The prospects for Vietnam’s agriculture sector are bright over the next few years thanks to a strong commitment from the government and the free trade agreements that have been put in place, wrote Surajit Rakshit, HSBC Vietnam's head of global trade and receivables finance.
I've seen hundreds of breathtaking photos of Vietnam, which is well-known for its picturesque landscape from North to South. Among those, the ones that capture majestic rice fields and vast green terraces are the most magnificent to me.
This sparkling beauty not only underlines Vietnam's must-see places but also tells a story of a proud nation which has transformed itself from suffering food shortages to being one of the world’s leading producers and exporters of many agricultural products.
Agriculture has long been the backbone of Vietnam’s economy thanks to a number of comparative advantages like cultivation land, forest coverage, sea territories, tropical climate, and available and cost-effective labor. It contributes roughly 12.5% of Vietnam’s GDP.
In 2022, Vietnam’s agricultural sector experienced its highest growth in recent years reaching 3.3%. Breaking it down to sub-sectors, farming increased by 2.8%, fisheries increased by 4.4%, and forestry increased by 6.1%. The export turnover of the whole industry was over $53 billion, up 9.3%. Vietnam currently exports a broad range of agricultural products all over the world. Its key exports are walnuts, coffee, cashew nuts, rice, and rubber, accounting for over $10 billion worth of agricultural exports. Many of Vietnam’s agricultural products have gained access to new markets.
Vietnam's role in global agriculture
Vietnam’s plant-based agriculture is experiencing rapid growth and the country is becoming a key player in the global market. Vietnam was selected by the United Nations to host the 4th Global Conference of the One Planet Network’s Sustainable Food Systems Programme in April this year. This conference brought together experts from around the world to discuss how best to develop ‘sustainable, resilient, healthy, and inclusive food systems’. At the same time, the World Economic Forum (WEF) selected Vietnam as one of the first three countries to pilot the Food Innovation Hub, a flagship initiative of the Food Action Alliance designed to improve sustainability in food production.
Vietnam has also signed 15 free trade agreements (FTAs), with 1 more FTA negotiation recently completed in April and 3 others under negotiation. Post implementing the Vietnam-Korea Free Trade Agreement (VKFTA), Vietnam has become the third-largest mango supplier to South Korea, reaching 1.7 thousand tons. This is equal to $7.4 million.
On the back of the EU-Vietnam Free Trade Agreement (EVFTA), Vietnam has become the largest source of cashew nuts for the EU. In the first 10 months of 2022, Vietnam exported 98.9 thousand tons of cashew to European markets, worth $699 million. This represents an increase of 9.8% over the same period in 2021. The EU was also the biggest importer of Vietnamese coffee and accounted for 39% of exports.
Government support
For Vietnam's agriculture to shine and thrive and for it to continue contributing to the country's sustainability as well as net zero goals, the Government has a critical role to play. Indeed, policymakers have already been quite active in this space. To support the agricultural sector and rural development, in 2018, the Ministry of Agriculture and Rural Development (MARD) issued a list of key national products, which includes rice, coffee, rubber, cashews, pepper, tea, etc. They are eligible for preferential support measures including exemptions from or reductions in land or water surface rents, preferential credit, and human resources training. That's not all.
Vietnam is continuing to implement policies to support the agricultural sector and the restructuring of agricultural production to improve competitiveness, increase added value, and promote sustainable development. In 2019, the government introduced Resolution No. 53/NQ-CP to facilitate access to credit, the agricultural insurance program, and preferential support measures for enterprises to encourage more investment in the agricultural sector and rural areas.
The government is also focusing on tackling one of the most pressing challenges – climate change – to help the agriculture sector to thrive sustainably. Due to Vietnam's geographic exposure, it is particularly susceptible to climate change which has a serious effect on agriculture.
In 2016, Vietnam ratified the Paris Agreement on Climate Change, committing to reduce greenhouse gas (GHG) emissions by 8% between 2021 and 2030 compared to usual levels using domestic resources, and up to 25% conditional on receiving international support. To realize these goals, the Government issued Decision 2053/QD-TTg, including activities for adaptation and mitigation in the agricultural sector.
