Strong FDI inflows into Vietnam are expected

>> Embracing the New Wave of FDI

In 2023, Vietnam remained a strong contender for global FDI, with its position becoming increasingly firm. The overall recorded FDI for the year 2023 was USD36.61 billion, a 32.2% increase over the previous year. Disbursed FDI increased by 3.5% YoY to USD23.18 billion, the highest amount seen for the 2017-2023 period. 1Q2024 continued to show strong signs, with FDI registered and disbursed totaling USD6.17 billion (13.4% YoY) and USD4.63 billion (7.1% YoY), respectively. Tran Duc Anh, Head of Macro & Strategy at KB Securities, predicted FDI inflows into Vietnam to increase significantly in 2024 as:

First, in light of rising geopolitical issues, notably those between the United States and China, there has been a drive to shift production out of China in order to diversify supply chains. Vietnam, with its strategic location in the center of Southeast Asia, good economic climate, and large young labor, has emerged as an appealing destination for manufacturers.

Vietnam's trade surplus with the United States expanded 2.7-fold between 2018 and 2023, placing it fourth among nations with the greatest trade surpluses, trailing just Mexico, China, and Canada. Vietnam has also emerged as a new location for high-tech manufacturers such as Apple, Samsung, Foxconn, and Pegatron. According to JPMorgan, Vietnam will provide around 65% of AirPods, 5% of MacBooks, 20% of iPads, and Apple Watches by 2025.

Second, Vietnam has several competitive advantages over the region and other rival countries, including stable economic and political conditions, a strategically advantageous location for investment activities, a number of signed free trade agreements (FTAs), a large low-cost labor force, and competitive production costs.

With an average price of USD0.078/kWh, Vietnam's power expenses are relatively inexpensive when compared to regional countries and rivals such as China and India (Fig 60). This gives Vietnam a substantial edge in recruiting FDI because power is a critical component for industry.

Furthermore, the Vietnamese government has consistently encouraged FDI attractiveness by offering attractive assistance packages, fostering a favorable business climate, and focusing on infrastructure building and renovations. According to EuroCham, business confidence among European firms in Vietnam has dramatically recovered following the pandemic-induced slowdown, with the Business Confidence Index (BCI) rising to 46.3 in 4Q2023 from 45.1 in the previous quarter.

Third, Vietnam's improved relations with the United States, Japan, and Australia, as well as diplomatic visits to important nations such as China and South Korea, have boosted commerce and FDI. Vietnam holds the world's second-largest volume of rare earth resources and the third-largest tungsten reserves, therefore the comprehensive strategic collaboration with the United States has created chances for the semiconductor sector. Both are essential components for high-tech manufacturing enterprises.

Fourth, Vietnam formally established a 15% worldwide minimum tax rate on multinational firms beginning January 1, 2024. "We believe the impact on FDI attractiveness is negligible because the numbers for new registered FDI in the first quarter of 2024 continue to indicate robust growth," said Tran Duc Anh.

>> Localities get ready for fourth FDI boom

Moreover, competing countries for FDI like Malaysia, Indonesia, and Thailand have also adopted similar tax regulations. The government is also considering issuing alternative incentives to support FDI enterprises based on revenue from the global minimum tax to protect competitive advantages.

Fifth, the recovery of FDI inflows will stimulate demand for industrial land, notably in Northern Vietnam's electronics industry and other industries in Southern Vietnam such as automobile manufacture, textiles, and packaging. As a result, Tran Duc Anh is optimistic about the prospects for industrial parks in 2024, citing: 1) Vietnam's significant investment in infrastructure (North-South expressway, Ring Road 4 in Hanoi, seaport and airport projects, etc.) and 2) the expected 6-12% increase in industrial land rental prices in 2024, resulting in a preference for industrial land in tier 2 provinces.

"We favor shares of firms with established industrial parks with large leasable lands, such as Kinh Bac City Development (KBC), IDICO Corporation (IDC), and Phuoc Hoa Rubber (PHR), especially considering the ongoing supply constraint scenario. KBC, in addition to its vast current land bank, is projected to shortly bring Trang Due 3 (687 ha) into operation, IDC still has over 700 ha of leasable land and an attractive dividend payout, and PHR should receive permissions to expand Tan Lap 1 and Tan Binh Industrial Parks," said Tran Duc Anh.

The trend of investment in high-tech sectors, particularly semiconductors, will provide long-term possibilities for IT and chemical firms like FPT Corporation (FPT) and Duc Giang Chemicals Group (DGC). The government is driving the development of human resources for the semiconductor sector, with the goal of having 30,000 engineers by 2030. In addition, a fund to assist investment in high-tech projects, particularly those in the semiconductor sector, is set to be formed by mid-2024.

The General Statistics Office (GSO) claimed that FDI accounted for 73% of Vietnam's export revenue in 2023. As a result, amidst rising FDI inflows and recovering international trade, the logistics industry (for example, Hai An Transport & Stevedoring (HAH), Gemadept Corporation (GMD) is expected to perform well due to higher freight rates caused by tensions in the Red Sea, limit  ed new supply, and the Ministry of Transport's recent 10% increase in container handling fees. building businesses focused on warehouse building projects, such as Coteccons Construction (CTD), will gain from impending foreign-invested construction projects.