Despite Vietnam’s record-breaking double-digit growth in the third quarter and a positive economic forecast for 2022, European businesses in the country showed less confidence in the country’s business and investment climate during the third quarter.
The European Chamber of Commerce in Vietnam (EuroCham) published its new Business Climate Index (BCI), showing a 6.4 index points drop from the previous quarter and 10.8 points from the first quarter of the year.
This comes at a time when global economic conditions remain unstable due to the escalating conflict in Ukraine, persistent inflationary pressures, a labor shortage worldwide, and stagnant global growth, EuroCham noted.
The BCI is a regular barometer of the business sentiment among European companies operating in Vietnam. EuroCham surveys more than 1,200 members representing virtually every sector of the Vietnamese economy to provide quarterly updates on the business environment and their outlook. Researchers from YouGov Decision Lab conduct the BCI research and compile the data.
The third quarter survey found that approximately 42% of the participants anticipate that the economy will stabilize or improve in the next quarter — showing an 18-point decrease from projections in the second quarter. Similarly, the number of business leaders who predict the deterioration of the economy increased by 7 percentage points to 19%.
“A worsening global economic environment is taking its toll on the optimism amongst European business leaders in Vietnam,” said Thue Quist Thomasen, the CEO of Decision Lab.
“However, by curbing inflation, improving credit ratings, and continuing GDP growth, Vietnam’s story stands out as less pessimistic globally as companies plan and look forward to 2023. By dropping 6.4 index points to 62.20, sentiment remains well above the midpoint of 50, indicating positive sentiment and a still optimistic view on the future.”
Hopeful amidst future challenges
The unstable global economic recovery may continue to fluctuate towards the end of the year. The International Monetary Fund has even cut the global growth forecast as it warned that “the worst is yet to come.”
In Vietnam, however, the national government expects a higher growth rate of 8%, beating its official target of 6-6.5% for this year.
European businesses are also showing optimism about the prospects for their own businesses during the fourth quarter, with 39% of the respondents having a “good” business outlook. Only 3% predict a “very poor” business performance in the October-December period.
Furthermore, 11% of the respondents indicate to have a moderate increase in their headcount. Investment planning, orders, and revenues are expected to remain relatively stable compared to the previous quarter.
As for foreign direct investment, 42% anticipate that their firm will increase FDI flows to Vietnam by the end of 2022. Respondents note that Vietnam could bolster these FDI levels by reducing administrative difficulties (68%), improving infrastructure (53%), developing human resource capacity (39%), and reducing visa barriers for foreign experts (39%).
“The future of Vietnam is bright. Vietnam offers great investment opportunities for European businesses, and we are very excited about the country's prospects in the medium- to short-term,” said Alain Cany, EuroCham Chairman.
He added that Vietnam and the EU’s shared commitment to sustainable development through the EU-Vietnam Free Trade Agreement shows a “great deal of growth potential.” Since taking effect in August 2020, EVFTA has boosted Vietnam’s export sector. EVFTA hit a total of $57.01 billion in 2021, a 14.5% increase from the previous year.
However, the current perception of EVFTA’s benefits has declined by four percentage points in comparison to the previous quarter. Administrative procedures were cited as the primary reason for this (38%), followed by a lack of understanding of the agreement (18%), and technical barriers to trade (16%).
“It is true that we are less optimistic now than we were at the beginning of 2022 due to external factors slowing global growth. The fourth quarter will also likely be less positive than the second or third quarters of the year.
“Still, these BCI results are encouraging. Vietnam will certainly be in a better position in two or three years, demonstrating its place among the most exciting and dynamic business and investment destinations.”