After more than two years of negotiations, the European Union (EU) and Vietnam reached an agreement in principle for a new free trade deal. Our team believes this deal marks an important milestone not only for Vietnam, but sets an important precedent for other countries in Southeast Asia, a region of particular interest to us.
Vietnam has experienced a drop in exports this year—which some have said may have contributed to a devaluation of its currency, the dong, for the third time this year in August. With that backdrop, this trade deal with the EU could prove even more important for Vietnam.
The new trade agreement means Vietnam’s exports could see a boost amid broader access to the EU—whose member-countries collectively represent one of the largest economies in the world. Vietnam’s key exports to the EU include telephones and parts, electronic products, footwear, textiles and clothing, coffee, rice, seafood and furniture, while the EU exports primarily high-tech products including electrical machinery and equipment, aircraft, vehicles and pharmaceutical products to Vietnam.
I think part of Vietnam’s impetus for this deal is to lessen the country’s dependence on China, its largest trading partner. There have been some tensions recently between the two countries over drilling rights in waters claimed by both countries as their exclusive territory. Additionally, the recent weakening of China’s yuan (devalued in August) would make Vietnam’s exports even less competitive and could further worsen its trade balance. We see Vietnam’s subsequent currency devaluation as a necessary measure in light of the fact that the dong had been much stronger than some other currencies in the region.
Other important aspects of the trade deal may be of interest to international investors. Besides eliminating tariffs, Vietnam will also remove almost all of its export duties. Vietnam is not only focused on traditional export drivers such as commodities; it has been opening up new market access opportunities in services and investments.
In general, political progress—or the lack thereof—can be a key factor in unlocking economic potential in Asia. While Vietnam remains a Communist-ruled country, its leaders seem to be embracing capitalism, at least in some respects. Vietnam’s recent removal of limits on foreign investment in many areas (which had been capped at 49% of a listed company) looks encouraging to us. Its government has also been focused on developing a strong technology sector in particular, offering financial incentives and tax breaks.
Vietnam is clearly attracting investor interest. While its market is still relatively small, it may come as a surprise that Vietnam was second only to China as the most-popular investment destination in the Asia-Pacific region, as of 2014. Bordering China, the country has strategic importance in the region, and offers a number of positives that have attracted this interest, including low-cost labor, strong domestic growth potential and a youthful demographic. Chinese firms are already active investors in Vietnam, taking advantage of significantly lower wage rates in comparison with Southern China.
As investors in Vietnamese stocks, the primary constraints we face are liquidity and limited choices in which to invest. But we are hopeful that soon will change. Vietnam has had a fast-growing economy, and we have found good companies there, including some that are state-owned. More importantly, we have also found companies with attractive valuations in Vietnam. Currently, state-owned enterprises account for 40% of Vietnam’s gross domestic product (GDP), but authorities have affirmed a commitment to a more modern and open economy, which we hope will lead to more privatization.