Fitch Publishes Vietnam FDI Flows Prediction For 2008

by Mary Swire, Tax-News.com, Hong Kong

06 February 2008

Fitch Ratings last week published a report suggesting that Vietnam's inward foreign direct investment (FDI) flows are forecast to remain high by historical standards, at USD4 billion in 2008, despite an expected global economic slowdown.

In the report, entitled "Vietnam: The Importance of Foreign Direct Investment", Fitch suggested that accession to the World Trade Organization (WTO) and a favourable domestic investment environment resulted in an estimated 60% increase in inward FDI flows in 2007, to USD3.9bn (5.5% of GDP).

Vietnam's inward FDI stock will continue to accumulate, the ratings agency predicted, reaching more than 50% of GDP in 2008.

Fitch explained that:

"In contrast with trade deficits run by domestic enterprises, the trade balances of foreign-invested enterprises (FIEs) have long been in surplus. Inward FDI has supported the accumulation of foreign exchange reserves despite current account deficits or small current account surpluses. As a result, Vietnam's international liquidity ratio reached a historical high of 1,301% in 2007, far better than the 'BB' median (Vietnam's foreign currency Issuer Default Rating is 'BB-' (BB minus)/Stable)."

"In addition, the country has been a net external creditor since 2006 and a net public external creditor since 2007. Fitch believes Vietnam's strong external financial position will remain a fundamental rating strength. FIEs have also become an important source of government tax revenue, which is supportive of sovereign creditworthiness, as public finances are a relative rating weakness."

It went on to add that Vietnam's inward FDI stock is the highest in GDP terms among emerging sovereigns in the region, and its inward FDI flows in GDP terms are one of the highest. Vietnam benefits from a higher degree of social and political stability than some of its regional competitors, which is crucial for attracting FDI.

A sizeable and growing local market and quality labour force are also among Vietnam's strengths in attracting foreign investors. In addition, a shift in the government's approach toward investment to being more proactive has helped support large inflows. The government has become more experienced in responding to the needs of foreign investors and has built industrial parks and economic zones to compensate for the state of the country's infrastructure.

Fitch continued:

"Bilateral trade and investment agreements have been supporting FDI growth in Vietnam since the early 2000s. After over a decade of negotiation, Vietnam finally became a WTO member in early 2007, which helps local producers gain access to overseas markets, supporting the country's large export-oriented manufacturing sector. As a WTO member, Vietnam is required to liberalise its legal and regulatory framework, allowing foreign companies to gain equal access to the burgeoning domestic market."

"Although the legal environment has improved with the revision and enactment of new laws (such as the United Enterprise Law and Anti-Monopoly Law) and many regulations have been brought up to international standards, a number of government agencies still lack the institutional capacity to effectively enforce rules. In addition, issues of corruption remain a major weakness in attracting foreign investment."

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