FD less than meets the I

FD less than meets the I Foreign investment floods into Vietnam, but not all
   of the announced investment is actually being spent.

By Eric Johnson

   Vietnam's Ministry of Foreign Affairs said in early January that the country had managed to lure $60 billion of foreign direct investment into the country in 2008.
   That's more than triple the amount Vietnam attracted in 2007, and nearly 10 times the amount from 2005. The story is clear: foreign companies are interested in the opportunities Vietnam's manufacturing, infrastructure and real estate sectors have to offer.
   However, the numbers may be less than meets the eye.
   That's because the amount of FDI registered in a country can differ dramatically from the amount actually dispersed into the country. In Vietnam's case, the difference between earmarked investment and implemented investment is a big one. As little as 16 percent of the announced FDI in 2008 was actually dispersed as of October, a total of $51 billion at that point.
   Numbers from the past three years show a similar trend. According to the Vietnam Bureau of Statistics, in 2005 there was roughly $7 billion in registered FDI, but less than $4 billion of implemented investment. In 2006, the registered FDI spiked to $12 billion, but the implemented capital stayed relatively even with 2005 at about $4 billion. In 2007, the registered FDI climbed further, to $18 billion, while the implemented capital climbed barely above $4 billion.
   The trend is clear, while registered FDI is growing unabated, the amount that is actually being put to use in Vietnam has not been growing. That changed a bit in 2008, when $11.5 billion of FDI had been dispersed, a near tripling compared to the previous three years.
   But the gap between announced FDI and implemented FDI is still widening.
   To put it another way, a foreign company may announce plans in a particular year to invest $1 billion into three projects in Vietnam. Those projects may range from building a tourist resort, to joining a public-private partnership to build a highway, to buying land in a free trade zone.
   If the company says it intends to sink $1 billion in Vietnam, but only ends up building the tourist resort, the country's infrastructure needs are not helped. Yet there's rarely a circular from the Ministry of Foreign Affairs stating which FDI was announced but did not actually come to fruition.
   'In the context of the global economic crisis, this year's impressive figures in FDI attraction have proved the international business community's continued confidence in Vietnam's business environment and the government's inflation control measures,' the ministry said in a Jan. 2 statement. 'The ministry, however, forecasts that with the unprecedented global economic and financial crisis in the world history, Vietnam's FDI attraction in the years to come will be very difficult and the volume of disbursed FDI capital may sharply decrease.'
   That may be as close as the government comes to admitting that something promised is not necessarily something received.
   The global downturn may affect Vietnam's ability to get projects funded. That's at least as important, if not more important, as the effect the downturn has had on short-term demand for Vietnamese exports. A short-term slump in sales can be weathered. But long-term, the downturn may mean that companies intending to building highways and warehouses and container terminals may take a pass right now. Even if the investment comes later, it might be too late as infrastructure in Vietnam needs an upgrade sooner rather than later.
   The fact that capital is hard to come by these days, and that banks are hesitant to fund projects, has only exacerbated the situation.
   'The availability of debt and equity for investment into Vietnam has shrunk dramatically over the past few months,' the American Chamber of Commerce said in December at the biannual Vietnam Business Forum in Ho Chi Minh City. 'There is entrenched pessimism about the prospects of many announced projects moving forward to completion. Yet from a macro-economic point of view, it is crucial that FDI continue to be disbursed into Vietnam. Such disbursements often depend on lenders being willing to back the projects.
   'Unfortunately, the credit environment has changed and has largely dried up. Companies that wish to finance investment projects in Vietnam now need to demonstrate to lenders that their projects are the best in Asia because lenders are being very selective. We all know the obstacles that exist to doing business in Vietnam, as many are repeated biannually at this forum. In many instances, these obstacles accumulate to the point where – even in the past – projects were not bankable. This is one of the reasons behind the already large gap between committed and disbursed FDI.'
   To gauge just how much of an impact the economic crisis, which broke out in September, had on FDI into Vietnam, it should be noted that registered FDI dropped from $9 billion in September to $2 billion in October to $726 million November. And that's registered, not dispersed.

'The government needs to work more closely, with investors, who are now facing a challenging environment for credit, to help solve their problems and to make their project more attractive than those in neighboring countries.'

American Chamber of Commerce in Vietnam

   It's also important to see which countries are predominantly investing in Vietnam, and which ones are more likely to fulfill their FDI commitments. Between 1998 and 2007, Korea, Singapore, Taiwan and Japan were overwhelmingly the largest investors, contributing more than half of the registered FDI during that decade.
   Of those four, Japanese companies were the most successful at delivering capital, as it invested more than $5 billion of the $8.7 billion it registered. Companies in the other three struggled to meet their aims, committing anywhere from a quarter to 40 percent of the capital they had said they would.
   The United States, the seventh-biggest investor during that decade, similarly struggled, implementing about $1 billion of the more than $2.5 billion it had registered.
   AmCham Vietnam called on the Vietnamese government to encourage lending for infrastructure so that announced FDI becomes committed FDI. Vietnam's Ministry for Planning and Investment estimated at the beginning of 2008 that it needed $7.4 billion a year to upgrade the country's transport infrastructure, including highways, railways, ports and airports. But only $2 billion to $3 billion is being spent annually, most coming from the country's internal budget and government bonds.
   'This gap may become many times wider unless attention is paid to these obstacles,' the chamber said. 'The government needs to work more closely, in partnership with investors, who are now facing a challenging environment for credit, to help solve their problems and to make their projects more attractive than those in neighboring countries.'