foreign banks to have been granted a licence to operate a 100%-foreign owned bank in Vietnam. While its strengths are in leveraging its international network to arrange mergers and acquisitions and corporate finance, it is also interested in Vietnam’s emerging SME sector.
“We see it as an exciting opportunity [in SME lending],” says Mr Sapru. “We believe that the differential point for us is our network and our role as facilitator connecting Vietnam to the world and connecting the world to Vietnam. The value proposition we bring to them is clearly our network, and our network is not just our international network but includes our Vietnamese network.”
Shinhan Bank Vietnam is also balancing its corporate banking with retail banking in Vietnam. After trying to penetrate retail banking on its own since 2013, in December 2017 Shinhan bought out the retail operations of ANZ, one of the true pioneers in the Vietnam market since 1993.
“[ANZ] had a platform, an organisation, people that Shinhan didn’t have at the time – risk management, agents,” says Mr Eun. “If we had built it up ourselves it would have cost a lot.” The $240m ANZ purchase has allowed Shinhan to become a player in Vietnam’s retail market, targeting the more affluent end of the population. “Currently our portfolio is about 50/50 corporate to retail lending, from zero retail [in 2013] to 50% retail now,” says Mr Eun.
Foreign banks are also using their partnerships with local banks to lend to FDI projects. “One thing that does not get widely discussed regarding Vietnam’s large FDI inflows is how much of the money needed for multinationals to set up their factories or other operations in Vietnam is borrowed locally,” says VinaCapital’s Mr Kokalari.
“This gives foreign banks further motivation to either acquire a local banking licence or to form a solid strategic investor relationship with local banks, to fulfil the financing needs of their home country clients in Vietnam. The partnership between Japan’s Mizuho and Vietcombank is probably the most prominent example of such an arrangement.” Mizuho Corporate Bank holds a 15% stake in Vietcombank, one of the ‘Big Four’ state-run banks in Vietnam.
Some Vietnamese banks are also cashing in on the FDI influx, such as Techcombank, but selectively so. “There are three kinds of FDI and we only service one – the FDI here that invests with overseas money using local resources for local consumption,” says Techcombank CEO Nguyen Le Quoc Anh.
The other two kinds of FDI – first using overseas money and local resources for exports, and second using overseas money and overseas resources for exports – are deemed too volatile and capital-intensive for Techcombank, whose lending policy is to focus on domestic consumption. “For example, [take] Samsung air conditioners. Most of the production is for in-country consumption and is using in-country resources so we service that,” says Mr Quoc Anh. “Techcombank is one of the biggest banks servicing the supply chain for Samsung in Vietnam.”
That supply chain, comprised of mostly local Vietnamese companies, is arguably just the kind of development Vietnam requires in the future. FDI companies accounted for $70.4bn in exports (70% of Vietnam’s total) and $52.9bn in imports (57% of the total) during the first five months of 2019. “In China there are a lot of backward linkages with the FDI. Here you don’t have that. The FDI comes in full block, bringing in the banks, their suppliers, everything,” says World Bank lead financial sector specialist in Vietnam, Alwaleed Alatabani.
Communist Vietnam has in the past neglected its domestic private sector, promoting state-owned enterprises instead, but sources say there is growing recognition that the private sector is crucial to the economy. “There is a keenness to develop the private sector,” says Mr Alatabani. “The question is how?”
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