"To see the change in Country X with my own eyes, even stuff as simple as the cheap locally-made Phin coffee filters, the quality of something this common and mass-produced is vastly superior now."
Amidst all the macro uncertainties and talks of global recession today, if we were to tell you that there is a country growing at 6-7% per year over the past decade and will continue to do so in the next ten years, would you believe us?
That country, as we alluded to as Country X earlier, is Vietnam.
Tucked away in Southeast Asia, Vietnam is generally known for two things. First, the US-Vietnam war, and second, as an exotic destination for the intrepid traveler in this part of the world.
Vietnam has since come leaps and bounds over the past ten years. However, the story has only just begun.
Economic reforms driving transformational growth
The typical magic formula for emerging market success is the triumvirate of economic reforms, political reforms, and market reforms. In Vietnam, we have them in spades.
The first seeds were planted in the mid-1980s, in what is known as the Doi Moi reform period, as the country transitioned from being a centralized command economy to a mixed socialist-oriented market economy.
Today, Vietnam is an important member of the global economy as a cost-effective manufacturing base in a strategic location. Sharing borders with China and located along several international shipping routes, the country is also a member of more than 12 Free Trade Agreements. There is a large, young and productive population of 97 million with wages that are just 1/3 of workers in China.
As a result, FDI net inflows have more than doubled since 2011. Even at the peak of the pandemic, multinationals such as Samsung and LG continue to expand production in Vietnam. Today, the country is a top-three exporter worldwide of products such as phones, furniture, and rice, amongst others.
Besides Vietnam's intrinsic attractions, the US-China trade war and supply chain disruptions have supercharged Vietnam's evolution as a strategic hub on the global manufacturing map. These are immense tailwinds that will remain for many years to come.
Political impetus laying the path for sustainable growth
Economic reforms would not have been possible without a stable socio-political environment. The Vietnamese government has done well but it is not sitting still.
With dreams of being a manufacturing powerhouse, the government has committed to an ambitious decade-long infrastructure plan to turn Ho Chi Minh City and Hanoi into regional metropolises and expand the formation of industrial bases across the country. At around 6% of GDP, Vietnam's share of infrastructure spending to GDP is among the highest in Asia.
The government has also kept the Vietnamese Dong stable to encourage international trade and investment. With a substantial current account surplus and healthy foreign exchange reserves, Vietnam will be one of the developing countries that US rate hikes will least impact.
Anti-corruption efforts have also been laudable. According to Transparency International, Vietnam's position has improved from 104th to 87th. More must be done, but the country is on the right track. The current Community Party chief Nguyen Phu Trong is well-known as Vietnam's anti-corruption czar who has brought down “untouchables” such as ministers and chairpersons of important public bodies.
Earnest market reforms, but more to be done
In terms of market reforms, the privatization of state-owned companies began in earnest in 2014. Lawmakers have also been active in proposing policy changes to improve capital markets access for companies while ensuring fairness and transparency for investors.
A significant move has been to allow local investors to open brokerage accounts via eKYC in August 2020, which ignited local investor participation. Today, the average daily trading value of the Vietnamese stock markets has exceeded developed peers in the region such as Singapore. There is still much room to grow, with only 4% of the population having a brokerage account.
However, restrictive foreign-ownership limits (FOLs) of companies have presented significant friction for foreign investors, and foreign passive funds are unviable. Vietnamese securities are also classified in the MSCI frontier market index instead of the emerging market index as a result.
Thus, for foreign investors looking to invest in Vietnam, investing in an actively managed fund is essential, and the ability to do so via a local vehicle is an edge. We should expect some FOLs to be lifted by 2025, which will allow Vietnam to be classified as an emerging market and attract a much greater pool of capital.
Youth is not wasted on the young
Having started with a quote, we would like to end with another from a friend who is a frequent visitor to Vietnam:
"The Gen Z in the country possesses a spirit and work ethic like no other country I have been to".
Vietnam is like Jekyll and Hyde. There are constant reminders of the war, and the older generation that has been touched by the war has not forgotten it. Although they have missed out on the spoils of capitalism given the late start, they continue to work hard and makes sacrifices to ensure that the next generation is well educated.
At the same time, the younger generation has caught on to the aspirations in the West and the ideals of globalization. They are ambitious, hungry, and leaving the villages en masse to find a job in the city and achieve a better quality of life.
There is much more to learn about Vietnam, and much to look forward to.
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Written by Ming Yeung Wu, Senior Investment Analyst, July 2022