The latest Business Climate Index (BCI) report reveals a modest decline of 4.5 points in European business confidence towards the Vietnamese market, with the current score of 43.5 reflecting prevailing market conditions with many challenges.
This report conducted by Decision Lab was released on Monday by the European Chamber of Commerce in Việt Nam (EuroCham).
The Business Climate Index is the premier metric for gaining insight into the European business and investment community’s perceptions of the Vietnamese market.
Assembled from feedback gathered from EuroCham Việt Nam’s expansive network of 1,300 members, who collectively represent nearly every sector of the country’s dynamic economy, this quarterly survey delivers indispensable insights into the current state of Việt Nam’s business environment.
“Việt Nam’s economy relies heavily on manufacturing and exports, and it has taken a big hit from the tough global situation. This decline in exports and orders has had a major impact on European businesses and the overall business community. The BCI clearly shows this current gloomy outlook,” said EuroCham Chairman Gabor Fluit.
CEO of Decision Lab Thue Quist Thomasen added: “In the previous quarter, we found ourselves at a crucial turning point, where companies adopted a cautious ‘wait and see’ approach to assessing the direction of the economy. The most recent BCI results indicate a decrease in optimism compared to the previous quarter.”
“During this trying time, the data suggests that the service sector shows resilience while challenges persist within the manufacturing sector,” said Thomasen.
The BCI reveals a challenging outlook, with a significant 10 per cent increase in negative responses regarding the current business situation. This growing sense of caution is further reflected in a 6 per cent rise in negative sentiment for the upcoming quarter.
The survey reveals that over half of the businesses surveyed have benefited from the European Union-Vietnam Free Trade Agreement (EVFTA). Among these beneficiaries, 35 per cent of business leaders have reported gains from tariff reductions.
Despite these gains, businesses continue to face challenges in fully capitalising on the agreement, with administrative procedures and a lack of understanding remaining the main barriers to full capitalisation.
Securing visas and work permits for foreign workers continues to pose persistent challenges, with over 80 per cent of surveyed businesses encountering various difficulties. The prolonged processing time for visas and work permits emerges as the most pressing issue.
The report also highlights the pressing concern of power shortages that significantly impacted businesses during the survey period.
Although there has been some relief due to recent rainfall, around 60 per cent of respondents experienced the repercussions of these shortages on their business operations.
This manifested in reduced operational efficiency, decreased productivity, and disruptions in production and services. Long-term solutions to ensure power supply stability remain a priority for sustaining business performance and overall economic resilience.
EuroCham Chairman Gabor Fluit said: “It is crucial for the Government to come up with long-term plans to address the recent power shortage problem, considering its cyclic nature. By taking prompt and comprehensive action, we can not only attract foreign investment but also ensure a resilient economy capable of overcoming future obstacles. Time is of the essence, and we must act decisively to secure a prosperous future for Việt Nam.”
Furthermore, the report highlights the perception among European business leaders of inadequate infrastructure development in Việt Nam, with 53 per cent expressing their views that it is currently “very inadequate” or “lagging behind”.
The Vietnamese Government has been taking proactive measures to address this concern. Notably, there is a strong focus on accelerating key infrastructure projects, particularly in the area of highways.
“Overcoming regulatory and infrastructure limitations is vital for smooth operations and increased productivity for businesses to further foster sustainable growth and attract foreign investment,” said Thomasen.
“Businesses are expressing that reducing administrative difficulties and upskilling the labour force will facilitate growth. A quality workforce has also proven to be crucial for businesses to maintain their confidence in their own enterprises and the economy.”
In the current cautious business climate, respondents highlight regulatory reforms and the availability of skilled labour as crucial drivers for their companies’ growth. Regulatory reforms are deemed the primary factor contributing to the growth in the service sector, while the manufacturing sector places significant emphasis on the availability of skilled labour.
However, amidst the challenges, there is also a glimmer of encouraging news. The report shows a 9 per cent increase in the number of business leaders who assess their business prospects positively for Q3 2023 compared to their assessment for Q2 2023.
Businesses are prudently assessing the landscape, focusing on optimising revenue and orders, with a marginal increase of 4 per cent in the proportion of companies anticipating a decline in these areas.
Additionally, there is a proactive approach, as 7 per cent more companies plan to carefully manage investments in the upcoming quarter. It is intriguing to note that despite these challenges, workforce planning remains stable, reflecting a resolute commitment to maintaining stability regardless of the prevailing conditions.
Despite the challenges, Việt Nam continues to attract foreign investors, with 48 per cent of respondents expecting an increase in their company’s foreign direct investment (FDI) in the country next quarter. However, a total of 40 per cent of businesses express no plans for elevating FDI, marking a 4 per cent increase from the previous BCI.
Nevertheless, Việt Nam remains firmly positioned among the top five investment destinations for over one-third of businesses, underscoring its enduring appeal.EuroCham Chairman Gabor Fluit said: “It is crucial for the Government to come up with long-term plans to address the recent power shortage problem, considering its cyclic nature. By taking prompt and comprehensive action, we can not only attract foreign investment but also ensure a resilient economy capable of overcoming future obstacles. Time is of the essence, and we must act decisively to secure a prosperous future for Việt Nam.”
The report further highlights concerns expressed by close to 40 per cent of surveyed respondents regarding the forthcoming implementation of the global minimum tax. Similarly, around 42 per cent of businesses report inadequate understanding of Việt Nam’s Personal Data Protection Decree, indicating the need for further education on this matter.
Meanwhile, awareness of the Carbon Border Adjustment Mechanism (CBAM) is demonstrated by 27 per cent of respondents, with only 43 per cent perceiving CBAM as relevant to their business activities.