Double upgrade of ties with US set to stimulate foreign investment in Vietnam: VinaCapital

The two-notch elevation of the Vietnam-U.S. relationship to a comprehensive strategic partnership last month will likely prompt an enormous investment inflow from America and encourage continued investment from companies in other “friendshoring” countries, according to VinaCapital.

The double upgrade cements Vietnam’s position as a member of the “friendshoring” cohort of countries favored by Washington, and this cemented status will facilitate more FDI to the Southeast Asian nation from companies in other parts of the word that want to sell their products in the U.S. without concerns that they could be subject to excessive tariffs, the fund manager said in a note sent to The Investor.

“Friendshoring” refers to the rerouting of supply chains to countries perceived as politically and economically safe or low-risk, to avoid disruption to the flow of business and supply chains.

U.S. Treasury Secretary Janet Yellen visited Hanoi in July to promote the Biden administration’s “friendshoring” approach, seeking to secure supply chains with Vietnam amid heightened geopolitical risks.

The U.S. currently accounts for less than 3% of Vietnam’s total FDI inflows, versus circa one-half for South Korea and Japan. Such an upgrade in Hanoi-Washington ties means U.S. investment into Vietnam is set to surge, VinaCapital’s chief economist Michael Kokalari commented.

“The coming wave of U.S. investment into Vietnam looks set to be dominated by investment into high-tech industries, including semiconductors, based on the numerous agreements signed during President Biden’s visit to Vietnam in September,” the economist wrote.

VinaCapital said it does not expect Vietnam to become as close to the U.S. as Japan and South Korea, but when the world’s wealthiest country focuses its attention on boosting another nation’s prosperity, it historically has been a pivotal turning point with far-reaching implications for that country, and in this case, for Vietnam.

The fund management firm went on to predict that Vietnam will host the Olympics. It sees parallels between the economic events that preceded the major “coming out” events for each of three countries – Japan, South Korea, China – who hosted the Olympics in 1964, 1988 and 2008, respectively, and closer Vietnam-U.S. ties.

Specifically, about a decade prior to Japan/South Korea/China hosting the Olympics, there were pivotal economic developments that strengthened the already robust growth trajectory of each country.

“Drawing parallels, we think that the U.S.-Vietnam Comprehensive Strategic Partnership embodies a comparable turning point for Vietnam,” VinaCapital said.

The fund manager, one of the largest in Vietnam, predicted the country’s GDP growth to slow from 8.02% in 2022 to 4.7% in 2023 given a collapse in exports and manufacturing output, and nearly flat year-on-year domestic consumption growth.

It forecast Vietnam’s expansion to bounce back to 6.5% next year, driven by a recovery in exports, which will in turn be closely accompanied by a rebound in Vietnam’s manufacturing sector output from flat growth in 2023 to 8-9% in 2024.

VinaCapital sees no risk to FDI into Vietnam from the application of the Global Minimum Tax as the Vietnamese government is likely to find ways to provide other incentives to companies in order to offset potential increases in corporate tax rates in the country.