FIA: Global minimum tax and currency devaluation affecting FDI

May 17, 2023 | 17:58
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Speaking at the VIR-hostedconference on May 15, Do Van Su, deputy director general of the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment (MPI) said that the decrease in foreign capital coming into Vietnam has been caused by recent shifts in global tax policy and currency devaluation in certain countries, while investment relocation from China has not brought much benefit.
Global minimum tax and currency devaluation pull FDI down: Foreign Investment Agency

Do Van Su, deputy director general, Foreign Investment Agency

Although there has been an increase of about 22 per cent in the number of foreign-invested projects so far this year compared to the same period in 2022, according to Su, Vietnam is missing out on huge projects that would mark a breakthrough in the size of investments in this country. "Therefore, the decrease in foreign direct investment (FDI) in Vietnam is due to the lack of these mega projects," confirmed Su.

This can be explained by the global minimum tax (GMT), which will be applied in early 2024 with large multinational corporations being mainly affected, so several major foreign players are waiting until governments respond with their own policies.

"In Vietnam, we are considering and proposing solutions which are expected to be issued in the next couple of months to retain existing investors and be attractive enough to entice new ones, while ensuring fairness and equality among businesses and economic sectors," Su said.

He added that one of the major factors affecting investment capital flows into Vietnam in recent years has been the devaluation of certain currencies. Two of the biggest investors in Vietnam are South Korea and Japan, whose currencies are severely depreciating. By the end of 2022, the Japanese yen had depreciated by about 27 per cent, and the South Korean won by about 22 per cent.

"That means that as the value of their money drops, and the larger the ventures in this country are, the more risk they incur, so the large-investment decisions are more carefully considered, and often delayed for longer," explained Su.

Resolution 50-NQ/TW of the Politburo to perfect mechanisms and raise the quality of foreign investment expects registered FDI inflows to reach $30-40 billion per year over the period of 2021-2025, rising to over $40 billion in the period 2026-2030. This could be considered ambitious as FDI inflows have slowed down over the past three years, in part caused by the Covid-19 pandemic, supply chain disruptions, and inflation, leading to a decline in consumption from Europe and America.

Su went on to explain that while investment relocation from China is not new, it started about 10–15 years ago when several Japanese and Korean investors began to set up production bases in Vietnam, the expected mass-relocation of FDI from China due to its strict lockdown policies has not brought as much benefit to Vietnam as was first thought.

"We can see that while foreign businesses relocating from China is a fact, they do not leave the country entirely. In fact, the average FDI flow into China increases by $10 billion each year, reaching a new peak of $172 billion in 2022, far higher than the $110 billion in 2018. The Chinese market is simply too attractive to leave," said Su.

Among the few foreign investors leaving China, 64 per cent of them have chosen to move to Southeast Asian countries, and more than half of them have come to Vietnam as it is a logistics hub and near to China, making it easy to connect to manufacturing facilities over the border. "While China is still strong enough to lure investment, neighbouring countries will continue to see only small benefits," Su explained.

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