Tag Archives: southeast asia

Outcomes of APEC – the TPP is dead, long live the CPTPP

As the dust settles and Vietnam returns to some semblance of normality following this year’s APEC summit, regional business leaders and investors are left to consider the consequences of the forum.

 

This year marks the second time that Vietnam has hosted the APEC summit, and the event was largely considered a success for the country. Vietnam was placed in a difficult position, between the competing interests of the United States and China, requiring a deftness in diplomacy.

 

Most media outlets were more concerned with President Trump and what would be his first appearance at a multilateral forum in the Asia-Pacific region. Widely-expected faux pas did not materialise, but neither did much news on the US’ position towards the region. Trump’s keynote speech was short on surprises, following familiar themes of protectionism, isolationism and criticism of predatory economic policies. Essentially, the speech underlined what we already know – that under the Trump administration the US would be taking a step back from the Asia-Pacific region and trade will need to be conducted on a bilateral basis.

 

In a marked contrast to the American tirade, China’s President Xi Jinping presented himself as a champion of economic openness and globalisation. Xi espoused a vision in support of a multilateral trade regime, and received hearty applause in return from the amassed delegates.

 

Putting his words into practice, Trump’s subsequent stop in Hanoi saw the signing of US$12 billion in commercial deals, including in the natural gas, transport and aviation sectors. In particular, national carrier Vietnam Airlines signed a deal worth US$1.5 billion for engines and support services from US firm Pratt & Whitney.

 

Despite the very different stalls set up by the attendant superpowers, Vietnam managed to balance itself somewhere in between. In a joint statement, Vietnamese President Tran Dai Quang and Trump reaffirmed the importance of the countries’ Comprehensive Partnership, and agreed to promote bilateral trade and investment.

 

Vietnam also stood in support of Xi’s signature policy, the Belt and Road Initiative. Specifically, both sides agreed to enhance economic and trade cooperation, with a particular focus on infrastructure.

 

Regional and international media praised Vietnam’s hosting of the summit and the final Economic Leaders’ Week, highlighting the country’s commitment to economic integration, sustainable growth and support for micro, small and medium enterprises (MSMEs). In the eyes of many, Vietnam has cemented its position at the centre of APEC’s economic structure. The country took advantage of the opportunity to enhance its prestige in the international arena and show others the strides it has made in development since it last hosted APEC.

 

Resurrecting the TPP

 

Trump’s election last year seemed to herald the demise of the Trans-Pacific Partnership (TPP), at least in its current form. Without US support, the trade agreement was surely destined to be forgotten or watered down to the point where it becomes worthless.

 

The US withdrawal failed to dampen enthusiasm for the trade pact, however, with Japan and Australia strongly advocating the continuation of talks, and protecting the gains made in the original TPP negotiations.

 

Following discussions in Danang, the 11 countries still backing the TPP agreed to its resurrection, and renaming, as the Comprehensive Progressive Agreement for the TPP (CPTPP). The move represents a clear rebuke to Trump’s ‘America First’ focus on bilateral deal-making. Despite a last-minute wobble from Canadian Prime Minister Justin Trudeau, the members agreed on keeping core elements of the original deal that would advance open markets, combat protectionism, and strengthen regional economic integration.

 

Vietnamese leaders were certainly sorry to see the US turn its back on the TPP; knowing that access to American markets would have brought significant economic benefits. Although a deal is better than no deal, the CPTPP is expected to have a more modest impact on the nation’s economic future.

 

The National Center for Information and Forecasting predicts that under the CPTPP, Vietnam’s GDP could increase by 1.32 percent, compared to a potential 6.7 percent with the TPP. Similarly, the export growth rate is estimated at 4 percent, instead of the 15 percent previously. If the CPTPP is ratified, Vietnam would also be able to expand its export markets, with opportunities to reach Canada, Mexico and Peru.

 

Nevertheless, there is still room for the CPTPP to be derailed – the pact requires domestic ratification by each member economy. While Japan has already done so, other members, particularly Canada, could require longer to officially validate the pact.

