Drawbacks in the Capital Market
The world has experienced various economic setbacks this year, such as supply chain issues and rising inflation. Monetary policies have been tightened around the globe, and the restrictions in the second half have increased further. The United States Federal Reserve has raised the target federal fund rate to 3.75% – 4%. These challenges are set to remain for the rest of the year and into 2023, putting huge pressure on Viet Nam’s interest rate outlook, domestic exchange rates and inflation.
According to the Global Financial Stability Report (GSFR) by the International Monetary Fund (IMF), the global economy is entering a challenging period as increases in prices and interest rates continue to threaten recovery prospects. This problem is not exclusive to developed countries but to developing nations as well.
After a strong performance following the pandemic, the State Bank of Viet Nam (SBV) has continued to be proactive and flexible with its monetary policies in the face of global uncertainty. It has also revised its fiscal and macro policies to control inflation, support recovery and adapt to domestic and foreign market movements. These are necessary to stabilise the monetary and foreign exchange outlook and to retain confidence in Viet Nam’s economy.
In just over a month, the SBV raised interest rates twice as well as the interest rate ceiling. During the latest adjustment on 24 October, the SBV approved raising interest rates by 1% to control inflation and stabilise the economy.
Reports from the General Statistics Office of Viet Nam show credit growth by the end of the Q3/2022 reached 10.5%, close to the 14% rate targeted by the SBV. The credit growth limit is 3.5% for the rest of 2022. Manufacturing and related activities will have credit priority.
Neil MacGregor assesses that the government and SBV are making strong efforts to control inflation and stabilise the economy, which will ensure stable growth for the mid to long term.
“The tightening of capital channels like bonds and bank credit will have certain short-term impacts on many domestic businesses, including manufacturing, services, and real estate. However, in return, we will see increased transparency in the capital markets, which will boost credibility in the eyes of foreign investors,’’ Neil MacGregor emphasises.
Double Trouble
That said, Neil MacGregor expects that there will be limited domestic capital available for real estate businesses.
Figure 1: Mr Neil MacGregor, Managing Director, Savills Vietnam
“Investors and developers are facing difficulties because traditional capital mobilisation channels such as bonds, credit, and the stock market are being disrupted,’’ the expert stated.
Reports from the Ministry of Finance show that in the first nine months of 2022, the value of bonds issued by real estate enterprises was approximately VND 93 trillion, accounting for 28.9% of the total issued value.
Real estate businesses also face challenges in the form of soaring interest and foreign exchange rates and construction costs.
Developers have long faced difficulties with complicated legal procedures, especially in investment policies and land allocation. Lengthy procedures have been a concern for the real estate market for many years.
To ensure a continued and stable recovery that facilitates a healthy supply, Neil MacGregor suggests raising capital through FDI.
‘’While capital mobilisation channels like bonds are currently not feasible, businesses and developers should explore FDI as a capital source. Viet Nam has welcomed FDI for more than 30 years and has received investments from 140 countries and territories. Manufacturing and real estate are the largest beneficiaries,’’ Neil MacGregor states.
A Safer Long-term Solution
With keen interest from foreign investors, Neil MacGregor believes that securing capital through FDI sources is a viable option.
According to the Foreign Investment Agency, as of 20 September, the total registered FDI in Viet Nam reached US$18.7 billion, decreasing by -15.3% YoY. Real estate was second with investments totalling more than US$3.5 billion or 19% of the registered capital. This has doubled compared to last year.
In 2022, Savills Viet Nam has welcomed Savills leaders and senior experts from around the world, including Global CEO Mark Ridley, Head of Asia Pacific Retail Nick Bradstreet, and more than 50 tenant advisory and representation experts from the US, UK, Middle East, India, South Korea and Southeast Asia. They all note that foreign investors remain confident and interested in the Vietnamese market, particularly manufacturing, retail, logistics, office, and housing players.
‘’The fact that Viet Nam is a destination of choice for Savills experts from around the world shows that the country has great strength despite global economic uncertainty. They see this as an attractive market to do business in because of its young and hard-working population and attractive investment policies. The outlook remains positive and aligns with growth, thanks to the relatively low risk and controlled inflation,” said Neil MacGregor.
Real estate businesses and developers should seek sustainable, long-term capital solutions. To attract capital and find suitable investors, they must obtain professional support from experienced consultants and maintain a good network across various supporting industries.
“Businesses must be flexible and proactive in finding alternative sources of capital. Suitable investors are not hard to find if those looking for investment have clear legal frameworks, work transparently, and can demonstrate their true capabilities. The coming together of domestic enterprises and foreign investors is a plus for the market. The market has already shown that these collaborations can produce large, high-quality real estate projects that sell well,” Neil MacGregor concluded.