Vietnam's FDI prospects bright as a manufacturing hub: Maybank exec

After continuous declines in the first five months, FDI disbursement in the first six months of the year inched up 0.5% year-on-year to $10.02 billion. Total registered FDI was estimated at $13.43 billion, down 4.3%, but the decrease was lower than in previous months and especially in the five-month period (7.3%). What has been the driving force for the increase in disbursement and the lower decline in registered capital?

Amid short-term headwinds and growth volatility, Vietnam’s structural story as a growing manufacturing hub remains intact, as we still maintain important advantages compared to regional peers such as cheap labor costs, stable politics, strategic location in the Asia-Pacific region, and extensive FTAs.

We also have an FDI-friendly government that has been proactive in implementing supportive policies to maintain macro stability and encourage growth, which have begun to show positive effects. Furthermore, the government has also been active in clearing legal bottlenecks and pushing for public infrastructure development, boosting Vietnam’s long-term capability and attractiveness to foreign investors.

In addition, given the ongoing US-China trade tensions, and now that China’s economy has pivoted into the post-pandemic era, we are seeing companies speeding up their “China plus one” diversification strategies. Even from the Chinese side, total new foreign investments from mainland China and Hong Kong SAR rose to $800 million in Q1, the highest since the start of the pandemic. The amount was 10% above the 3-year pre-pandemic average when US-China tensions started to rise, demonstrating Vietnam’s bigger role as an alternative manufacturing base to China.

How do you assess the prospect of FDI in Vietnam in the second half of this year? What are the challenges in the future?

Vietnam’s FDI prospects remain bright not just for H2 this year but also from 2024 onwards. Recently, over 200 South Korean investors accompanied their President on his visit to Vietnam, the largest figure ever recorded in an official government trip. Many have expressed their intention to invest further in Vietnam. For example, we saw LG pledging another $1 billion to raise its total investment in Hai Phong to $2 billion.

In addition, just earlier this month, Sumitomo announced its intention to develop a $400 million industrial park in Thanh Hoa, while Foxconn was granted approval to invest $246 million in new manufacturing plants in Quang Ninh. In particular, Foxconn’s investment approval was processed online in just 12 hours, significantly faster compared to the previous 14-day process, also showing the government’s willingness to implement necessary technology to eliminate lengthy legal procedures.

On future challenges, the government has been proactive in holding dialogues with FDI enterprises to begin tackling legal bottlenecks and provide guidance for companies to navigate Vietnam’s environment. We would like to see more of that from the government on clearing cumbersome legal procedures and simplifying the investment environment.

In addition, one of the pressing challenges in the near future will be to quickly deploy the power development plan VIII (PDP8) to avoid power shortages that we saw in the past month to ensure the continuity of business. Another will be to address the global minimum tax coming into effect next year.

How is the business environment in Vietnam compared to regional peers in terms of weak points and strengths?

As mentioned, aside from a favorable strategic location with competitive skilled labor and manufacturing costs, and extensive FTAs, Vietnam has an FDI-friendly government that has been aggressively pushing investment in public infrastructure projects.

Moving forward, Vietnam will need to continue addressing some issues such as unclear legal regulations and lack of guidance for businesses, investment into infrastructure for logistics activities, investing in human resources with high professional qualifications, and reducing lengthy administrative and legal procedures.

The global minimum tax of 15% is scheduled to be adopted in Vietnam on January 1, 2024. How will this policy affect FDI inflows into Vietnam?

In general, the global minimum tax (GMT) of 15% will force companies that are enjoying tax incentives under current policies to pay more taxes, affecting business strategies and potentially reducing the attractiveness of previous incentives.

This isn’t necessarily a bad thing. If tax breaks are replaced with increased infrastructure spending or even other alternative investment incentives, foreign investors could stand to benefit more broadly.

In addition, Vietnam’s status as a growing regional manufacturing hub should remain intact. Vietnam will still benefit from FDI flows driven by the "China plus one" strategy. Important factors such as geographical advantage, political stability, favorable business environment, skilled workforce at competitive costs, fast growing infrastructure, and extensive FTAs remain unchanged.

What does Vietnam need to prepare for the global minimum tax?

The government is working on policies to support foreign businesses when the GMT becomes effective in 2024 to ensure Vietnam remains competitive as a manufacturing hub. Most recently, the government has set up a task force to study the impacts of the GMT and work on solutions set to be proposed at the National Assembly meeting in October.

Incentive alternatives such as tax offsets and cash support have been floated as possible solutions to make Vietnam a more attractive investment destination, though it may take some work to ensure these incentives comply with OECD rules and regulations.

In a way, the introduction of the GMT is also spurring Vietnam to invest further in infrastructure and human resources, while reforming administrative hurdles and regulatory barriers in terms of both quantity and quality, which should serve the growth of the overall economy in the long run.

Foreign businesses like Samsung have also proposed schemes such as a Qualifying Domestic-Minimum Top-Up Tax (QDMTT). This initiative laid out by the OECD would ensure that the increased tax due to be paid by foreign firms to bring them up to 15% would remain in Vietnam as opposed to being collected in a multinational's home country.

What are your recommendations for the country to attract and retain foreign investors given the new tax?

To remain competitive, Vietnam needs to continue pushing for legal reforms to simplify the business and investment environment to retain and attract foreign investors, while also investing further in infrastructure, skilled labor, and technology.

Vietnam should also look to further into policies, incentives and schemes to capture the ongoing trend of investing in and applying renewable energy, as foreign investors are increasingly interested in this field. The government needs to urgently address regulatory gaps, bureaucracy and inadequate grid infrastructure that are preventing Vietnam from attracting sufficient foreign investment to unlock its vast potential in renewable energy.

Finally, Vietnam will need to gradually address its power shortage issues, which the approval of PDP8 should provide guidance to facilitate the prevention of power shortages and ensure stability.