Understanding-Vietnam

March, 2015

Contents

2

Vietnam – Macroeconomic Indicators

Vietnam – An attractive destination

Chapter 1: Business Environment

• SWOT Analysis

• Infrastructure

• Market orientation

• Calling for Investment

Chapter 2: Political Outlook• SWOT Analysis

• Domestic Politics

• Long-term Political Outlook

Contents

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Chapter 3: Economic Outlook

• SWOT Analysis

• Economic Activity

• FDI uptick signals investment-led growth

Conclusion

4


2013* 2014* 2015f 2016f 2017f

Nominal GDP, US$bn 141.0 184.0 220.8 248.6 280.4

GDP per capita, US$ 1,900 2,028 2,364 2,639 2,952

Real GDP growth,

% change y-o-y 5.42 5.98 6.4 6.6 6.4

Population, mn 90.0 90.7 93.4 94.2 95.0

Unemployment,

% of labour force, eop4.8 2.08 3.4 3.5 3.5

Lending rate, %, ave 9.0 8.0 7.0 7.0 7.0

Exchange rate VND/US$, ave 20,900.00 20,800.00 20,330.00 20,215.00 20,000.00

Goods and services exports,

US$bn132.2 150 168 186.8 208.3

Notes: * General Statistics Office; f BMI- Business Monitor International forecasts.

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According to GSO (Vietnam General Statistic Office), GDP of Vietnam in

2014 reached $ 184 billion, up 5.98% compared to 2013.

GDP per capita of Vietnam in 2014 reached $ 2,028.

US

Germany

Japan

China

India

Vietnam

GDP growth of Vietnam, comparing to some other countries.- Source: IMF

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Goods and services exports of Vietnam in 2014 reached $ 150billion, up 13.6% compared to 2013.

21.2

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2013 2014

10 Biggest Export Group

22.9

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13.5

28.5

27.9

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14.8

14.7

US

EU

ASEAN

China

Japan

2014

2013

Biggest Export Markets

- Source: General Department of Vietnam Customs

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The avarage CPI of Vietnam in 2014 was 4.09%, the lowest point in

the last 10 years.

PMI index of Vietnam has been over 50 for 14 months.


1. Location:- Vietnam’s location – its proximity to China and South East Asia, and its good sea links

– makes it a good base for foreign companies to export to the rest of Asia, and

beyond.


2. A low manufacturing cost but skilled workforce country:- Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors.- The labor pool is increasing by up to 1.5mn a year, while wage costs are still low

compared with other countries in the region, although wage growth has picked uppace in recent years.

- Some of costs that related to business operation:

3. Foreign Direct Investment strongly supported by Government:- The government is looking to fully maximize economic gains from FDI by reviewing

and establishing new standards to give priority to investment projects that are likelyto boost employment and labor productivity, allow for technological transfer, andimprove the overall efficiency of the economy.

Fuel:

Electricity:Updated on Mar 5 2015

Gasoline A95 (per liter):

Diesel(per liter):

$0.76 $0.71

per kWh (ave)

$0.07

Labor cost:

- Applied since Jan 1 2015

First area: $150

Second area: $130

Third area: $120

Forth area: $100


4. Political stability:

- The Communist Party of Vietnam (CPV) remains committed to market orientedreforms. The one-party system is generally conducive to short-term politicalstability.

- Political reforms for a more balanced and democratic political system as a crucialelement in driving the country's economic growth over the long run. These limitedreforms will first come in the form of allowing for more debate within the NationalAssembly (NA) on:

• economic policies,• increased transparency and accountability from the government,• greater efforts to clampdown and address rampant corruption at the lower

level, and• an increased tolerance towards the impact of social media and the internet.


5. Foreign Trade Regime:

Member of the WTO in January 2007.

Bilateral trade agreement with the US in effect since December 2001.

Vietnam-Japan Economic Partnership Agreement since July 2009.

Free Trade Agreement with the EU since June 2012.

Under negotiation to be a member of Trans-Pacific Partnership (TPP).

Impact of TPP:

Contribute to Vietnam’s GDP growth.

Stronger trade with US.

