The Switzerland-headquartered private banking group set out the case for Vietnam, a country in the fast-growing Southeast Asia region. While much of the surrounding forces are positive, the firm also explains a few challenges for Vietnam.

The following commentary about the Vietnam economy and its investment prospects is from Charles-Henry Monchau, chief investment officer, Bank Syz. The editors are pleased to share these insights; the usual editorial disclaimers apply. To respond and comment, email tom.burroughes@wealthbriefing.com

Vietnam's journey from a centrally controlled economy to one of the most dynamic emerging countries in the East Asia region is an economic success story. Since the launch of a policy, in English known as renovation, in 1986, a series of economic reforms, coupled with beneficial global trends, propelled Vietnam from one of the world's poorest nations to a lower middle-income country within a generation. This transformation has seen Vietnam's gross domestic per capita increase 3.6 times between 2002 and 2022, reaching nearly $4,200. Poverty rates have seen a significant decline, from 14 per cent in 2010 to 5.7 per cent in 2023.

Despite recent challenges, Vietnam's economic outlook remains strong, supported by the burgeoning export manufacturing sector and substantial foreign direct investment (FDI) inflows. Vietnam is anticipated to experience the highest growth in Southeast Asia, with projections of 6 to 6.5 per cent in 2024, driven by exports, services (including tourism), robust imports, and stronger manufacturing activity. The economy's growth momentum is expected to maintain an annual rate comfortably above 6 per cent in the subsequent quarters.

Why invest in Vietnam? 
Strategic location, young demographics, and favourable business environment
Vietnam's appeal to investors is clear: a prime location in Southeast Asia, a youthful and educated population, and a business-friendly environment. Situated at the centre of ASEAN, it offers direct access to nearby countries such as China, Thailand, and Malaysia, making it a key hub for regional operations. Vietnam boasts a young (median age 33 years) and educated (literacy rate of 97 per cent) nation of 100 million people.

Actively engaging in significant trade deals, Vietnam is part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the EU-Vietnam Free Trade Agreement (EVFTA), and the ASEAN Free Trade Area (AFTA), which collectively grant Vietnamese exports preferential access to a market of over 500 million people. Moreover, Vietnam is undertaking substantial efforts to enhance its business environment, streamline bureaucratic processes, and attract foreign investment, all of which have contributed to the expansion of its industrial sector in recent years.

ChinaPlusOne strategy
Vietnam's strategic location, abundant natural resources, and a burgeoning skilled workforce make it an attractive prospect for companies looking to move away from China. Tech giants including Apple, Dell, Google, Microsoft, and Intel, have all diversified their supply chains through investments in Vietnamese facilities in recent years, as part of a “ChinaPlusOne” strategy. Vietnam's manufacturing sector remains highly attractive to both international and domestic investors, particularly in the smartphone supply chain and consumer electronics., This was evidenced by Apple’s supplier, Luxshare Precision Industry, making a $504 million investment in a Vietnamese facility. Its rival, Samsung Electronics, produces half of its smartphones in Vietnam and has invested a total of $22.4 billion in the country.

Dutch chipmakers are also joining the trend, with BE Semiconductor Industries planning a $5 million investment in factory space. Looking ahead, Vietnam aims to expand its semiconductor manufacturing capabilities, with plans to train 50,000 engineers by 2030, indicating its commitment to become a key player in the global semiconductor industry.

FDI to transform the economy
Since joining the World Trade Organisation in 2007, Vietnam has seen a remarkable influx of foreign direct investment (FDI), which has been pivotal in transforming its economy into a significant manufacturing and export hub.

This period marked a notable shift towards an export-driven model, with goods exports leaping from 57 per cent of GDP in 2011 to an impressive 91 per cent in 2022. During this time, Vietnam's share in global exports tripled from 0.5 per cent to 1.5 per cent, with the share of sales of telephones, computers, and other electronic goods accounting for 32 per cent of total exports.

Rising middle class
The Vietnamese economic growth is accompanied by a steady expansion of the middle class (daily expense higher than $12 as defined by World Data Lab), a demographic segment with a major impact on the consumer market. Based on this definition, the middle class in Vietnam is estimated to comprise around 13 million people, representing about 13 per cent of the total population and is expected to double (30 per cent) by 2026. This demographic shift signifies not just an upturn in disposable income but also a heightened demand for diverse goods and services, offering investors and businesses a lucrative opportunity to penetrate the Vietnamese market.

The economic expansion has also benefited from a favourable interest rate environment, with the State Bank of Vietnam cutting interest rates by 150 basis points to 4.5 per cent in 2023. This adjustment encouraged companies to borrow at around 4 to 5 per cent (7 to 8 per cent at the beginning of 2023) for working capital and capital expenditure, further supporting economic growth. Inflation is forecasted to be at 3.5 per cent in 2024, enabling the Vietnamese government to continue its accommodative monetary and fiscal policies.

Bumps in the road…
Investing in Vietnam can be gratifying, but it also carries its share of challenges.

Firstly, Vietnam’s real estate sector, once buoyed by rapid growth, now exacerbates the nation’s debt burden through escalated bond issuances from $12 billion in 2020 to $26 billion by the end of 2021.

This surge in financing was a reaction to liquidity crises faced by overleveraged firms during the Covid-19 pandemic downturn, leading to a massive jump in bond issuances connected to real estate.

The sector's struggles were further highlighted by regulatory scrutiny following global market tremors caused by the Evergrande default and exacerbated by geopolitical tensions and inflationary pressures, which led to regulatory reforms and increased interest rates, tightening liquidity further.

Additionally, multinationals dominate the export sector, accounting for 75 per cent of foreign sales. The domestic stock market is therefore overly exposed to banks and real estate developers (50 per cent of equity market), who in turn are exposed to currency risks. It is worth mentioning that the Vietnamese Dong is not a freely convertible currency and may not always be taken out of Vietnam.

Conclusion
Vietnam's strategic location, skilled workforce, rising middle class, balanced foreign policies, robust FDI climate, and status as a manufacturing hub justify its investment appeal. The land of the rising dragon must harness its strategic advantages to achieve its ambitious 2045 vision.