Confidence of European firms in local business climate remains strong in Q3

This information was unveiled in the Business Climate Index (BCI) published by the European Chamber of Commerce in Vietnam (EuroCham) and produced by YouGov Decision Lab.

Despite the Vietnamese economy growing at a record 13.67% on-year in the third quarter of the year, the BCI endured a decline for the second consecutive quarter, dropping 6.4 index points from Q2 and 10.8 points from Q1.

This comes amid global economic conditions remaining unstable due to the escalating conflict taking place in Ukraine, persistent inflationary pressures, a global labour shortage, and stagnant economic growth.

In the midst of the current global economic uncertainty, the BCI remains 10.2 points higher than its pre-pandemic level of 52.0 recorded in the fourth quarter of 2019, and 1.2 points higher compared to the fourth quarter of 2020, when the nation was in the process of easing pandemic-related restrictions.

The BCI represents the leading indicator of the European business and investment community in the country. In order to gain a better understanding of the Vietnamese market, EuroCham invites over 1,200 members from virtually every sector of the Vietnamese economy to provide quarterly updates on the local business environment and forecasts for their own businesses. Researchers from YouGov Decision Lab conduct the BCI research and then compile the data.

The BCI’s results indicate a decline in optimism among European business stakeholders. Indeed, approximately 42% of participants anticipate that the economy will stabilise or improve moving into the fourth quarter of the year. This makes up an 18-point decrease from the previous quarter when 60% held this view. Similarly, the percentage of those anticipating economic deterioration moving forward increased by seven points to reach 19%.

Despite these concerns, when respondents were asked whether or not they were optimistic about the prospects for their own businesses during the fourth quarter of the year, 45% responded positively, down only four points from the previous quarter.

Furthermore, respondents anticipate that investment planning, orders, and revenues will remain relatively stable in comparison from the previous quarter. The outlook here therefore appears to be more optimistic compared to that for the economy as a whole.

In terms of foreign direct investment, 42% anticipate that their firm will increase FDI flows to Vietnam by the end of 2022. Respondents indicated that the nation could bolster these FDI levels by reducing administrative difficulties, with 68% believing this, improving infrastructure, 53%, developing human resource capacity, 39%, and reducing visa barriers for foreign experts, 39%.

While only 2% of BCI participants reported that they have relocated a significant portion of their operations from China to Vietnam, this suggests that considerable room for growth remains. In the event that these aforementioned obstacles are resolved, then the nation would be well positioned to attract more foreign firms seeking to relocate from China.

Despite a quarter of respondents identifying green growth as a key factor in attracting FDI to Vietnam, the number of respondents who rated Vietnamese green potential positively witnessed a fall from 44% to 32%. As a means of accelerating green development, participants in the BCI recommended that the nation seek to improve its legal framework, with 92% stating this, its infrastructure, 87%, and its investment incentives, 86%.

As August marks the two-year anniversary since the implementation of the EU-Vietnam Free Trade Agreement (EVFTA), the perception of its benefits has declined by 4% in comparison to the previous quarter. Administrative procedures were cited as the primary reason behind this at 38%, followed by a lack of understanding of the agreement, 18%, and technical barriers to trade, 16%.

 “The future of Vietnam is bright. Vietnam offers great investment opportunities for European businesses, and we are very excited about the country's prospects in the medium- to short-term. Through the EU-Vietnam Free Trade Agreement and our shared commitment to sustainable development, Vietnamese and European companies have a great deal of growth potential,” said Alain Cany, chairman of EuroCham.

“It is true that we are less optimistic now than we were at the beginning of 2022 due to external factors slowing global growth. The fourth quarter will also likely be less positive than the second or third quarters of the year,” Cany added.

“Still, these BCI results are encouraging. Vietnam will certainly be in a better position in two or three years, demonstrating its place among the most exciting and dynamic business and investment destinations,” the EuroCham representative noted.

“A worsening global economic environment is taking its toll on the optimism amongst European business leaders in Vietnam. However, by curbing inflation, improving credit ratings and continuing GDP growth, Vietnam’s story stands out as less pessimistic globally as companies plan and look forward to 2023. By dropping 6.4 index points to 62.20, sentiment remains well above the midpoint of 50, indicating positive sentiment and a still optimistic view on the future,” said Thue Quist Thomasen, CEO of Decision Lab.