Source : Eugenia Lotova, Vietnam Briefing, www.vietnam-briefing.com, June 25, 2016
As the British people decided that they wanted to leave the European Union in a 52 to 48 percent vote, much more than a decision over Britain’s self-conception hung in the midst. While many citizens have long expressed frustrations regarding their own country’s inability to self-govern due to their EU ties, the impact of a Brexit will be reaching far beyond Britain and the European Union. In the case of investment, the Brexit will compel British investors to reconsider their business strategy in Vietnam.
Alternatively, the effects on the Vietnamese export sector will be minimal and may even present opportunities for the communist nation to solidify consumer bases in the United States and European Markets.
Post Brexit Market Volatility
As the polls began to close, the British pound was quick to react — hitting a 31 year low against the US dollar. There is some uncertainty regarding the medium and long term impact of the referendum, but there seems to be a general consensus among financial experts that the currency may plummet in the near future and the country will experience a decrease in GDP growth—anywhere between 0.2 and 2.2 percent. The Euro may also experience a drop of 4 percent. The Vietnamese Dong is up 3.74 percent against the Euro and a massive 12.55 percent against the British Pound.
While fluctuations in the Euro and Pound may have an impact on Vietnamese exports to Europe, the most important currency paring to watch will be the Dong to Yuan (China) exchange. Heavily restricted in trading by both Chinese and Vietnamese Governments, the wild fluctuation of the Euro, Dollar, and Pound, is likely to put immense pressure on monetary authorities in both countries as they struggle to maintain control. In the event that the either runs out of resources or willpower to continue currency controls, the fallout will be substantial. Vietnamese imports from China currently account for nearly a 30 percent share of its total global purchases. If the cost of these goods were to rise as a result of a float by either currency, it would certainly be a significant blow to Vietnamese export competitiveness.
News of Brexit also wiped more than US $1 billion from Vietnam stock market with 500 Vietnamese stocks dropping and 1.9 percent off VN-Index at closing on June 24th, as bearish sentiment dominated for both local and foreign investors. However, the sell-off is attributed to the investors’ panic rather than actual negative effects on Vietnam. While consumers will be able to purchase more from British companies, it also means that potential British investors will have less purchasing power in Vietnam and any companies exporting to Britain may experience a decrease in demand.
Long Term Trade Implications
The Bilateral Investment Treaty, which was signed in 2002, was recently replaced by the EU-Vietnam FTA (EVFTA). Talks ended in 2015 and the agreement is expected to come into force in 2018, and thereby provide investors with additional incentives to set up business in Vietnam. Nonetheless, the referendum will force Great Britain to renegotiate trade agreements with Vietnam, disrupting the tax breaks that British investors would have been able to take advantage of under the EVFTA.
The top exports to the UK, which include electronics, footwear, machines, and clothing will be negatively impacted by a depreciating currency. In the first 8 months of 2015 revenue from exports to the UK reached nearly 3 billion USD and investments have been spreading to sectors such as banking, manufacturing and garments, indicating a British interest in the Vietnamese markets. Currently the largest companies investing in Vietnam are in the logistics, food and drink, and insurance sectors.
Therefore, although the UK is only 16th in amount of foreign investment into Vietnam, the country is Vietnam’s largest trading partner amongst the European Union nations so the referendum will have a major effect on trade relations in the region. However, compared to Hong Kong, Singapore, and Japan, Vietnam won’t feel as much of a shock according to Ms. Do Thi Ngoc, Deputy Head of Vietnam’s Price Statistics Department, because the EUVFTA hasn’t been implemented yet.
Opportunities for Investment
Despite the volatility it has caused in currency markets, Brexit may end up increasing demand for Vietnamese goods and lead to investment in certain sectors. With the current crisis unfolding in mainland Europe, many of the ongoing EU-ASEAN agreements, with countries such as Thailand, Singapore and the Philippines will be stalled. This will encourage Europeans to invest in Vietnam over other ASEAN destinations as EU consumers pursue discounted imports. The impetus for increased demand is likely to be brought on by devaluations in the Euro as well as potential declines in EU growth. As Vietnam is the only country in ASEAN to have successfully concluded an agreement with the EU, imports from the country will presented a significant discount over traditional imports as well as alternative low cost export markets.
Although Euro and Pound depreciation may inhibit EU and UK foreign direct investment to a certain degree, this is likely to be made up for by US investment. In the case of the United States, the US dollar’s position as a global safe haven currency has caused it to appreciate significantly against other currencies. Although strong currency management on the part of Vietnamese authorities has thus far prevent significant movement on the Dong to Dollar currency pair, US based investors will likely have more money to spend in the years ahead. In conjunction with reduced trade barriers, converged regulatory standards, and increased access to restricted sectors soon to be unlocked under the TPP, it is highly likely that Vietnam will reap the benefits of US investment in the years ahead.
Naturally, any investment made during such a period of volatility should be done with extreme care and with a up to date understanding of market dynamics.