 

There are, however, reasons to be optimistic. Many were certain the US withdrawal would be the death knell for trade pacts like the TPP, only to see America’s Asia-Pacific allies regroup and move forward on their own. There is clear commitment to regional economic integration, with or without America’s blessing.

 

A multilateral trade deal would provide much-needed clarity for businesses, especially smaller ones, in entering new markets. Universal standards would make life a lot easier for the region’s many MSMEs looking to expand their operations across borders. Those working in the digital sector would benefit from a framework on data security, privacy, intellectual property and e-commerce.

 

Even after Trump withdrew the US from the TPP, the original template survived almost wholly intact. The bar remains high, and the remaining members now have the opportunity to hash out a progressive framework for continued economic growth.

 

Although Donald Trump received the most attention in Danang, the main achievement of APEC may be the reanimation of a deal he sought to kill. This time the harsh rhetoric may have had an unintended consequence – pushing the region even further towards economic integration and free trade.

 

For more information about doing business in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam steps up sale of SOEs

Hopes abound that a new Decree will drag the near-moribund process of privatising large State-owned enterprises (SOEs) into a new and more efficient phase.

 

Over the past 30 years, the restructuring of SOEs has been a key component of Vietnam’s economic reforms under Doi Moi (renovation). The process has been undertaken by successive governments and is a central pillar to creating the business-friendly climate desired by the current leadership.

 

Nevertheless, it remains largely a work in progress. According to a report by the Central Institute for Economic Management (CIEM), since 1992, Vietnam has ‘equitised’ over 4,500 enterprises (‘privatized’ being considered an unsuitable term for Vietnam and not always accurate anyway given the propensity for the State to maintain controlling stakes).  The fact is that many of these took place in a short period of time and were smaller production units of large conglomerate-type corporations.  The CIEM report concluded that progress is below expectations. SOEs have struggled to attract strategic investors and sale of shares has not reduced the level of State budget in SOEs’ charter capital, as was hoped.

 

There are multiple reasons for the disappointing progress including restrictions on foreign ownership, and the State’s desire to maintain ultimate management control.  Opaque valuations and concerns over transparency also deter strategic and other investors from getting involved in the process and ultimately slow it down.

 

To continue growing, Vietnam is under increasing pressure to reform the equitisation process for its SOEs, with new efforts being made to accelerate the government’s divestment. Under plans announced earlier this year, the government will equitise a further 137 SOEs in the 2016-2020 period.  Many of those slated are large and some can be considered the cream of the crop.

 

This renewed motivation is driven in large part by the government’s need to mobilise financial resources to deal with a rising fiscal deficit and public debt. The country’s obligations under a number of free trade agreements also provide impetus to break up the big entities.

 

Determining demand

 

Recently, a significant change was announced in a bid to speed up equitisation of SOEs: the law will change to allow book building as a means of determining interest and price for IPOs of SOEs.

 

Up until now, the equitisation of Vietnam’s SOEs has been handled through public auction, direct negotiation and underwriting. Most have adopted the public auction method, but this has proved unattractive to investors, with even big assets like Vinamilk failing to generate the expected interest.

 

Under new Decree 126/2017/ND-CP, the Prime Minister has instructed the Ministry of Finance to prepare detailed guidelines on implementation of book building to facilitate efficient IPOs as part of the equitisation process.

 

This method of price discovery, used widely internationally and now approved for the first time in Vietnam in connection with equitisation purposes, is expected to make the process more efficient and attractive to strategic investors.  Decree 126 also eases restrictions on the profitability of strategic partners (from three to two years), cuts the lock-in period (from five to three years) and provides more detailed guidance on valuations of SOEs generally (notably removing reference to DCF valuation and providing more clarity around valuation of land use rights and goodwill).

 

It is hoped that this move, to take effect from 1 January 2018, will enhance transparency in SOE equitisation and hasten the hitherto slow listing on the country’s stock exchanges. The Decree will have a particular impact on the next wave of SOE IPOs, slated for 2018-19.

 

Energy giants next?

 

An area in dire need of extensive equitisation is the energy sector. In order to ease electricity shortages, attract more investment and boost economic growth the country will need to tackle inefficient State-owned power actors.

