Vietnam’s economy has seen considerable growth in the past decade, growing by 7-8 per cent a year for the past ten years. Its economic performance is second only to China’s in Asia. This in turn is leading to increased demand for a more efficient treasury management environment. Despite the perception that the country is still a cash-based society with limited payment channels, Vietnam is evolving into a more efficient treasury environment, according to Asian treasury experts. For instance, the country introduced an electronic payment system in 2002.
Hoptenly Tamba, corporate sales head for JPMorgan Chase treasury services in Vietnam, Indonesia and Thailand, based in Singapore, says that with this centralized electronic payment system in place, the basic infrastructure of Vietnam’s clearing environment is heading in the right direction and local banks now have more efficient inter-bank payment networks to facilitate funds transfers. “This rate of growth and development is attracting both the investment of time and expertise of many forward looking multinational corporations (MNCs) to tap the market potential,” says Tamba. “This results in many CFOs and treasurers needing experience and products for cash and liquidity management that provide the appropriate business models to meet the changing needs of the region.”
Vietnam is an increasingly important location for MNCs that require integrated solutions to support regional activities in Asia Pacific. JPMorgan’s Tamba adds: “One apparent trend in Vietnam is it is becoming an important node in the set-up of enterprise resource provider (ERP) networks, as MNCs look for more automated and technology driven solutions. MNCs that look to centralize their payments and collections need a bank that is able to not only pull together the information, but also construct, collate and merge it into a single file format.”
The concerns facing many corporate treasurers in Vietnam are similar to those experienced in other countries in Asia, such as China and Korea. Repatriation of cash and FX conversion are both areas that pose problems:
gtnews asked its readers to send in questions on management in Vietnam and a common question was how a foreign-owned enterprise (FOE) in Vietnam would be able to convert its Vietnamese dong revenue into US dollar. Hung Duc Duong, cash product manager at HSBC in Vietnam, says: “The foreign exchange laws in Vietnam strictly control the use of foreign currency. Resident organisations may purchase foreign currencies from authorised banks for overseas payments or payments for other permitted transactions (such as import obligations, foreign currency loan repayments, and others). Those who purchase foreign currency with Vietnamese dong are required to submit the necessary supporting documents to the authorized banks. Depending on the type of underlying transaction, examples of documentary support required for the purchase of foreign exchange are customs declaration forms, invoices, and/or contracts.”
As with other Asian nations, Vietnam’s foreign exchange controls are changing rapidly to keep up with growing foreign direct investment demands. According to Pham Bach Duong, legal and compliance adviser at Standard Chartered Bank, Hanoi Branch, in the last quarter of 2005 the government amended the Decree on Foreign Exchange Control. He says: “The changes were endorsed by the National Assembly of Vietnam in a new Ordinance on foreign exchange control (effective on 1 June 2006). Basically, current transactions are liberalised in accordance with Vietnam’s commitments to the International Monetary Fund (IMF). Capital account transactions are still subject to controls (e.g. tax certificate requirements).”
Duong at HSBC says: “There have been new regulations regarding cash management issued in Vietnam recently, for example Decree No. 74 in August 2005 provided a legal framework for the reporting and investigation of suspect transactions made in cash or gold worth VND200m (US$12,560) or more. It’s expected that new regulations will be issued to ensure greater transparency and further facilitate investment.”
Repatriation of Cash
One gtnews reader from a treasury in a Vietnam-based company asked about the best way of repatriating cash out of Vietnam to, for example, the Philippines. The reader wanted to repatriate cash on a regular basis – weekly or monthly – in order to handle operating expenses such as salaries and technical fees. Pham Bach Duong, at Standard Chartered, states that there is no restriction on repatriation, provided that the foreign investor has fulfilled all its tax obligations. He adds: “Under the amended regulations on FX control, current transactions (import payments, short-term loans, etc.) are carried out freely. Fund remitters are required to provide supporting documentation (import/service contracts, loan agreements, etc.). These documents are needed to allow banks to qualify the transactions as current. In the case mentioned above, the joint venture will have to produce relevant employment/service contracts with executives and technical staff based outside Vietnam and service contracts for technical fees repatriation.”