Capturing greater exports in manufacturing industries where China’scomparative advantage is fading.

Overall boost to exports.

Higher income enabling re-investment and more rapid growth.

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Chapter 1: BUSINESS ENVIRONMENT

SWOT ANALYSIS:

Strengths: Weaknesses:

• Having a large, skilled and low-cost workforce, which has made the country attractive to foreign investors.

• Vietnam’s location – its proximity to China and South East Asia, and its good sea links –makes it a good base for foreign companies to export to the rest of Asia, and beyond.

• Vietnam’s infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country’s economic growth and links with the outside world.

• Vietnam remains one of the world’s most corrupt countries.

Opportunities: Threats:

• Increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and know-how.

• Vietnam is pressing ahead with the privatization of state-owned enterprises and the liberalization of the banking sector. This should offer foreign investors new entry points.

• Trade disputes with the US, and the general threat of American protectionism, which will remain a concern.


INFRASTRUCTURE:

Physical Infrastructure:- Vietnam's inadequate infrastructure has become a major grievance for foreign investors and may

thus impair future FDI.- Thanks to development assistance from international donors, is investing heavily in constructing

new roads, railways, ports and power plants.- As an example of progress already made, more than 90% of rural households now have

electricity, compared with just over 50% 10 years ago.

Labor Force:- Vietnam's large, well-educated and inexpensive labor force remains one of the country's chief

attractions to foreign investors.- The labor pool is increasing by up to 1.5mn a year, while wage costs are still low compared with

other countries in the region, although wage growth has picked up pace in recent years.- Workforce by Occupation- 2014:

- Vietnam does not have a bad industrial relations record. Most strikes have resulted from legal orcontractual breaches, including failure to pay wages and benefits, failure to pay social insurancecontributions, and failure to pay severance pay at termination.

- The government has raised the monthly minimum wage rate to VND 2.15 million to VND 3.1million ($100-$145), dependent on economic zone, from January 1 2015.

Agriculture Industry Services

46.6% 21.4% 32% - Source: GSO


MARKET ORIENTATION:

Foreign Investment:- FDI is an integral part of Vietnam's ambitious economic expansion plans; and, with ratings

agencies pushing their grades higher, the country looks like a solid investment destination,especially for manufacturing.

- Most FDI into Vietnam comes from North East Asia, notably Taiwan, South Korea, Japan andChina/Hong Kong. Canada and the US are the largest non-Asian FDI sources. Leading sectors forFDI are manufacturing, other industry and oil and gas.

Foreign Trade Regime:- Vietnam has committed to bound tariff rates (or legal ceilings) on most products ranging from

zero to 35%. Reductions in most bound rates from 17.4% on average in 2007 to 13.6% are to bephased in gradually by 2015.

- Vietnam became a member of the Association of South East Asian Nations (ASEAN) since 1997–with Brunei, the Philippines, Indonesia, Laos, Myanmar, Malaysia, Singapore, Thailand andCambodia – as well as of the linked ASEAN Free Trade Area. Vietnam is thus party to negotiationson free trade agreements being conducted by ASEAN, such as talks with the EU, China, Australiaand New Zealand.

- A member of the WTO in January 2007.- A bilateral trade agreement with the US in effect since December 2001.- Vietnam-Japan Economic Partnership Agreement since July 2009.- A Free Trade Agreement with the EU since June 2012.- Under negotiation to be a member of Trans-Pacific Partnership (TPP). 14


TAX REGIME:

- Corporate Tax: from Jan 1 2014, the main corporate tax rate is 22%, and the rate will be reducedto 20% from Jan 1 2016. The corporate tax is targeted to be 17% in 2020.

Firms involved in prospecting, exploration and mining of petroleum, gas and other rare andprecious natural resources are subject to rates from 32% to 50%.

• Resident firms are taxed on global income.• Non-resident firms are taxed only on Vietnamese-sourced income.

- Individual Tax: The bill stipulates that personal income is to be taxed at a rate between 5% and35%, for individuals resident in Vietnam for 183 days or more in a 12-month period.

- Indirect Tax: Main VAT rate is 10%.

