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NIKKEI ASIAN REVIEW
Why
bulls should not charge headlong into Vietnam Nation has
much to offer investors, but state interference still poses risks William Pesek Executives in Vietnam
may see the prefix "+81" -- Japan's country code -- on a growing number
of incoming calls this year. The Southeast Asian
economy has often been a favored destination for Japan Inc. Now out of
all regional options, 36% of Japanese companies see Vietnam as the
number one place to do business, says a December survey by Kyodo
News-affiliated NNA. By a wide margin, too. Second-ranked India scored
less than 18% of interest. China, less than 8%. Vietnam has 7%-plus
gross domestic product growth, a sizable consumer market and is working
to become a central production hub, as an alternative to China. Quite a
standout in a region being upended by the global trade war. Largely
devoid of the currency gyrations and election intrigue afflicting
neighbors from Indonesia to Thailand, Vietnam offers shelter from the
coming global storm. Punters expect Ho Chi Minh City stocks to rally
nearly 20% this year. What could go wrong?
Quite a bit, actually. The bull case is
evident. Even with its many boom-bust cycles, Vietnam's GDP has advanced
on average by more than 5% annually since 2000. The government has
worked steadily to create a cost-effective manufacturing power. In 2018,
it attracted enviable foreign-direct investment inflows from Japan,
South Korea and Taiwan. As of Dec. 26, actual FDI disbursements had
risen 9% in 2018. The year ahead, Hanoi hopes, will see even more. The benchmark VN Index
appears cheap. Back in April, shares on average traded at roughly 20
times estimated earnings. Today, they are in the 14-15 range, compared
with, say, 20 in the Philippines and 19 in Malaysia. Given that
Vietnam's initial public offering market exceeded Singapore last year,
with total proceeds of $2.6 billion, investors would seem to have plenty
of targets. Hence the 18% rally analysts polled by Bloomberg expect this
year. Yet here are three risks
that could easily upend optimism in the 12 months ahead. First, Donald Trump's
tariffs. For now, Vietnam is an obvious winner in Asia's "Plan B" beauty
contest as conditions in China turn ugly. The U.S. president's taxes on
$250 billion of mainland goods are imperiling China's export engine.
Though President Xi Jinping's government is telegraphing 6.3% growth in
2019, almost no one believes it can achieve that. As companies from Japan
and South Korea to the U.S. look for an alternative, Vietnam's $241
billion of annual GDP feels comfortably familiar. A Communist
government, openness to smokestack industries, a firm hand on public
dissent, urbanization and 97 million-strong population can make the
place seem Chinese enough without the Trump-Xi histrionics. Yet no trade-reliant
economy is immune to what might happen next. Trump's threat to impose
25% levies on imports of cars and auto parts, for example, would
devastate the supply chains on which China and Korea rely. These, it is
worth noting, are two of Hanoi's biggest markets. Increased chaos on the
trade front, and the specter of Trump starting a currency war, could
mean fewer incoming +81 calls than expected. Japan Inc.'s 2019 will
darken with each Trumpian outburst. No open Asian economy can wall
themselves off from an erratic White House. Next, government
short-termism. Last week, Prime Minister Nguyen Xuan Phuc called on the
Ministry of Finance to hasten reforms, focusing on more effective tax
policies, simpler customs procedures, increased budget revenues and
tighter corporate governance. Investors could be
excused for feeling a sense of deja vu. Twelve months ago, market
watchers were forecasting a 20%-plus surge in VN shares amid hopes
Phuc's team would accomplish much of what he discussed once again last
week. The slower-than-hoped pace of reform helps explain why stocks lost
9.3% in 2018. To validate investors'
optimism, Phuc's team must accelerate steps to open up the economy more
to financial investors and privatizing hundreds of state-owned
enterprises. Given Vietnam's young population -- roughly 25% of which is
under 15 -- punters are especially interested in greater access to
consumer and health-care-related SOEs. Markets will cheer any progress
on upping foreign-ownership caps in listed companies above today's 49%,
something Phuc's team has proposed. Yet efforts to
strengthen the financial system have lagged Vietnam's ambitions. In a
Dec. 4 report, Fitch Ratings noted that for all its progress building a
consumer market, Vietnam remains highly dependent on state-directed
industrial investments for growth. In other words, it is
more about stimulus than organic growth, a demerit that will sound
familiar to China investors. As such, Fitch warns, bank capital "remains
under pressure" thanks to overextending credit. Finally, imperiling
innovation. When trying to take on China, it is wise to avoid
Beijing-like own goals. Hanoi's new cybersecurity law is a case in
point. Daniel Bastard of Reporters Without Borders, the media freedom
lobby group, minced no words on Jan. 1, deriding it as a "totalitarian
model of information control." Mark Zuckerberg of
Facebook renown might agree. Last week, Hanoi picked a headline-grabbing
fight with the world's biggest social network. Hanoi accused Facebook of
allowing the posting of "slanderous content, anti-government sentiment
and libel and defamation of individuals, organizations and state
agencies." Over the top?
Zuckerberg's juggernaut can defend itself (and it does, claiming it has
restricted illegal content in Vietnam). But this brawl might unnerve
those investors, many in Japan, who believe Vietnam is destined to
become an innovation powerhouse. How Hanoi cultivates a
Silicon Valley vibe while limiting the involvement of local
entrepreneurs in the big conversations of the day is an open question.
Google, too, is pushing back against demands that tech companies store
data in Vietnam, fearing the government might want access. All this works at
cross-purposes with Hanoi's ambitions. One reason Vietnam "is not an
investment market for the faint of heart," says global consultancy
Control Risks, is its "complex political patronage networks, rampant
corruption, 'evolving' infrastructure, low levels of transparency, and
capricious policy initiatives. The ability to successfully navigate
these challenges is critical to business success in Vietnam." The fastest way to
improve navigation is embracing global internet companies as allies in
reducing opacity. Xi is going even further in bolstering censorship,
imperiling China's development as a tech leader. Vietnam should not make
the same mistake. There is plenty that
could go wrong for developing markets with Trump still on the prowl. So
an ambitious country like Vietnam should take care to avoid making life
even harder for itself. Now it is a clear favorite for CEOs from Tokyo
to New York. But another year of disappointing investors betting on a
modernized economy would cost the nation dearly. |