Hung Duc Duong at HSBC adds: “The remittance must be for permitted transactions and supported by appropriate documentation. In case of regular and periodic payments out of Vietnam for salaries, the supporting documents (i.e. labour contracts) can be submitted one-time at the beginning. If the technical fees are also regular and periodic under a certain contract, then the contract needs to be submitted just once. Otherwise, supporting documentation has to be submitted each and every time the payment is made.”
The Banking Sector in Vietnam
The Vietnamese banking system is regulated by the State Bank of Vietnam (SBV) and is dominated by five state-owned commercial banks. According to HSBC, these banks have 80 per cent of the Vietnamese loan market. Hung Duc Duong, at HSBC, writes in his article: “The government is planning to equitize these banks, starting with Vietcombank and Mekong Housing Bank. There are around 50 joint-stock banks, which have 10 per cent of the market. There are 28 foreign bank branches operating in Vietnam, which face some restrictions compared to local banks. For example, resident Vietnamese individuals may not open foreign currency accounts at foreign bank branches in the country. Another constraint is the charter capital that a foreign bank has to invest in order to open a new branch in Vietnam. These restrictions have created an uneven playing field for foreign banks in terms of access to domestic funds and client base.” For more information on the banking sector in Vietnam, read Hung Duc Duong’s article Cash Management in Vietnam.
The largest local bank in Vietnam is Vietcombank and this has the most widely used intra-bank (and interbank) clearing system. According to Tamba, at JPMorgan Chase Treasury Services in Singapore, Vietcombank’s clearing system is likely to become Vietnam’s main clearing system in the future. He says: “The partnership with Vietcombank is a non-competitive partnership providing coverage for clients and knowledge transfer to our local partner to increase its competitiveness in the market. Vietcombank will in effect become the latest member of a virtual local bank network in the region.”
Vietnam is expected to enter the World Trade Organisation (WTO) in the second quarter of this year, which will further strengthen its economy. Last December, Standard Chartered increased the GDP growth forecasts for Vietnam for 2006 from 7.5 per cent to 9 per cent. The bank cites the “strong domestic consumption due to soaring credit growth” as the main driver of the revised GDP growth prediction. According to the bank, retail sales grew by 25.5 per cent year-to-October 2005 year-on-year, which is the biggest increase in four years. One factor for this is the availability of credit.
However, Vietnam has also suffered some set-backs in the past year. Its delayed entry to the WTO meant that it had no protection against US-imposed quotas on its textile and garments exports. Previously, Vietnam was protected by the Multi-Fibre Trade Agreement (MFTA), but this lapsed in 2004, and, combined with the country’s delayed entry to the WTO, meant that the production growth of Vietnam’s textile and garment industry (Vietnam’s second largest export) has slowed.
Crude oil is the country’s biggest export. According to Standard Chartered, “Vietnam has benefited from high oil prices with crude oil exports expanding year-to-October 2005 at 33.5 per cent year-on-year.” However, Vietnam lacks the capability to refine oil and it therefore relies heavily on petroleum imports, which have risen much faster than oil export growth (at 46.7 per cent year-to-October 2005, according to Standard Chartered).
Despite strong domestic consumption and future WTO accession, Vietnam also has strong inflation to contend with. According to Standard Chartered, inflation for October 2005 stood at 8.3 per cent. The bank has raised its 2006 inflation forecast from 5.5 per cent to 7 per cent, and says: “Monetary conditions are loose despite the SBV’s recent 45 basis point rate hike to 8.25 per cent. Vietnamese real rates are still negative and the balance of risks has shifted from growth to inflation.” Avian flu is also a serious problem in Vietnam. Approximately half of both the total number of deaths and the reported cases have been in Vietnam.
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