The dangers to the economy

High interest rates, weak purchasing power, constant on/off cycles due to Covid-19 lockdowns, and many other factors accumulated over the past few years have driven his business into a state of exhaustion. “I’m negotiating with several foreign partners to buy the company. At this point, it’s really hard to hold on any longer,” he said.

I've known this entrepreneur since he started his business, and I've witnessed his persistent efforts, the near-failures, and the burning passion he's had to grow his enterprise. Selling the business to investors and then working for his own company again is hard to accept. But it's the only way to save the company, save jobs, and save himself as well. Perhaps many Vietnamese businesses are facing a similar situation to this entrepreneur. Regardless, the unprecedented Covid-19 pandemic is having increasingly clear consequences on the "health" of many Vietnamese businesses.

The impact of the pandemic, coupled with a host of other macroeconomic factors in post-Covid-19 2022, has triggered numerous challenges and risks for businesses. To give just one example, the fact that over 12,000 businesses close each month is a huge and worrying number. Clearly, the story of the businessman mentioned above is not new. They have to find resources to restructure and survive. The problem is that mergers and acquisitions (M&A), led by foreign investors, seem to be becoming a trend in our country. At the M&A Forum held in Ho Chi Minh City... Recently, data from KPMG auditing firm in Ho Chi Minh City indicated that the total value of M&A transactions in Vietnam reached US$5.7 billion in the first 10 months of 2022. This figure represents a decrease of over 35% compared to the same period in 2021. The issue is that M&A transactions were led by foreign investors, with Vietnamese businesses accounting for only US$1.2 billion of the total.

Incomplete figures presented on this forum indicate that M&A activity has reached nearly ten billion dollars annually in recent years. M&A activity is normal as Vietnam has pursued a market economy and integrated deeply into the global economy. However, what is concerning is why this activity mainly takes place with Vietnamese businesses within the country? Why don't Vietnamese businesses conduct M&A activities abroad? On another front, the Vietnamese stock market experienced one of the worst declines in the world last year, making countless stocks "dirt cheap" and causing the assets of listed companies to "evaporate". However, foreign capital continues to flow in. Here are some prominent recent headlines: "Foreign investors have their highest net buying month since the beginning of the year," "Foreign investors increase net buying, focusing on accumulating real estate and securities stocks," "Foreign investors net bought over 1,900 billion VND in a red market session"...

Illustrative image.

According to economists, the preferred method for global investors is to find good businesses in a host country and buy them at the most favorable price, often when the economy is in difficulty or crisis. Good businesses, but facing the risk of illiquidity or bankruptcy, are often forced to sell. Given the current difficulties, the likelihood of some good Vietnamese businesses falling into the hands of foreign investors is very high. This is due to a lack of liquidity and the inability to raise capital domestically, while cheaper capital is readily available abroad, potentially forcing some businesses to sell themselves.

Foreign direct investment (FDI) reached its highest level in the first 11 months of the past five years. This demonstrates that foreign investors continue to have confidence in the economic prospects of our country and are willing to maintain and expand their production and business activities in Vietnam. However, the problem lies in the fact that this business sector is growing stronger, becoming a main pillar of the economy and, in many cases, suppressing and overshadowing the country's domestic business sector.

According to a document from the Central Economic Committee, in the current economic structure, the FDI sector contributes 20.13% of GDP, accounts for 72% of total export value, and approximately 50% of industrial output. Based on value-added index, revenue, and employment, FDI enterprises dominate 12 out of 24 processing and manufacturing sub-sectors, playing a dominant role in 4 out of 5 of Vietnam's largest export industries: textiles, footwear, electronics, and wood products, as well as import-substitution processing and manufacturing industries such as rubber and plastics, basic metals, and mechanical products. However, the contribution of the FDI sector to the state budget remains modest; the growth rate of budget contributions is lower than the growth rate of profits; and the proportion of contributions to the state budget tends to decrease.

The figures above show that FDI enterprises are playing a very significant role in the Vietnamese economy. These enterprises dominate in the export sector and also in purely domestic sectors such as consumer goods and retail systems. Just look at the gateways in Hanoi, or Ho Chi Minh City, and now some densely populated provinces to see who owns the large supermarkets. Such presence certainly has many advantages, as they bring capital, management skills, and technology. However, this dominance is also a cause for concern if Vietnam wants an "independent and self-reliant" economy, challenging the desire for domestic enterprises to become the main pillar and raising the risk of manipulation from external factors.

Some economists warn that if the government of one or more countries supports its businesses with cheap credit or other means to acquire businesses and assets in countries they wish to influence, it will pose a challenge to Vietnam's security and economy. Given that Vietnamese businesses have not grown significantly, accounting for only 10% of GDP for decades, and have suffered major shocks like the one experienced by the aforementioned businessman, this trend is very concerning and could occur in Vietnam today. The risk of "underground investment" or "investment under false pretenses" has been addressed in resolutions to warn against disguised real estate transactions where Vietnamese individuals or businesses are listed as owners, but the properties are actually owned by foreign entities. Recalling this highlights that vigilance is necessary in the current context.

In addressing this issue, I have absolutely no intention of discriminating against the foreign sector, which has brought so much innovation, modernity, and progress to the economy and the people over the past three decades. The issue is that we need to continue more effective reform programs to develop domestic businesses, so that people continue to invest capital in business, instead of hoarding gold at home or transferring assets abroad. Major policies such as public-private partnerships, healthcare socialization, improving the business environment, and enforcing property rights, etc., need to be reformed. That's the long-term perspective. In the short term, for the aforementioned entrepreneurs, they want access to capital to maintain cash flow; otherwise, selling their assets is inevitable.