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OLIVER MASSMANN - Partner, General Director DUANE MORRIS VIETNAM LLC
VIETNAM’S ECONOMY IN 2015Attempts to reform leading to remarkable
development?
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AGENDA:
• VIETNAM 2014 ECONOMY AT A GLANCE
• M&A AND CAPITAL MARKET OUTLOOK
• OUTLOOK FOR VIETNAM’S ECONOMY: IMPACTS OF THE NEW INVESTMENT LAW, ENTERPRISE LAW AND INTERNATIONAL FTAS
• CONCLUSION
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Vietnam 2014 Economy at a glance
• GDP: US$187.5 billion• GDP per capita: US$2,028• GDP Growth: 5.98 % • Inflation: 4.09%• Population: About 90.73
million • Labor force aged 15 and
above: 54.48 million• Total export and import
turnover: : US$ $298 billion• Minimum wage: VND 2.7
million (US$ 147) per month (Jan 2015)
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WTO ANALYSIS OF LIBERALIZATION OF MARKET ACCESSVietnam ties in first place with Singapore
• *Typical restrictions: number of opened sectors, JV requirement, limits on foreign-owned shares, permission requirement
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Country Limitation of market access*
Country Limitation of market access*
Malaysia medium Myanmar high
Indonesia medium Cambodia medium
Philippines medium Laos medium
Singapore low India high
Thailand medium China medium
Brunei high Vietnam low
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M&A activities in Vietnam
• M&A activities in Vietnam have seen steady growth after Vietnam officially became member of the WTO in 2007
• Especially Vietnam has risen 5 times the deal value from US$1.08 billion since 2009 to a record breaking US$5.1 billion in 2012
• M&A activity is expected to remain buoyant in the coming years, with a projected growth rate of 25-30% per year over the next five years
• First M&A wave in Vietnam from 2008-2013 when the Japanese investors kept coming to Vietnam with total M&A value of US$1.2 billion in 2012. Japan leads the nations that bring M&A deals to Vietnam in terms of both quantity and value
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M&A activities in Vietnam
• There has been an emerging wave of ASEAN investors taking over Vietnamese firms
• FMCGs is considered the most attractive, with the total M&A transaction value up to US$1 billion, accounting for 25% of the total M&A value in Vietnam while the retail and real property have always been very robust in M&A with the big deal value
• The Trans-Pacific Partnership, and Free Trade Agreement between EU and Vietnam currently under final negotiation process. When they are concluded early this year, it may also drive more interest in M&A activities in Vietnam.
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Notable M&A deals in Vietnam in 2014• Berli Jucker (BJC): BJC bought 19 Cash & Carry and their
related real property of Metro with a deal value of US$ 879 million
• Vingroup: Vingroup bought 70% of Ocean Retail Company’s capital on 03 October 2014
• Modelez International bought 80% of Kinh Do JSC’s capital in sweets manufacturing section at US$370 million
• Standard Chartered Private Equity acquired a significant minority stake in An Giang Plant Protection JSC at US$90 million
• Creed Group bought enterprise bonds of NBB at US$30 million to invest in City Gate Towers ( a real estate project)
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Equitization plan for 2011 – 2015 period• Target: 899 equitized SOEs• Results: 99 in 2011-2013; 432 in 2014• 368 SOEs to be equitized in 2015! Great challenges
ahead• Certain kinds of equitization:
– issue of shares in order to capitalize state-owned enterprises– partial sale of state-owned capital; and complete sale of state-
owned capital for the purpose of transformation into joint stock companies
Foreign equity limitation: 30% in general, except certain sectors (Securities: 49%; Banking and finance: 20%)
• The State of Vietnam remains main control over certain equitized enterprises by holding special controlling shares in these enterprises.
