Vietnam's appeal as a key investment target could be about to decline in light of concerns over inflation, combined with problems with the country's infrastructure and problems finding highly skilled workers.
Ratings agency Fitch announced at the end of May that it has reaffirmed the country’s debt rating at BB-, but had downgraded its outlook to negative from stable, reporting that the government’s response to rising inflation has been too slow and is potentially putting the country’s banking system at risk. Inflation rose by more than 25% in May this year.
However, the agency also noted that any aggressive increase in interest rates could threaten the banks, especially if there was widespread economic decline.
Commenting on the problems facing the country, Franklin Poon, director of Fitch’s Asia sovereign ratings team, says: "There has been a sharp deterioration in the country's current account deficit, whose financing increasingly depends on non-FDI capital inflows. This highlights the increased external vulnerability of the sovereign, and the potential erosion of what had been a credit strength for the country".
Vietnam’s problems are mirrored in some of its neighbouring countries, with the Philippines, India and South Korea also suffering the ill-effects of soaring oil prices. Rising inflation, weakening currencies and deepening current account deficits are just some of the challenges facing many Asian governments.
Last week, the Vietnamese prime minister Nguyen Tan Dung called upon the ministry of planning and investment to undertake a study looking ways of improve the appeal of Vietnam, and draw in much needed foreign direct investment. He has commissioned a study looking at the pros and cons of investing in Vietnam compared to other nearby Asian nations.
"Although foreigners still see Vietnam as an attractive place to invest, we need to know our exact position in the region and in particular our weaknesses in macroeconomic stability,” Nguyen Xuan Trung, vice head of the MPI’s foreign investment agency, told the local Vietnamese press.
According to Trung, the main obstacles to foreign direct investment were the country’s lack of adequate infrastructure, limited pool of skilled workers and complicated administrative systems. He said added that even the benefits of low-cost labour may no longer be enough to maintain the appeal of the country to foreign investors.
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