Vietnam Left Out of Foreign Capital Inflows

Vietnam isn’t experiencing the growing influx of foreign investment capital of its southeast Asian neighbors, apparently due to the perceived risk from fluctuations of the dong, high inflation and high interest rates.

Economists have forecast strong capital inflows into Asia for 2011, as interest rates in developed economies are being kept at low levels and the average GDP growth rates of developing economies will be about 4.4 percent higher than of developed economies. Total private capital inflows into the rising economies should hit $825 billion this year, much higher than $581 billion in 2009, according to the Institute of International Finance.

For example in neighboring Thailand since the start of the year foreign investors have bought nearly two billion dollars of stocks and are now buying up bonds. Capital inflows there have been so strong that the Thai government decided to impose a 15% income tax on bond investments. It is also considering other measures to curb capital inflows to slow the rate at which the baht has been appreciating. It is now reaching the highest level since July 1997.

On the other hand Vietnam’s bond market, generally favored by foreign financial investors, has seen little activity. Trinh Hoai Giang, Deputy Chair of the Vietnam Bond Association, believes the absence of foreign investors on the bond market stems from worries about exchange rate fluctuations and high inflation. A depreciation of the dong is seen as a prerequisite to attracting foreign capital.

However, domstic security firms feel foreign investors will continue to stay watchful for an opportunity to enter the Vietnam market. However, they note that foreign capital is likely to avoid closed investment funds. In fact, no major investment fund has been established since 2008 as funds have still not proven their ability to produce a good return on investment during the past two years.