TPP: Impact on FII and FDI

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A gradual increase in incoming investment post deal would be the best outcome in HSC’s opinion

A game changer such as TPP comes with both opportunities and associated risks. The key is to avoid squandering the potential huge dividends by avoiding the pitfalls of allowing structural imbalances to be created as a result of large capital inflows.

For example, a surge in incoming FII and FDI could risk unbalancing the balance of payments; exacerbate the twin deficits (trade and budget) and lead to an appreciation in the currency. Thus eliminating some or all of the competitive advantage gained in the deal.

Alternatively a more gradual increase in FDI and FII spread out over 3-5 years would lead to a smoother pace of acceleration and thus avoid these risks. In some ways; underdeveloped infrastructure such as roads, power plants, & ports and the stock market itself may act as a natural constraint against such a surge.

The country needs a huge injection of funding into building better infrastructure if it is to sustain its development as a major manufacturing power. For example, the Korean Chamber of Commerce recently highlighted a potential looming power generation shortage from 2018.

FDI should increase dramatically but not right away

Given these obvious constraints, HSC would argue that the shift of large scale manufacturing (and hence large scale FDI flows) into Vietnam is likely to come over a much longer timeframe. And we would cite the post WTO environment as evidence for this where the acceleration of FDI especially in manufacturing took place only several years after the deal was signed.

There is always a lag time where the dust settles before important decisions are taken to move capacity. In this case given the small size of Vietnam’s GDP in relative terms; thin base of forex reserves and known infrastructure shortcomings that is probably a very good thing. It should enable us to avoid the risks of unbalancing the economy if the money starts coming in too quickly.

These submissions are extracted from reports accomplished by Ho Chi Minh City Securities Corporation (HSC)’s Research Division team led by Fiachra Mac Cana, Managing Director, Head of Research

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