Vietnam: Opportunities for investment

Despite the doom and gloom, the 'Vietnam story' makes for interesting and encouraging reading. This interview was published at http://www.cityscapeintelligence.com/page/328008.

Don Lam, CEO of Vinacapital, is someone who knows Vietnam well. I thought it would make a change for someone else to speak to the opportunities for investment in Vietnam.

Vietnam Opportunities for investment
05 May 2009

Interview with Don Lam, VinaCapital

How has Vietnam been affect by the global financial downturn?

In terms of the macroeconomics, Vietnam saw the financial crisis take hold much earlier than elsewhere. In early 2008, the Vietnam economy was hit with inflation and together with a slight devaluation in the Vietnam Dong, the economy slowed, so the liquidity crunch started in Vietnam around the first quarter of 2008. The Government then initiated policies which reduced inflation and stabilised the economy, so Vietnam was back on track around July 2008 – but the world crisis hit with the Lehman bankruptcy in October. So although Vietnam started to go into the crisis earlier, we got out earlier, which meant by late 2008 and January 2009, Vietnam was already on the way to recovery. This is one of the reasons why in the first quarter of 2009, the Vietnam economy was actually growing about 3.1 percent annualised. We are expecting about 5 to 5.5 percent growth for 2009 and it is one of the few countries in Asia which has recorded a growth rate for 2009 so far – we are second only to China at the moment in terms of the growth rate for 2009. So although 2008 was a tough year for Vietnam 2009, looking forward it looks like a very positive year as we will recover much quicker than the rest of South East Asia.

From the real estate perspective, 2008 prices in Vietnam dropped, depending on area and depending on the type of asset, between 30–50 percent. On top of that, in 2008 there was a liquidity crunch in Vietnam so you could not borrow money to build anything and even if you could, interest rates in 2008 were at about 20 percent. Finally, construction costs increased by 100 percent, so as a developer 2008 was a tough year. Construction activity and development slowed significantly in 2008, so entering 2009 there was a huge supply and demand gap. There is not enough supply coming on the market but the demand is still significant, as even with the slowdown last year the economy still grew 6.3 percent. With economic growth, people have housing needs but there is no supply because no one wants to build. So 2009 I think offers a significant opportunity. One reason is that interest rates have gone back down to 9–10 percent, half the levels they were previously, and construction materials have dropped back to about half the levels they were in 2008. So you have a lower financing cost, you have a lower material cost, real estate land has dropped again by, in some cases, 30 or 40 percent. This is now a perfect opportunity for development to take place.

Are banks lending again?

Yes and interest rates have dropped so there is significant liquidity in the market. In fact, foreign banks are not lending in Vietnam but local banks are flush with liquidity because the government decided in early 2009 to stimulate the economy by pumping a lot of money into the system. The actual stimulus programme is about US$6bn, that sounds small but what they do have is something called the subsidised interest rate. In certain sectors, the Government will subsidise a 4 percent interest rate so that means people can borrow at 4 percent per annum. As a result, with the low interest rate and the banks lending, companies have borrowed a lot of money over the last three months.

Is the real estate sector driven by domestic demand or foreign investors?

It is purely domestic driven, you just have to look at the demographics – about two thirds of Vietnamese are under the age of 30. So because we have such a young population, a lot of them are in the stage of early marriage when they are moving into new family housing. Similar to Europe and the US after World War II, you have a baby boom and so this segment of the population continues to have high demand for basic housing. That is why 2008 was a bad year in terms of people not building. Some of the low end and mid level housing prices increased even though the land had dropped in value, as there was no supply.

Are developers moving away from high end to more affordable housing?

This is exactly the case in Vietnam because before the credit crisis, a lot of developers in Vietnam really focused on the high end product, such as serviced apartments, five star hotels and resorts. Now in early 2009 because we are mostly focusing on the domestic sector and the mass market, a lot developers are now focusing on the mid level mass housing market. The other reason for that is that now it has become more profitable to focus on the mid market because the land costs have dropped, financing costs have dropped and construction material costs have dropped therefore you are able to cater for the mass market and still make a fairly decent profit margin.

Is there investment into infrastructure development?

Yes and I think that is more true in Vietnam than in most places because we are behind in infrastructure and a lot of investment is needed. In addition, the Government stimulus programme has given the 4 percent interest rate subsidy to infrastructure projects. The Government actually sponsors infrastructure as a way to stimulate the economy, just like in China. One way to stimulate the economy is to build the infrastructure you have wanted to do but haven’t had over the last few years because you worried about the inflationary effect. So infrastructure is picking up significantly in Vietnam because of the stimulus package and because of the slow down. The infrastructure being developed is mostly roads and ports at the moment. The energy sector is being developed, but energy needs a lot more money.

Is the government looking to establish Public Private Partnerships?

They are looking at it. They have been looking at ways to learn from the UK in particular and they have a number of delegations going to the UK learning about PPP. I think it will be a while before this is implemented, mainly because we need to have proper legislation in place before you can do that.

What improvements do you think need to be made in the regulatory environment?

I think the current regulatory environment is very good, that’s why in Vietnam we attract significant foreign direct investment because the regulations are very open. But PPP is a new space so they need time to develop the legislation. But the overall foreign direct investment legislation is very good and last year Vietnam attracted US$60bn of foreign direct investment commitments.

What challenges do you see for Vietnam over the next 12 months?

I think one of the biggest challenges and one of the biggest worries is that because of the stimulus programme and with money being pumped into the system, inflation will come back. When inflation comes back, one of the first things it will do is squeeze out liquidity again to slow down inflation. The second worry we have is because of lot of lending is taking place over the last six months or so, there may be some bad debt entering the system much sooner and that with the weak financial system we have in Vietnam may have an impact overall.

Are you concerned about diminishing levels of foreign direct investment?

I think FDI will continue to come in, although at a slower pace – which is fine. The domestic demand will cover the shortfall in foreign direct investment. Keep in mind also that a significant part of the Vietnam economy is relying on the domestic sector but also agricultural commodities for export such as coffee, rice, and sea food exports. For example over the first quarter of this year, Vietnam was one of only three countries that had a positive growth of exports to the US, mainly because our products have competitive prices. But because of the economic growth they are starting to have a shortage of workers in rural areas, so with the slowdown in the industrial area, people are actually moving back to the countryside. The difference between China and Vietnam is that when the city worker moves back to the countryside in China they are unemployed, but when the Vietnamese worker from the factory moves back to the countryside, they have a job right away. There is actually a shortage at the moment of workers for agricultural cash crops as an export commodity.

If you look at Vietnam within South East Asia, economic growth here will likely lead the region and will continue to attract investment because of the political stability. Political stability in Vietnam is the key driver of foreign direct investment and that is why we are not so concerned about jobs and the level of FDI for 2009 because we know it will come back – political stability is one of the key things foreign investors are looking for.

Are there any challenges for foreign investors that need to be resolved?

Yes, I think what is true in most of the emerging markets is the problem of bureaucracy, red tape, corruption, and any of the emerging markets have the same issue. Foreign investors just have to be smart about it and at least have a proper local partner in place so that they can navigate around these issues. Anywhere in South East Asia is exactly the same. To find a local partner in Vietnam, typically people go through their traditional banker, accountant or lawyers who make a recommendation for them. In real estate it is simple because there are not that many major players so you can check around on reputation.