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COSTS – RELATED TO BUSINESS OPERATION:

Fuel:

Electricity:Updated on Mar 5 2015

Gasoline A95 (per liter):

Diesel(per liter):

$0.76 $0.71

per kWh (ave)

$0.07

Labor cost:

- Applied since Jan 1 2015

First area: $150

Second area: $130

Third area: $120

Forth area: $100


CALLING FOR INVESTMENTS

Offers from State Government:- Corporate Tax: beside the route map of reducing corporate tax which presented above, there are

some advantages for new enterprises invest in difficult areas, high-tech zones, softwaredeveloping, education – training developing, vocational training, health, culture, etc. to attract andcreate favorable conditions for investors interested in this sector, by reducing or exemptingcorporate tax in 3 to 5 years.

- Import – export tax: reducing or exempting tax for materials, supplies and components importedto create fixed assets of the encouraging investment project; projects funded by officialdevelopment assistance (ODA); etc.

- Credit policy: interest rate ceiling for short term loans in VND 8% per year (applied since March 172014), for priority economic sectors: agriculture and rural development, exporting, supportingindustries, small and medium-sized enterprises and hi-tech enterprises.

CASE STUDY: INVESTMENTS OF SAMSUNG IN VIETNAM- Samsung has been invested more than $4.0 billion for projects in Bac Ninh and Thai

Nguyen.- Samsung’s advantages:

• corporate tax: 10% in 30 years.• tax exemption for 4 years since having profits • and 50% of the payable tax in the next 9 years.• Besides, Thai Nguyen province proposed Samsung to have other advantages, such as

free infrastructure renting fee, free import tax of raw materials, machinery.

Chapter 2: POLITICAL OUTLOOK

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SWOT ANALYSIS:


• The CPV remains committed to market oriented reforms. The one-party system is generally conducive to short-term political stability.

• Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia.

• Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party.

• There is increasing (albeit still limited) public dissatisfaction with the leadership’s tight control over political dissent.


• The government recognizes the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials.

• Vietnam has allowed legislators to become more vocal in criticizing government policies. This is opening up opportunities for more checks and balances within the one-party system.

• Although strong domestic control will ensure little change to Vietnam’s political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable.

• Relations with China have deteriorated over recent years due to disputing the islands in the South China Sea.


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DOMESTIC POLITICS:

CPV under increasing pressure for political change:- The ruling CPV, which has fiercely defended its totalitarian stance in the past, also appears to

be slowly losing its grip on public opinion with increasing adoption of the internet, and inparticular, social media's role in promoting political discussion among the country's youth in recentyears.

- Political reforms for a more balanced and democratic political system as a crucial element indriving the country's economic growth over the long run, and limited reforms have beenintroduced gradually by the CPV.

Democratic reforms to come amid push to expand economy:- Reforms for a more balanced and democratic political system as a crucial element in driving the

country's economic growth over the coming years, which has been forecasted for Vietnam's realGDP growth to average a robust 6.7% from 2013-2022 (Vietnam’s real GDP growth in 2014 is5.98%).

- The CPV will eventually allow for limited democratic reforms to be introduced in the coming years,albeit gradually. These limited reforms will first come in the form of allowing for more debatewithin the National Assembly (NA) on:

• economic policies,• increased transparency and accountability from the government,• greater efforts to clampdown and address rampant corruption at the lower level, and• an increased tolerance towards the impact of social media and the internet.


LONG-TERM POLITICAL OUTLOOK:

Key political challenges over the coming decade:1. Inflation and devaluation as drivers of discontent:

- The Vietnamese government’s loose fiscal and monetary policies have led to high levels ofinflation and repeated devaluations of the VND in recent years.

2. Divisions within the Communist Party:- High inflation and devaluation have opened schisms within the CPV leadership between

proponents of <continued economic reform> and <a more conservative wing which believes that adeceleration or even reversal of reform policies would benefit macroeconomic stability>.

3. Demands for increased religious rights- One of the most concerted challenges against the CPV in recent years has come from Catholics

wishing for a stronger recognition of their right to worship in what is still a nominally atheistcountry.

