European business confidence drops slightly

Amidst global economic uncertainty, the EuroCham business climate index, which reflects European business confidence in Vietnam’s investment environment, dropped slightly in the second quarter of the year.

The index (BCI) declined 4.4 points over the first quarter to 68.8 points.

In contrast with earlier in the year, compounding factors such as the continuing war in Ukraine, commodity price spikes, and the ripple effect of China’s zero-Covid policy have dampened expectations among Vietnam’s European business community, the European Chamber of Commerce in Vietnam (EuroCham) said Monday in a press release.

Although the BCI has fallen, it remains 7.6 points higher than in the fourth quarter of 2021, when it measured 61.0 points.

“Although the outlook among European business leaders has decreased since the last quarter, the factors affecting it are mostly beyond the Vietnamese government’s control. A perfect storm of external factors is contributing to global economic instability. This problem is not unique to Vietnam,” said EuroCham chairman Alain Cany.

There has also been a drop in optimism about Vietnam’s potential growth. 60% of respondents predicted that the Vietnamese economy would stabilise or improve in the third quarter of 2022, compared with 69% who held this belief entering the second quarter.

According to the findings, 45% of respondents were significantly or moderately satisfied with Vietnam’s efforts to attract and retain foreign direct investment (FDI), while 76% expected their company to increase investments in the country before the end of the third quarter. This may be due to the fact that 55% of respondents felt Vietnam has improved its FDI attraction and retention capabilities since the first quarter, the Eurocham release said.

The survey also found most respondents positive about Vietnam’s green growth prospects, with 79% saying their assessment of the nation’s potential in this regard had improved from the first quarter.

Regarding the link between green growth and FDI, nearly 90% of respondents believed Vietnam should increase green sector development to attract more foreign investment.

35% of respondents cited reducing administrative barriers as the most effective way to increase FDI, while 24% pointed to infrastructure development. Likewise, 45% of participants said administrative procedures impede their ability to utilise the EU-Vietnam Free Trade Agreement (EVFTA), demonstrating the difficulty foreign companies face in navigating Vietnam’s bureaucratic processes.

“With this BCI, Vietnam's path to improving its investment and business environment is clearly outlined. Green growth is the way of the future, not just because it will help build a prosperous foundation for Vietnam's economy and people, but also because it will support the country’s transformation into one of the world's strongest markets," Alain Cany noted.

“Prime Minister Pham Minh Chinh's COP26 commitments and the government's National Green Growth Strategy show that the government is serious about making the changes necessary for a green transition. Therefore, despite the global economic uncertainty, it is an incredibly exciting and promising time to do business in this country,” he added.

EuroCham invited its more than 1,200 members, representing virtually every sector of the Vietnamese economy, to provide quarterly updates on Vietnam’s business environment and forecasts for their own businesses in Vietnam. YouGov Vietnam researchers conducted the BCI research.

CEO of YouGov Thue Quist Thomasen commented: “This BCI measurement clearly shows a small setback in Vietnam’s reopening and return to normal. However, Vietnam’s handling of the current situation is clearly a mitigating effect in the global economic context. The near target inflation rate and improvement in the country’s credit ratings are a strong testament.”

“As foreign investors' confidence in the Vietnamese market remains stable in a turbulent time, more FDI is flowing into the country. Vietnam's potential for green growth is also inspiring European investors. As a result, these BCI results should be interpreted positively, as should the Vietnamese market in general,” Thomasen noted.

Vietnam's economic expansion hit 7.72% in the second quarter of the year, a 12-year record high, with the figure for the first six months reaching 6.42%. Growth higher than pre-pandemic levels was recorded in sectors like processing, manufacturing, goods retail, consumer services, and exports, according to the General Statistics Office (GSO).

FDI capital registered in Vietnam in the year to June 20, which includes newly-registered capital, expanded capital and capital contribution for stake acquisitions, hit over $14.03 billion, down 8.9% year-on-year. Foreign-invested project disbursement reached $10.06 billion, a 8.9% increase against the same period last year and a record high in five years.

Vietnam continues to be one of the top countries in Southeast Asia for FDI attraction, especially in the manufacturing sector, according to HSBC. The country has become a rising star in global supply chains, gaining a substantial global market share in many sectors including textiles, footwear, and consumer electronics, the bank noted in a report released in late June.