There’s a renewed buzz of activity in the foreign investment community in Vietnam. The more adventurous portfolio investors are attracted by low valuations and foreign corporations are being drawn in by growth potential. In contrast to most other Asian countries, growth rates are picking up. Yet Vietnam is a small economy in a region just embarking on reform. Its stock market is new and tiny. Opinion is divided as to whether Vietnam will remain an exotic destination for small amounts of specialist emerging market investment, or is on the brink of becoming a serious option for foreign businesses. Dominic Scriven, a director of UK investment company Dragon Capital, which is prominent in equity trading in Vietnam, is in no doubt. “If you blow away all the hot air and verbiage and stress it is a fairly simple proposition,” he says. “It’s cheap, it’s not going to get much cheaper and it’s likely to get more expensive.”
At the coal face of foreign direct investment, Tuv Rheinland’s general manager, Klaus Ehret, is waiting patiently in Ho Chi Minh City for the necessary government licences to establish a local office of his certification and testing company. Though his company senses opportunity, Ehret feels in no risk of being trampled in the rush of foreign business into the country. The German Business Association in Vietnam has had “more sayonara parties than welcome parties”, he says, and his gut feeling is that more expatriate businessmen have left than have come into the country in the past two years.
John Bubrik, chief representative of ABN Amro Bank in Vietnam, takes a middle line. “The country is probably on the brink. Is it going to open and take a new step and have a second chance in the eyes of the world, or not?” he wonders. “A lot of things are happening, but mostly a lot of dust, nothing really tangible.” Bubrik has been based in Vietnam for a couple of years, and believes the country is now emerging from a “dormant period.”
That’s not before time. The market-opening measures first promised a decade ago did not materialize anywhere near as fast as hoped for, and Vietnam suffered indirectly from the Asian crisis, despite its being a fairly closed and tightly-controlled economy.
A break through trade deal
The US-Vietnam trade agreement signed in the middle of last year, followed by president Bill Clinton’s visit, put the spotlight back on investment in the country, however. “The momentum is picking up, but it is not going to translate in our view into instant investment and new business,” Bubrik cautions, adding that the trade agreement is not scheduled for ratification by the US until the second quarter. “And even once that happens there is a period of time before foreign investment comes in,” he adds. “We will have to wait and see whether it translates into business for bankers. It’s not anything that’s going to happen instantly.”
Nevertheless, there has been a flurry of activity recently, including the formation of a new European Chamber of Commerce. Tourism, hotels and the serviced-apartment business seem to be picking up and the removal companies are reporting more in-bound than out-bound business in the past couple of months. “Everybody is beginning to prowl around seriously to see whether the country is back in vogue again. Big international companies will begin to send people out on fact-finding missions and then the process generally starts when someone forms a representative office, then progresses to a joint venture with a local partner and then eventually maybe a fully-fledged manufacturing operation,” explains Bubrik.
The government is keen to encourage foreign investment on the back of the US trade agreement and foreign investors now need fewer licences. Scriven says: “Things are well-established in a strong cyclical up-trend, and that’s true of the economy as well as industry itself. Unusually in Asia this year, Vietnam’s economic growth is strengthening, not weakening.”
The government is forecasting 7.5% growth for this year, against 6.7% last year. “That reflects a few fallow years of not just the Asian crisis but Vietnam having its own issues to deal with, and that growth is pretty favourable,” says Scriven. Multinationals are beginning to recognize this. Foreign investment pledges totalled $2.4 billion last year, up 9% on the previous year, according to figures from the planning and investment ministry. Remitted foreign investment is up 50%, says Scriven, most visibly in the stock market, which only opened in the middle of 2000. The index is up 130%. “It’s small,” concedes Scriven, but he quips, “it would be even smaller if we didn’t have a stock market at all.” There has not been a single failed trade in the exchange’s eight-month history, Scriven adds. That is due partly to its regulations, but also its paperless system, which Scriven says, “leaves London way behind.”