 

The issue of power shortages could come to a head in the next four years, with forecasts predicting that annual growth in electricity consumption will start to match, and possibly outpace, the installed capacity growth. If consumption continues to expand at a similar rate to the last decade (an average of 12 percent a year) the country could soon be facing a power crisis.

 

This gloomy scenario is looking increasingly likely, considering that foreign direct investment (FDI) into the manufacturing sector, which accounts for 50 percent of total electricity consumption, has doubled over the past four years to reach US$63.1 billion. Luckily for businesses, the government is keen on keeping this development trend going, and having the electricity to power it.

 

Recent reports in the media state that the government has lined up a series of sizable IPOs of major power corporations, including PV Power, EVN Generation Corporation Number 3 (Genco 3) and Binh Son Refining and Petrochemical Company Limited (BSR). If the above projections on power demand growth are anything to go by, Vietnam’s power sector holds significant potential, and may prove an irresistible offer to foreign firms. This offer, however, is contingent on the government breaking up the energy giants and levelling the playing field for investors. Official approval of the book building method for pricing IPOs is a start.

 

PV Power, the country’s second-largest electricity producer, plans to auction a 20 percent stake through its IPO scheduled for the end of this year, and 28.8 percent of shares will be sold to strategic investors. Meanwhile, the equitisation of Genco 3 is awaiting the government’s go-ahead.

 

The changes above demonstrate a willingness to step up the equitisation of SOEs, with looming budget considerations providing a timely incentive. Beginning next year, the slow process may finally gather some much needed pace and see involvement of foreign players previously put off by the state of play.

 

For more information about Vietnam’s equitisation and IPO processes, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Hope and hesitation at M&A forum

Discussion at this year’s Vietnam M&A Forum, which took place earlier this month in Ho Chi Minh City, revolved around the challenges facing Vietnam’s M&A market and the need for a big push to maintain the momentum of previous years.

 

As of this month, deals have fallen short of the record levels in 2016, and surpassing the US$5.8 billion total looks like a tall order. Although impressive, last year’s figure represented just 5% of Southeast Asia’s total M&A activity, with Singapore alone claiming over 50%. Additionally, 64% of the deals in Vietnam were valued at less than US$20 million. While 77% of the deals were domestic, Thai firms were the biggest foreign buyers in terms of value, enacting aggressive takeovers of major Vietnamese firms in retail and consumer goods. In terms of quantity most deals came from Singapore and Japan.

 

With advantages of proximity in terms of geography, culture, and climate, Thai firms have sought to penetrate the growing Vietnamese market quickly. Alongside other neighbouring nations who have struggled as their home markets mature, they have increasingly sought high-growth or low-production-cost economies for expansion elsewhere.

 

There is a lot to celebrate, but the total value of M&A activity reached just US$1.1 billion in the first quarter of 2017, a drop of 24.4 percent year-on-year. A slowdown in the State’s equitisation process is partially to blame for the drop, and many of the speakers at the M&A Forum expressed the need for a big push in the second half of the year.

 

Trains, planes and automobiles

 

To continue the high rate of economic growth achieved over the past few years, the Ministry of Planning and Investment (MPI) concluded that Vietnam is in dire need of M&A investment in the infrastructure sector. Deals need to come in thick and fast across many branches of the economy, with roads, railways, airports and seaports needing upgrades to meet international standards, in addition to the continued expansion of the country’s real estate and retail conglomerates.

 

As well as the increased divestments of State-owned enterprises, Vietnam’s administrative policy framework will need to be improved to attract and accommodate foreign investors.

 

Banking on big deals

 

Besides recent prime ministerial decisions regarding the SOE equitisation process, the government has made a priority of dealing with non-performing loans. This in particular could mean big news for M&A activity in the banking sector.

 

A resolution was recently adopted by the country’s National Assembly, with the State Bank of Vietnam (SBV) aiming to reduce the ratio of non-performing loans (NPLs) to below 3 percent by 2020. As part of the resolution, credit institutions, foreign entities and bad debt trading institutions will be able to buy and sell bad debts in an open and transparent way.

