Vietnam has become Asia’s hottest investment destination. Last year the country attracted $17billion in FDI commitments, arguably the largest for an emerging market relative to its GDP of $250billion. In the first quarter of 2018, the country became the fourth largest IPO market in the region, felling larger incumbents such as South Korea, Singapore and Australia. The property market in Ho Chi Minh is booming and GDP is growing at or about 7% per annum. Pending ratification of the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) and a free-trade agreement with the EU (EVFTA) are expected in the coming months, further integrating Vietnam in the global economy. Starting in 2020 Hanoi will host the newest Formula 1 Grand Prix. In short, there are many reasons to take a positive long-term view on the country.

How has this happened?

Broadly speaking, the country’s leadership has agreed on a vision of economic development focused on offering highly productive, cost effective labour for labour-intensive export manufacturing. This has driven those record FDI inflows - largely from more mature Asian economies such as Japan, Korea, and Taiwan - over 90% of which is going into manufacturing. The country has become integral to global supply in everything from smartphones and electronics to catfish and cashews. Vietnam is also poised to be a major beneficiary of the ongoing US-China trade as foreign companies seek to restructure their supply chains.

Critical to Vietnam’s growth story has been the government’s plan to ‘equitize’ (partially privatize) hundreds of state-owned enterprises (SOEs), that is attracting a flood of portfolio investment across several sectors, most notably consumer and healthcare. Such investment interest is likely to accelerate following recent legislation drafted by Vietnam’s Ministry of Finance that foreign ownership caps on listed companies - currently at 49% - will be lifted in 2019.

Add to this mix a young, educated entrepreneurial population of 95 million (the 14th most populous country in the world) that is rapidly urbanizing and enjoying real spending power for the first time, and it is easy to understand why international brands like Apple, Starbucks and McDonalds are betting big on Vietnam, and the country’s tech scene is thriving.

Red state, red tape

Despite all the ‘good news’, Vietnam is not an investment market for the faint of heart. The country has many attributes of typical emerging markets – complex political patronage networks, rampant corruption, ‘evolving’ infrastructure, low levels of transparency, and capricious policy initiatives. The ability to successfully navigate these challenges is critical to business success in Vietnam.

Since 2016 Vietnamese politics has been defined by a high-profile anti-corruption drive spearheaded by President and Party Secretary Nguyen Phu Trong. This campaign has targeted over 30,000 Party members to date, and has brought down several prominent politicians and businessmen, almost all of whom were considered close to Trong’s political rivals, former prime minister Nguyen Tan Dung, and the late president Tran Dai Quang. Even though Trong has been able to consolidate his power base to almost unprecedented influence in recent history, the anti-corruption campaign shows no sign of abating.

Although to date no foreign companies or nationals have been directly investigated in the government’s recent corruption investigations, several local real estate companies have been targeted, resulting in a spate of cancelled contracts for lucrative projects involving foreign investors. Although it would be unfair to define the anti-corruption drive as entirely politically-motivated, little progress has been made in tackling the routine corruption that foreign companies are exposed to on an almost daily basis. One of the key operational challenges in Vietnam is the sheer size of its bureaucracy and the multiple hoops companies must jump through for even basic activities such as paying taxes or connecting utilities, yet alone establishing in-country business operations. The multiple touch-points with various local administrative offices are not only time-consuming and costly, they also create opportunities for local officials to request facilitation payments.

The widespread prevalence of corruption across business sectors in Vietnam requires that investors take steps to understand and mitigate the associated risks - specific focus should be given to examining relationships and interactions with state bodies and officials and identifying the points at which facilitation payments are likely to arise. Above all the current climate presents elevated reputational risk for investors with interests in politically exposed companies and it is worth bearing in mind that - more so than other ASEAN states - the military and security organs of state are closely integrated into Vietnam’s corporate landscape. These vested interests are arguably the most powerful in the country and use their unique position to safeguard their commercial interests where their own corporate proxies operate. Foreign investors and partners will need to identify and understand these connections as part of any investment diligence process.



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