Big player in a small market
The entire equity market capitalization is just $100 million. That’s too small to attract any but the most specialist of portfolio managers. A few years ago, when the Asian tigers were roaring and emerging-market investors were seeking the next frontier market, six funds were focused on Vietnam. Since then Lazard has closed its fund, Templeton has shifted much of its focus to Thailand and the rest have apparently paid back a large chunk of their cash. Dragon Capital, though, is sufficiently bullish to be in the middle of a third round of capital-raising. It is looking for another $30 million to double the size of its Dublin-listed Vietnam Enterprise Investments fund, which boasts a small premium compared to other country funds trading at discounts of up to 40% to net asset value.
Dragon’s existing $30 million is all invested and leveraged up to 104%. It claims to be the second largest investor in Vietnam’s stock market after the government. The fund takes significant minority stakes in private Vietnam-owned and managed companies, working with them towards the ultimate objective of flotation. So far two of its investments, Refrigeration Electrical Engineering (REE) and cashew nut processor Long An Food Company, have both listed. REE is the largest company on the exchange. To date the fund has made 18 investments, across a range of sectors including banks, manufacturing, construction, property and food processing, and it is aiming for 80% of its assets to be publicly listed.
Who is buying into Vietnam funds now? Anyone from traditional institutional investors in the US and Europe to total-return funds and private banks. “Vietnam is not a benchmarked indexed stock market or investment proposition, so it requires the best reception from people who have a strong emerging-markets focus or an Asian focus,” says Scriven.
The stock market structure is developing in ways that may improve valuations, moving away from a traditionally strong emphasis on dividend yields – previously 10% to 12%, which are higher than bank deposit rates. The growth of the stock market has pushed these yields down to 4% or so. “There’s a lot of liquidity in this economy and potentially it’s going into the stock market,” says Scriven. “It’s quite difficult to find a really solid, modestly priced, relatively low-risk investment proposition. The macro risk factors [in Vietnam] are very low, and such risks as there are, are much more at the micro level.”
Others are less enamoured of a five-company stock market, where volatility is capped at 2% a day. “The government doesn’t want to list the really competitive companies,” says a banker, referring to potentially profitable companies such as Vietnam Airlines and Vietnam Post&Telecommunications.
Meanwhile, Ehret is in the final steps of applying for a licence for Tuv Rheinland as a 100% foreign owned company. Papers were submitted in August and Ehret is hoping for approval fairly shortly. The process was a little slower than he would like, he admits, perhaps because the category A licence required approval from the prime minister’s office and 13 ministries. “It’s quite difficult but we are confident we will receive our licence,” he says.
Beyond the cumbersome approvals process, other considerations over which the government has no control weigh on foreign companies considering investment in Vietnam. Ehret attributes the departure of several foreign investors to the regional economic slowdown, and the greater competition from China. “China is a major player, and for Vietnam it’s difficult to catch up,” he says.
Ehret lists the disadvantages of doing business in Vietnam – high telephone, office and apartment charges, for example, although they are coming down. He adds: “It seems as if the government is doing something step-by-step. In the last six months we are really seeing things becoming better. They are going to improve, but of course it takes time and we have to give them one or two years to change”.
Benjamin Monzain, a corporate banker at Credit Lyonnais in Vietnam, sees foreign investors in Vietnam moving in both directions. “Some companies are leaving and some others still believe in it because there is a huge market,” he says. “Those that are leaving have often tired of difficulties with the authorities over licences and the like. However, small investors are still coming in because they believe in the Vietnam market, and can see the country getting richer, especially in the country’s second city, Ho Chi Minh City.”
In the banking industry, there are hints of market liberalization, though foreign banks, have seen the proportion of their deposits required to be lodged with the central bank increase from 8% to 12%. The interest rates that banks can offer are also restricted, to 2.5% for deposits of less than six months, and 3% for longer terms. “For the time being it’s quite hard,” admits Monzain.