 

The move has had a positive impact on banking shares, and recent reports suggest that South Korea’s Shinhan Bank is poised to acquire a financial institution in Vietnam, following its takeover of ANZ Vietnam’s retail business. Two Japanese investors are also negotiating the purchase of stakes in two different Vietnamese financial institutions.

 

Moves like these show that foreign firms appreciate the potential of Vietnamese consumer finance, especially with attempts to unburden the system of its bad debt. StoxPlus, a leading financial and business information corporation in Vietnam, valued the market in 2016 at US$26.55 billion, with an annual growth rate of 30-40%.

 

Japan’s interest is good news for Vietnam’s budding financial sector, which could do with an injection of experience from more established players.

 

So, there is reason to be optimistic. However, participants at the M&A Forum stressed that foreign-ownership limits and the lack of clear regulations in areas attractive to big investors are still obstacles to fulfilling the country’s potential.

 

Dearth of details

 

Foreign investors often bring up the subject of transparency, which remains a big issue. The opaque investment environment can complicate negotiations in Vietnam, and this is particularly true when dealing with equitised state-owned enterprises. Investors are required to make substantial upfront commitments in terms of time and money at the early stages of the bidding process, shouldering significant risks to enter the market.

 

Used to dealing with more sophisticated operations, the financial statements of Vietnamese companies can also fall short of investors’ expectations. There is certainly a need for advisors and consultants, who can help with valuations and due diligence, offsetting some of the risk involved.

 

Until Vietnamese firms grow large enough to regularly participate in substantial cross-border M&A deals, foreign partners will need to make sufficient preparations when it comes to tax and legal requirements. Over time, Vietnamese companies will become more aware of the requirements set forward by investors in M&A transactions, which will generate more deal flow as well as shorten the transaction process.

 

Cause for cautious optimism

 

These complaints aside, the overall impression at the M&A Forum was positive, with some predicting that M&A activities in Vietnam would double or triple over the next five to ten years. With some adjustments it’s certainly possible to surpass 2016’s deal value in the short term, especially if the growth of the consumer retail sector continues to attract the attention of Korean investors. Raising the foreign-ownership limits in Vietnamese banks could also prove to be a tipping point for some big transactions.

 

To maintain momentum over the long term, however, more significant adjustments will be needed. The issues of equitising SOEs, state divestment and the foreign ownership cap will become more urgent as time goes on. The government will need to respond to suggestions and support legal reforms if the country is to attract more M&A capital. Crucially, the efficiency and transparency of the M&A market will need to be improved for foreign investors. Policymakers have promised that further legal reforms are underway and the government is pushing forward with state divestment. Let’s hope they keep to their commitments.

 

For more information about M&A in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Risk and reward in Vietnam’s real estate as investors ignore uncertainty over future of land rights

Vietnam has emerged as an attractive destination for foreign investors looking to enter the real estate market. Driven by a fast-growing economy, high rate of urbanisation and expanding middle-class, cities like Hanoi, Da Nang and Ho Chi Minh City have become dynamic and lucrative metropolises. For those willing to shoulder the risks, the market offers substantial rewards and great potential over the coming decades.

 

Much of the development can be attributed to the implementation of the Land Law (No. 45/2013/QH13), Law on Housing (No. 65/2014/QH13) and Law on Real Estate Business (No. 66/2014/QH13), which effectively opened the floodgates to foreign investment in real estate.  In principle, these laws allow foreigners most of the same rights as locals when it comes to purchasing and owning real estate.  Many foreign development companies are jumping at the chance to develop new residential and commercial properties in one of the world’s fastest growing economies.  Question marks remain however over the underlying rights foreign-invested developers enjoy in the land on which these buildings sit and it remains to be seen how this will play out.

 

Lack of Certainty 

 

For many developers the country’s political landscape remains a hurdle. In Vietnam, land is collectively owned by the people, and administered by the State on their behalf. Under this system, property owners are denied full and legal ownership over the land. Their rights to the land are limited to ‘land use rights’ within the scope permitted by law.  A land user is issued a land use right certificate (LURC) that recognises the land user’s rights over the property.  There are different types of land use rights possible and some come very close to being analogous to freehold ownership as many would know it in the West (use right in perpetuity, subject to reversion and compulsory public works acqusitions, right to sell, transfer, mortgage etc).