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M&A and Capital Market Outlook in 2014-2018• M&A activities in Vietnam expected to maintain an
annual growth rate of 25-30 percent over the next 5 years
• The firms from Japan and ASEAN using M&A to enter Vietnam’s market will continue to be robust for M&A in the next few years since the banking system is still being stepped up for restructuring process while the real estate market is frozen and many property investors are facing financial difficulties
• The M&A activities in consumer goods will also be active as the F&B industry in Vietnam is one of the most attractive investment industry in the eye of the equity fund and foreign firms
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More banking M&A transactions in 2014-2018
• M&A activities will continue to be buzzing as the number of commercial banks will be reduced to 13-15 in 2017 (on-going M&A deals: Southern Bank merged with Sacombank, MDB merged with Maritime Bank, PGBank merged with Vietinbank)
• GP Bank acquired 100% by the UOB of Singapore may open the M&A wave in 2015
• Pressure for divestment from banking area of SOE’s in 2014-2015 will lead to more M&A activities: EVN still holds 16.02% stake in ABBank, PVN owns 20% of stake in Ocean Bank
• The bank will be more active in finding new foreign strategic partners when the pressures from competition and capital requirements may push smaller banks to look for new foreign investors to achieve expansion
• To resolve the problems, the weak banks will be merged with the other big banks
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M&A and Capital Market Outlook• Vietnam’s economy still remains upbeat as the
Government is on the right track to keep the inflation stay low, stabilize the macro economy
• The government may loosen the foreign ownership caps to give investors more room to boost holdings
• The prospects of a TPP and EVFTA with the increase of trade deals will be great outlook for Vietnam to attract more foreign capital
• The reform of SOE by equitization and IPO: targeted to equitize 368 companies in 2015 which definitely provides a good number of companies for the stock market
• New Investment Law and Enterprise Law!!!
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M&A and Capital Market Outlook
HOWEVER: There remain certain risks of non-performing loans (NPLs)…•The ratio of NPLs is not under control (15% of the total assets of banks, ~3 times higher than the official ratio announced by the SBV of 4.7%) hinders the capital flow•Capital remains inadequate to absorb the extent of potential losses stemming from pervasive weaknesses in asset quality (Moody’s Vice President)•Lack of strong legal framework dealing with NPLs resolution.12
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M&A and Capital Market Outlook• Establishment of Vietnam Asset Management Company
(“VAMC”) as a solution to NPLs:– Buying bad debts from credit institutions– Recovering, collecting, handling and selling debts
and other guaranteed assets– Debts restructuring– Using and renting the bought-back guaranteed assets– Etc.• Up to October 2014, VAMC has dealt with 54.3% of
the total bad debts from September 2012; recovered VND95,000 billion and sold VND4,000 billion of bad debts with profits.
• BUT: VAMC is not a solution – Bad debts are still there, just change of pocket
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Outlook for Vietnam’s economy
• Impact of EVFTA and TPP on Vietnam• Impact of the new Investment Law and
Enterprise Law• Outlook for Vietnam’s economy in 2015
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TPP’s Impact on Vietnam’s Economy
• Vietnam will enjoy strong economic and trade expansion and is expected an additional 1% economic growth from this agreement
• Vietnam is expected to gain significantly from the TPP’s considerable plans for tariff and duty reduction
• Vietnam’s export will enjoy the agreement’s great benefits when the US and Japan are one of the biggest partners of Vietnam, especially the garment and textiles sector
• Export to the US would increase by 13-20% a year until 2017, fetching total export of US$25-30 billions
• The foreign businesses are planning to enter Vietnam in preparation for a post-TPP business climate
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Government Procurement in TPP• 3 out of 11 TPP negotiating countries are parties to the
WTO Government Procurement Agreement (Singapore, Japan and the United States)
• Allows all firm operating in any signatory country to be provided equal access as domestic firms to the domestic procurement contracts (National Treatment principle).
• The United States is the biggest trading partner of Vietnam Vietnam enterprises operating in the United States have
significant access and equal treatment as the U.S. firms in the government procurement process.
• TPP is a stepping stone for Vietnam to become party to the WTO GPA increase competition, enhance the efficiency and transparency of the government procurement system VN to attract more foreign investment and avoid corruption.