Following Vietnam's bold net zero commitment at COP26, the government approved the National Green Growth Strategy 2021-2030, with a vision to 2050, which is an important policy for the country’s economic growth and sustainable development, with specific goals related to greenhouse gas emission reductions. The commitment to reduce agricultural GHG emissions has also been affirmed in MARD's Action Plan to implement the National Strategy on Green Growth for the 2021-2030 period which was approved in 2022.
It is projecting GDP growth of 2.5-3% per year for the agriculture sector. The proportion of organic fertilizer products in the total fertilizer produced and consumed is expected to be over 30%. There is a plan to increase the number of biological pesticides used to over 30%. Also, at least 30% of shallow crops will be grown using advanced and water-saving irrigation methods.
Recently, the government of Vietnam approved the National Electricity Development Plan for 2021-2030, with a vision to 2050. Known more commonly as the Power Development Plan 8 (PDP8), this master plan has been almost three years in the making. The PDP8 highlights the significant investment required to develop Vietnam’s energy sector and presents potential opportunities for foreign energy firms. Once executed, this will have an impact on the agriculture sector as well.
The role of financial institutions
Financial institutions also have a significant role in advancing agriculture's net zero agenda by channeling green finance, educating the market, and helping agriculture companies build a sustainability mindset.
Banks like HSBC are willing to support or consider green trade (supported by certain certifications) or machinery/capex to support sustainable production. We’re in the process of closing a green loan for a local company in the farming and seafood industry. We previously provided ASEAN's first Push facility to Nutifood (dairy) to support capex and working capital.
As one of the world's largest financial institutions with far-reaching international connectivity, which has committed to and been seriously involved in net zero transition since the very early stages, our support for agriculture companies goes beyond banking solutions. Whether they need guidance, financing or insights, we can support their business to prepare for the transition.
This is clearly in line with HSBC’s overall sustainability strategy and we have been helping clients to foster this with our strong capability in the space. Our sustainability strategy has, at its core, a commitment to support our customers to understand and act on their transition to lower emissions and to help them achieve their wider sustainability ambitions.
In early 2022, HSBC Vietnam announced a commitment to arrange up to $12 billion of direct and indirect sustainable financing for Vietnam and the corporate sector in Vietnam by 2030. We are leading the way to meet our client’s sustainability needs and making good progress with our commitment, achieving roughly 14% of the target by completing a number of notable green transactions for clients with solutions ranging from green trade financing options to sustainability-linked loans to sustainable supply chain finance.
Such climate commitments of financial institutions open up a world of opportunity for agriculture companies to tap into green finance to support their growth and sustainability agendas.
Role of agriculture businesses
Agriculture companies have become more proactive and serious in developing and executing their sustainability strategy – from circular economy to sustainable supply chain, to other environmental and community support programs. They focus more on green agriculture not only to help Vietnam reduce its carbon footprint in agriculture productions but also to meet the increasing demand from export markets (like the U.S., EU) for sustainable products in the agriculture and aqua sector.
Agriculture companies have also become much more agile and sophisticated in how they manage their treasury activities, moving away from cash transactions to online platforms. They are also looking for ways to digitalize their internal activities, and further improve and optimize their working capital.
I want to highlight this point because the general perception in Vietnam is the agriculture business is very cash-heavy, which has gradually changed and the Government has been trying to modernize the industry with various initiatives.
Agriculture is an encouraged sector and the State Bank of Vietnam (SBV) has capped its VND short-term lending interest rate at 4.5%. There are many financing options available like loans for paymentss to farmers on the input side as well as loans against export/packing credit for the output side. Increasingly, agriculture companies are paying more attention to supporting their ecosystem and have become more interested in solutions such as supply chain financing or distributor financing.
This has also become a competitive advantages when competing with each other in the fierce pricing environment. HSBC has been at the forefront in supporting companies with these solutions. Be it sub-sectors like farming, seafood exporters, animal feed companies, sugar exporters, or dairy and agri product companies, HSBC has been helping clients with trade loans and working capital solutions across the entire spectrum.
Conclusion
As highlighted earlier, agriculture plays a significant role in the Vietnamese economy. We have seen momentous transformations in this sector. There are challenges around global macroeconomic factors, inflation, negative impacts of climate change, shortage of highly skilled labor, and increased competition.
However, with a strong commitment from the government as well as various initiatives and the FTAs, the prospects for the agriculture sector are bright over the next few years.