Vietnam is becoming an important market for financiers in light of its continued need for investment capital to fuel the growth of the economy, writes Eleanor Hill.


Considered to be one of Southeast Asia’s most dynamic emerging economies, Vietnam has been undergoing significant political and economic reform since 1986. The resulting transition to a market economy from a rigid, centrally-planned approach has propelled Vietnam to lower middle-income status. It was previously one of the world’s poorest nations.
Full integration into the global economy will still take time, but joining the World Trade Organisation in 2007 was a significant step onto the world stage for Vietnam. In addition, the country is now actively involved in negotiations towards several important free-trade agreements. These include the Trans-Pacific Partnership (TPP) and a bilateral free-trade agreement with the EU.

Despite its global aspirations, Vietnam also continues to forge strong relationships with its fellow Association of Southeast Asian Nations (Asean) members, working towards establishing the Asean Economic Community (AEC) by 2015. The AEC’s aim is to “transform Asean into a region with free movement of goods, services, investment, skilled labour and freer flow of capital”.

Trade headwinds

Aspirations aside, 2012 was a relatively tough year for Vietnam in terms of trade volumes, says Lawrence Wolfe, acting head of transaction banking at Techcombank. The growth rate of both exports (+18%) and imports (+7%) slowed down considerably in 2012 compared with previous years. In 2011, exports grew by 35% and imports by 27%. Over the past decade, both had grown by over 20% annually on average.

This slowdown was due to the slower growth of the economy (GDP grew 5% versus an average of +7.5% over the past 10 years), which was reflected in slower growth of industrial production (+4.8%), high inventory levels of key industrial goods and a lack of sufficient credit to businesses due to banks’ conservative credit policies. “The latter resulted from the accumulation of bad debts by banks, persistently high interest rates on the lending side and borrowers’ unwillingness to borrow due to high interest rates on VND loans and economic uncertainties at home and abroad,” says Wolfe.

“Banks also focused on increasing liquid assets in order to have a sufficient cushion against potential deposit outflow and expected tightening of regulations regarding loan loss provisions,” he continues. So while banks had sufficient US dollars to lend at attractive rates, “the State Bank of Vietnam further tightened lending conditions for loans in foreign currency, requiring that borrowers must have sufficient foreign currency revenues to settle the loan amount. This put a squeeze on some importers that didn’t meet the requirement”.

Supply and demand

Nevertheless, Steven Beck, head of trade finance at the Asian Development Bank (ADB), believes that there is still significant growth potential in Vietnam, and therefore a great deal of interest in the market.

“In turn that interest translates to significant demand for trade finance,” he observes.

“We’re also in an environment where people are watching the risks very closely, including risk around the banking sector. So the combination of demand and concern about risk creates a situation in the Vietnamese market where there’s a lot more appetite than there is capacity to support trade,” he explains.

This is an assertion supported by Anurag Mishra, regional head, Asia and the Pacific, at the International Finance Corporation (IFC). “Although Vietnam’s overall trade growth may have slowed slightly in the second half of 2012, under the global trade finance programme (GTFP) we continue to see demand for cover and the challenge on the capacity side remains,” he confirms.

Plugging the gap

Both local and international banks provide trade finance in Vietnam, with little to distinguish the two, although the internationals often have a pricing advantage. This is offset, at least in part, by the hurdles of operating in an emerging market. As Beck puts it: “The international banks have a constant challenge in explaining the market environment and nuances to their risk management teams back at HQ. This is a hurdle that the Vietnamese banks can help them face by providing as much information as possible. This is also where the trade finance programme (TFP) tries to play a very active role. We speak with our international bank partners on a regular basis, including at times with their risk management partners, to share our experience of the Vietnamese market.”

An initiative run by the ADB, the TFP provides guarantees and loans to banks to support trade in challenging markets. “Today, there’s great demand in Vietnam for the TFP to continue working with the private sector to fill any market gaps to support trade,” says Beck. In order to do that, one of the primary things the bank has done to increase its capacity is to bring in more partners, such as Swiss Re, to share risk in that market. “We’re also working with Australia’s export credit agency, Efic, to support more trade in Vietnam,” he continues.

Another partner that the ADB works with to share the risk on certain transactions is the IFC, which also runs its own global trade finance programme (GTFP). In a similar manner to the ADB’s TFP, the IFC’s GTFP extends and complements the capacity of banks to deliver trade finance in markets such as Vietnam. Both the ADB and IFC also play a significant role as knowledge providers in the country.

Market characteristics and trade corridors

The most noteworthy trend that both Beck and Mishra see in the Vietnamese trade finance landscape is the consistently high level of demand. Similarly, for them, there is no stand-out industry sector among the range of transactions, which stretch across everything from capital equipment to commodities and consumer goods.

One area where opinion is more divided, however, is the trade corridors that will be important to Vietnam in the future. For Beck, south-south trade is one to watch. “There’s a lot of talk about the promise of enhanced trade (economic growth and jobs creation) through realising the complementary possibilities of trade between countries like Vietnam and countries in Latin America,” he says. He qualifies this however, by saying: “While it’s exciting to talk about south-south trade, if the banking relationships don’t exist to underpin that potential, it’s going to be difficult. So building those relationships is a medium-term goal for us [ADB] to focus on.”

The IFC’s Mishra, on the other hand, sees “Africa as the more lucrative and promising continent to build trade relationships, similar to other Asian countries like China and India which have greatly expanded their exports into Africa over the past few years”. That said, Mishra believes that “Asia will still remain the country’s top trading partner for the foreseeable future”.

Techcombank’s Wolfe agrees with Mishra. “Clearly, Vietnam is a major player and is heavily dependent on intra-regional trade. This trend is bound to continue and accelerate given that Asian FDI in Vietnam accounted for nearly 85% of the total approved FDI of US$13bn for 2012.” He also expects that this Asian FDI will spur further growth of Vietnam’s intra-Asian trade volumes over the coming years.