Continue reading Risk and reward in Vietnam’s real estate as investors ignore uncertainty over future of land rights

Plenty of life in Vietnam’s M&A market despite bumps

Globally, 2017 has been an unpredictable year for the mergers and acquisitions (M&A) market, with the hangover of political and economic instability from 2016 inspiring caution among investors.

 

Foreign investment has been put on the back foot due to rising protectionism and the failure of promising free trade deals like the TPP (Trans-Pacific Partnership). Vietnam in particular has suffered and will need some big breakthroughs to regain lost momentum.

 

Although the TPP would have brought some big benefits to Vietnam, it is expected that other trade deals on the horizon will make up most of the shortfall. The nation has joined six regional FTAs as an ASEAN member, including the ASEAN Free Trade Area (AFTA) and the five FTAs between ASEAN and China, Japan, South Korea, India, Australia and New Zealand, as well as four bilateral FTAs with Chile, Japan, South Korea and the Eurasia Economic Union (EAEU). Negotiations over an FTA with the European Union (EU) have also been concluded.

 Sluggish start

 

Whereas 2016 was an exciting year for M&A in Vietnam, 2017 has gotten off to a slower start. According to a report released in advance of the M&A Forum (August 10, HCMC), deals in Vietnam hit an all-time record of US$5.8 billion in 2016, a growth of 11.92 percent compared to 2015. However, the market has slumped since the latter half of last year with fewer headline signings. The total value of M&A activity reached just US$1.1 billion in the first quarter, a drop of 24.4 percent year-on-year.

Continue reading Plenty of life in Vietnam’s M&A market despite bumps

Solar deals despite doubts: bankable or not, investors dive in

Foreign interest in Vietnam’s solar sector had surged after the Ministry of Industry and Trade (MoIT) announced a solar feed-in tariff (FiT) and a draft solar PPA earlier this year.  Concerns over the bankability of the proposed agreement have done little to dampen enthusiasm, with a number of players eager to get a slice of a Southeast Asian success story.

Continue reading Solar deals despite doubts: bankable or not, investors dive in

Smart cities: intelligent infrastructure for Vietnam’s grid

If not already mesmerised by the traffic, visitors to Vietnam’s large cities often comment on the mass of cables that hang like jungle vines across the streets.

 

Along with the ubiquitous motorcycle, the sight of electrical poles that look more like birds’ nests is emblematic of modern-day Vietnam. It is also a clear sign that the country’s power infrastructure has some serious catching up to do.

 

As mentioned in last week’s post, Vietnam has achieved significant growth over the last couple of decades. Reforms have paved the way for international trade and investment, as well as rising incomes for Vietnamese citizens. The face of cities like Hanoi and Ho Chi Minh City are changing rapidly, with shiny new developments cropping up as far as the eye can see. Many areas are unrecognisable compared to just ten or twenty years ago. Power needs are marching in lockstep with growth. Electricity of Vietnam (EVN) is the country’s largest power company, and as of 2015 had a transmission network of some 21,883 kilometres.

Continue reading Smart cities: intelligent infrastructure for Vietnam’s grid

The sun rises on Vietnam’s energy sector

Over the past three decades Vietnam has witnessed startling economic success thanks to the country’s openness to international trade and investment. The energy sector in particular has grown rapidly, with abundant hydrocarbons and hydropower resources allowing the country to keep pace with the energy demands of a rising population.

 

However, there may be clouds on the horizon. The most easily-accessible resources are running out and imports of coal and gas will be increasingly needed to keep industry chugging along. To maintain its high rate of growth Vietnam will be looking for huge investment over the coming years. In order to do this, and keep to its international greenhouse gas commitments, the government has set its sights on some ambitious targets for solar power generation.

 

Recent decisions issued by the government represent baby steps in this direction. Evidently, there is some enthusiasm for a solar-powered future, but is it enough?

Continue reading The sun rises on Vietnam’s energy sector