Vietnam to remain FDI magnet despite global minimum tax application

Vietnam is likely to remain attractive to foreign investors even after it began applying the global minimum tax last month, Mirae Asset Securities Vietnam (MAVN) says in a strategy report.

Some of the factors driving FDI attraction will include the elevation of Vietnam-US ties to that of a comprehensive strategic partnership; manufacturers looking for new markets to locate factories or adopting the China+1 strategy; and acceleration in infrastructure investment, the report says.

FDI inflows will also be catalyzed by supportive policies and the nation’s commitment to net-zero carbon emissions by 2050; and competitive labor costs compared with other Asian countries.

The good start in January, when both registered and disbursed FDI rose 40.2% and 9.6% year-on-year, respectively, is expected to continue as 15 U.S. semiconductor firms stand ready to pour around $8 billion into Vietnam once bottlenecks to clean energy infrastructure are cleared; and South Korea’s Hyosung has announced plans to invest an additional $2 billion this year, the report notes.

Looking ahead, the brokerage house is upbeat about Vietnam’s economy. Public investment is expected to be the key driver of economic growth amid Vietnam’s ample fiscal space and other growth drivers seeing only modest rallies. More funding for infrastructure spending was approved in the parliament in an extraordinary session last month.

The country’s exports are set to further recover in 2024, driven by phones and components, particularly with the release of Samsung’s new S24 smartphone line; imports of input materials entering positive territory in January; and signs in recent months of improvement in demand in some major export markets like the U.S., China, ASEAN and South Korea.

MAVN analysts say they also expect an uptick in industrial production in 2024, thanks to export improvement with some of Vietnam's key trading partners and movement towards reversal of a decline in the import of production materials.

In terms of downside risks, they say they are keeping a close watch for weaker-than-expected economic growth and subdued consumption in Vietnam’s main trade partners.

They continue to view Vietnam’s monetary policy leeway as more favorable than in 2023, with forex sources from trade surplus, FDI disbursement, and remittances. Vietnam has maintained FX reserves of around three months of imports since 2018.

Regarding Vietnam’s stock market, MAVN analysts note that the VN-Index had risen for a third consecutive month in January 2024.

They conclude that the outlook for 2024 is positive, supported by continued efforts by the government to achieve ambitious economic targets.

In addition to the main drivers of public investment and FDI attraction, they expect recent amendments to the Real Estate Business Law, Housing Law, Land Law, and Law on Credit institutions to shape a positive long-term outlook for Vietnam's growth drivers.

According to their calculations, the NPATMI (net profit after tax and minority interest) of Ho Chi Minh Stock Exchange-listed firms in Q4/2023 increased 4% quarter-on-quarter and 28% year-on-year. However, despite the strong recovery in Q4/2023, the 2023 NPATMI fell 3.2% year-on-year.

The analysts assess that P/E of the VN-Index is returning to its historical average (15x versus the average of 16x), with room for growth in earnings.

“In terms of downside risks, we are closely watching: uncertainty surrounding the timing and scale of future Fed rate cuts in 2024; the impact of high global interest rates on debt rolling, business activities, and consumption; impacts of struggling China’s real estate sectors; slowdown in Europe; and geopolitical risks, especially impacts of Red Sea crisis on global inflation, policy changes after a series of elections in key countries,” the report says.