’s economy take a knock from Britons’ decision to abandon the European Union (EU) membership or Brexit
, especially when it comes to trade, investment and the financial market, according to local economists.
Blow to Trade
Prof. Nguyen Mai, chairman of the Vietnam Association of Foreign Invested Enterprises (VAFIE), told local press that as a big trade partner of Vietnam in the EU, the UK’s withdrawal will somewhat cause a certain deceleration in the British economy, thus leading to weaker demand for imports, including Vietnamese goods.
“With a plunging British pound, the general rule is that Britain should be a less attractive market for Vietnamese exporters if they cannot hedge their forex position,” Saigon Securities Inc. (SSI), the top brokerage house in Vietnam, said in a note.
Vietnam’s export sector will likely be the most vulnerable to risks originating from Brexit as the UK is the Southeast Asian country’s major export market in the 28-member bloc, with a CAGR of 22.5%, according to Nguyen Xuan Thanh, director of the Fulbright Economics Teaching Program.
Vietnam’s export turnover to the UK reached $4.65 billion in 2015, equivalent to 2.4% of its GDP, much higher than an average of 0.7% in East Asian economies. “This is why international media has forecast that Vietnam will be the most exposed to Brexit in East Asia,” Thanh noted.
A weaker British pound will hurt Vietnam’s exports to the UK at least in the short term and the impact will be magnified if the European country falls into a recession in the coming two years before officially withdrawing from the EU.
On breaking down export staples, Vietnamese exporters of apparel, footwear, furniture and farm produce will take the hardest knock from the EU leaving the EU, he said.
However, at macro scale, Brexit impact on Vietnam’s external trade and economic growth will be marginal, the lecturer added.
Limited Impact on UK-Vietnam Investment
Brexit will leave an insignificant influence on UK investments in Vietnam as the European country is a modest investor here and diplomatic relations between the UK and Vietnam are in a good shape, Mai told BizLIVE.
The event is likely to negatively affect new investments from the EU while the impact on existing operations will be minimal as long-invested British projects such as BP and Roll-Royce still offer good returns, the veteran economist added.
According to the Foreign Investment Agency under the Ministry of Planning and Investment, British enterprises had 241 projects worth $4.74 billion in Vietnam as of December 2015, making the UK the 15th largest among the 110 investors in the Southeast Asian country.
In addition, firms incorporated in the British Virgin Islands had invested $19.27 billion in Vietnam.
Lesley Craig, chargé d’affaires of the UK Embassy in Hanoi, told VnExpress that the outcome of the referendum will not change the course of the UK-Vietnam trade relationship in the short term.
Vietnam remains the UK’s interest and the two nations will continue to develop bilateral trade and investment ties, she added.
Psychological Factor as Cause of Volatile Financial Market
Vietnam’s money and stock markets have undergone fluctuations in the past week, tracking global turbulence stemmed from the UK vote to leave the EU.
Vietcombank quoted the GBP/VND rate at 29,322.59 for buying and 29,793.18 for selling on July 2. The rate has declined around 3.7%-4.87% from June 24 after Brexit results were announced.
Meanwhile, the Vietnamese dong has strengthened 0.11% against the U.S. dollar over the past week.
Minister of Planning and Investment Nguyen Chi Dung said on June 30 at a monthly cabinet meeting that Brexit influenced the country’s forex and stock markets over the past few days.
“The USD/VND rate at local commercial banks increased slightly in the past several days, mainly due to psychological factors, originating from the UK vote to leave the EU, but remained within allowed bands,” he added.
The VN Index of the Hochiminh Stock (HOSE) closed up 1.27% at 640.30, the highest since the start of this year, after rising for a fifth day in a row, according to exchange data.
The UK vote rocked the Vietnamese share market on June when the benchmark index plunged 5.4% to the intraday low of 597.91 and ended down 1.82%.
Le Duc Khanh, strategy director at Maritime Securities, and Nguyen Mai Phuong, head of research at VNDirect Securities, and Nguyen Duc Hung Linh, director of retail research and investment advisory at SSI, all agreed that the plunge of Vietnamese shares on June 24 was driven by volatile investor sentiment.
The recovery of the stock market has shown that market sentiment is now firmer than that when China deployed a giant oil drilling platform into Vietnamese water in May 2014, they added.
Swelling Public Debt
Brexit will indirectly cause Vietnam’s public debt to increase as the Japanese yen has continuously appreciated as investors see the currency as a safe haven, along with gold.
As the yen account for the largest share of Vietnam’s public debt, at around 45%, Vietnam will have to spend more on debt servicing, Nguyen Duc Hung Linh from SSI noted.
In addition, Vietnamese companies that have yen-denominated debt will be hard hit, Linh added.
Dezan Shira & Associates, a Hong Kong-based consulting firm, said that manufacturing in Vietnam could be a “big winner” in Brexit.
In a June 24 analysis, the firm said the political chaos of Brexit will give Vietnam a key advantage as an Asia manufacturing location, since it already has a free trade agreement signed and awaiting implementation with the European Union.
Most of the other nations of emerging Asia, by contrast, have made little progress in their ongoing trade talks with the EU.
“Given its unique position in low cost manufacturing, Vietnam will likely be more competitive than ever among European consumers,” the firm said. “The longer that negotiations are drawn out in other ASEAN
states, the more solidified Vietnam’s advantage will become.”