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EVFTA’s Impact on Vietnam’s Economy• Vietnam’s annual economic expansions rate may grow an
additional 15% every year (said Tomaso Andreatta, representative of the European Business Association in Vietnam (EuroCham), at the Vietnam Business Forum 2014)
• Tariffs for most of Vietnamese export product to the EU will gradually reduce to 0% and Vietnam’s export to EU is expected to grow about 35% for next few years
• The real wages of skilled laborers may increase by up to 12% while real salary of common workers may rise by 13%
• The EVFTA is the legal framework for a more stable relationship in bilateral trade for Vietnam when competing in the international market
• The EVFTA will generate greater effects, e.g. increased quality of investment flows from EU, acceleration of the process of sharing expertise and transfer of green technology and the creation of more employment activities17
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Government Procurement in EVFTA• All European Free Trade Association (EFTA)
states are signatories to the WTO GPA, except for Vietnam.
• Vietnam will have better access to Europe’s relatively open public procurement market.
• Transparency in state-owned enterprises, which used to enjoy privileges over access to land, credit and government contracts, will be improved.
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Impact of the new Investment Law and Enterprise Law on Vietnam’s economy
• More transparent investment environment, ventilation and reduce business costs
• Fair competition between domestic and foreign investors
• More large-scale investment projects in Vietnam
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DEFINITION OF FOREIGN INVESTOR – CLEARER NOW?• New Investment Law: Very simple
definition!
Foreign investor is any foreign individual or organization incorporated under
foreign law doing business investment activities in Vietnam
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DEFINITION OF FOREIGN INVESTOR – CLEARER NOW?• New Investment Law removes the Foreign
invested enterprise concept in favor of a new definition:
Economic entity with foreign owned capital: Entity has any member or shareholder who is a
foreign investor
• Foreign invested enterprise vs. Economic entity with foreign owned capital (“FOC Entity”): ANY Difference? => Just change the nameBUT the capital ratio of foreign investor in FOC Entity will decide the licensing procedures21
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DEFINITION OF FOREIGN INVESTOR – CLEARER NOW?
• When FOC Entity needs to follow the licensing procedure for the foreign
investor?
Defined by the capital ratio of 51%:
1.FOC Entity has any foreign investor who holds 51% or more charter capital or has foreign individuals as the majority of partnership members (‘‘FOC Entity No. 1’’)2.FOC Entity has FOC Entity No. 1 who holds 51% or more charter capital (“FOC Entity No. 2”)3.FOC Entity has FOC Entity No. 1 and FOC Entity No. 2 who hold 51% or more charter capital (“FOC Entity No. 3”)
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M&A PROCEDURES UNDER NEW IL • M&A Procedure: Appears to be simple!!! Implementing
regulations only in the upcoming months Satisfying the requirements for investment Submitting application dossier Assessment by the licensing authority and decision
making after 15 days• Subjects:
foreign investors making investment in conditional business activities applicable for foreign investors;
FOC Entity No. 1 , FOC Entity No. 2 or FOC Entity No. 3 holding 51% or more of the targeted economic enterprise as a result of the M&A
Exclusion: FOC Entity other than FOC Entity No. 1 , FOC Entity No. 2 and FOC Entity No. 3: same procedures for domestic investors
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Recommendations for M&A in Vietnam• Make clearer rules on foreign ownership in
Vietnamese companies;• Clarify the basis for calculating the market share
of a potential target company in relation to an economic concentration;
• Harmonise the interpretation of transfer price;• Clarify and improve the regulatory framework on
tax liabilities arisen from M&A transaction;• Ensure that decisions taken by the Vietnam
Competition Administration Department (VCAD) are made quicker.
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Outlook for Vietnam’s economy in 2015
In 2015, Vietnam is expected with a brighter economic situation: Macro economy and monetary policy will remain
stable The inflation will be under control, estimated rate
of 4% 2015’s GDP is estimated to rise from 6.2%
Exports, especially FDI manufacturing companies, will push the growth of Vietnam’s economy in 2015
Continued stronger reform of institutional and administrative procedures to improve investment environment
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DUANE MORRIS VIETNAM LLC
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