4. Relations with China:- Relations with China have become increasingly strained in recent years as Beijing has expanded its

economic, political and military influence southwards. The main point of contention is theconflicting territorial claims for the Paracel and Spratly Islands in the South China Sea.

- Vietnam’s relations with China have also been strained by the large bilateral trade deficit it runswith its northern neighbor, which amounts to more than 10% of GDP.

- Because of those, Vietnam will seek increasingly close relations with the US – and potentiallyIndia and Japan – in the defense sphere, as a hedge against China’s rising power in the region.

Chapter 3: ECONOMIC OUTLOOK

SWOT ANALYSIS:


• Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2012.

• The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 14.0% in 2010.

• Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to global economic uncertainties in 2012.

• The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high,

contributing to inflationary pressures.


• WTO membership (and TPP membership-in the near future) has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition.

• The government will in spite of the current macroeconomic woes, continue to move forward with market reforms.

• Although inflation has subsided in 2014, complacency by the State Bank of Vietnam on this front could result in a decline in investment.

• Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilize the economy.


ECONOMIC ACTIVITY:

Manufacturing and retailing to help support Growth- The industrial sector, which accounts for approximately 33% of the economy and includes

manufacturing, mining, water management, and power generation accelerated by 6.1% y-o-yin June and 5.8% for the first half of the year.

- At 21% of GDP, manufacturing accounts for the lion's share, accelerating by a robust 7.8%y-o-y in H114, driven by textiles (21% y-o-y), leather goods (19.2%), and motored vehicles(22.9%), a trend we expect will remain in play given the continued strength in the country'sdomestic demand and export markets.

Exports continue to strengthen- Vietnam's export sector continues to be a driver of

growth for the country, and we forecast this trend toremain in play over the coming months. Exports for2014 expanded by a robust 13.6% y-o-y, and saw theaccumulated.

- Moreover, we expect exports to continue drivinggrowth going forward given that the Viet-namesegovernment has been making a concerted push tobuild diplomatic and trade ties with many countriesand is negotiating several free trade agreements. Oneof the most important ones is the Trans-PacificPartnership (TPP), which could be signed by as early as2015.

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2013 2014


ECONOMIC ACTIVITY:

Investment and Infrastructure Development to Drive Growth- The investment picture also remains very bullish in Vietnam as the country has been able to

attract both private investment as well as foreign aid, which will help underpin both short-andlong-term growth. There were a total of 1,588 investments in 2014 with a total value of$ 20.23 billion.

- The largest source of investment this year has been from South Korea at $ 7.3 billion, followedby Hong Kong ($ 3 billion), Singapore ($ 2.8 billion), Japan ($ 2 billion). Several companies,such as Samsung, continue to be attracted to the country's lower labour costs, which suggeststhat foreign investment will continue to flow to Vietnam.

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Seeing a steady inflow of FDI- Vietnam's current stage of economic development requires significant amount of foreign

investment in transportation and logistical infrastructure to support its long-term economicgrowth plans, present significant scope for investment opportunities in the infrastructure sector aswell as higher-value manufacturing industries.

- Efforts by the Vietnamese government to speed up the privatization of state-owned enterprises(SOEs) and allow for more foreign competition in the banking sector should provide a strongcatalyst for investors to take advantage of opportunities in the financial services industry.

The government pledges more support for foreign companies- The government is also looking to fully maximize economic gains from FDI by reviewing and

establishing new standards to give priority to investment projects that are likely to boostemployment and labor productivity, allow for technological transfer, and improve the overallefficiency of the economy.

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CONCLUSION

With all above data, you can see that:

Vietnam is stable and equal social-political environment.competitive labor cost.

Foreign Direct Investment strongly supported by Government.

Main Export Markets are US, EU, Japan, etc.

Worldwide Companies are seeking new primary and secondary sources for low costmanufacturing and supply bases;

China hasn’t been the priority choice when there are many problems such asincreasing production costs, rising foreign exchange rates, restrictive governmentpolicies, inflation and even the possibility of widespread civic disputes.

Vietnam represents a “first mover opportunity” for

those who want to make the investment in time, energy and money.

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THANK YOU!

Understanding-Vietnam

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