Despite global trade tensions and the loss of many investment incentives, many ASEAN countries, including Vietnam, have seen a boom in foreign direct investment (FDI) of late, which is likely to persist and lift local industry, stated HSBC in its latest report.
ASEAN has seen a bounty of FDI in recent years, thanks in large part to the region's tremendous economic potential. The financial crisis in 2008-09 was a big catalyst to the region's FDI boom, as multinational companies searched for investment opportunities at faster-growing economies.
Total FDI to ASEAN-6 (including Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) has averaged nearly US$117 billion per year since 2010-approximately 3x more than its average from the previous decade (2000-2009 average: US$41 billion). Similarly, net FDI (inbound FDI - outbound direct investment) is averaging nearly US$50 billion a year since 2010, which is about 3.5x its average from the previous decade.
HSBC forecast the post global financial crisis trend is likely to persist in the near to medium term, provided that ASEAN's growth outlook remains robust and the region's economic fundamentals remain sound.
According to HSBC, structural issues like the rule of law, strength of institutions, demographics, and investment incentives all play a key part in attracting FDI to the region. Most countries have also seen significant improvements in their "Global Competitiveness Index (GCI)" rankings over the past decade.
The GCI measures a country's set of institutions, financial markets, infrastructure, education, health, and other factors that contribute to sustainable economic development. In particular, the Philippines, Vietnam, and Indonesia have seen the biggest improvements in recent years, which speaks to economic and political reforms that those countries have implemented, including: improving infrastructure, reducing corruption, easing investment restrictions, and better fiscal management, among others.
As manufacturing continues to be the backbone of foreign investments in Vietnam, approximately 63% of the country's FDI goes to the manufacturing sector and where exports from the foreign-invested sector are now more than double those of the domestic sector.
Indeed, continued FDI into and expansion of Vietnam's manufacturing sector are key to reducing poverty and raising productivity, which paves the way for more inclusive growth.
Risks to the current FDI climate
There are some risks to the current FDI climate. For one, continued trade tensions present a risk, at least to some countries, given the region's integration and sensitivity to global trade.
Although it remains difficult to ascertain the implications until there is more clarity on the full scope of tariffs implemented, continued trade tension poses risks to certain ASEAN sectors, especially where companies ultimately decide to shift production to the US.
While it is also true that the region may benefit if companies decide to shift all factors of production to ASEAN to avoid China-specific tariffs. There is no unequivocal answer, but HSBC expected the risks may outweigh the benefits in the near term in terms of FDI, given the integrated nature of trade.
Under this circumstance, Vietnam must find ways to remain competitive in the long-term, as the sustainability of investment incentives may be in question for countries with reduced fiscal space.
Moreover, most countries need to upgrade existing economic zones and build next-generation zones to better integrate regional value chains and to attract new targeted industries.
