Quarter 2-2012: EuroCham Business Climate Index stagnates near midpoint EuroCham Business Climate Index stagnates near midpoint

Ho Chi Minh City - Results of the seventh quarterly EuroCham Business Climate Index survey, conducted in April/May 2012 and released today, show that business confidence and outlook among European businesses in Vietnam has remained consistenly near  the “neutral” index midpoint of 50 for the 3rd quarter. European businesses that participated in the survey continued to be cautious about their business outlook and in assessing their current situation as well as the overall economic outlook in Vietnam.

Unpromising current business situation:

Compared to our last survey, there was a 10% increase in respondents assessing their current business situation as ‘not good’ to 29% , up from 19% last quarter and only 12% one year ago. 34% of companies described their current business situation as good. This is unchanged from the last survey but down from 50% with a positive view on current business one year ago. Not one respondent described their current situation as ‘excellent’. 
Little optimism in business outlook: 
The signs of optimism in companies business outlook seen in the last survey remain largely unchanged. 38% stated a ‘good’ and 36% a ‘neutral’ outlook. This is almost unchanged from last quarter, but is put into perspective by the 51% of respondents that had a positive business outlook this time last year. 26% of respondents had a pessimistic outlook for their business in the next 6 month. These results are still not decidedly positive and we can see little in the form of recovery of business outlook. It is worrying that 62% assess their outlook as either ‘neutral’ or negative.
Mixed attitude towards investment plans:
When asked about their investment plans for 2012, many respondents have continued to be cautious. 34% want to maintain their level of investment and 38% are looking to increase their investments in Vietnam. That is a slight increase from 36% in the last survey, but still a significant fall from 59% aiming to increase their investments this time last year. This shows a continuation of the trend that businesses are getting more cautious about investing. 28% of businesses are looking to reduce their overall investment in the country, up from 24% last quarter and only 8% in early 2011. This result is the continuation of a downward shift in confidence to invest in Vietnam. While the majority of companies are looking to maintain and increase their investments in the country, it is worrying that nearly a third of companies in this survey are considering a reduction of their investments here.
Positive outlook on revenue has little effect on hiring plans:
When asked about their expected number of orders and revenue in the medium-term the answers were mixed. 58% expect an increase in revenue in the medium term, this is a solid increase from last quarter (47%). Fewer companies (18%) expected their number of orders to remain constant than last quarter where this view was shared by 27% of respondents. The number of businesses expecting their revenues to fall remained constant at 22%. Overall, this represents an upward trend in the outlook on revenue/orders for the last 2 quarters. This trend has yet to have an effect on recruitment plans with the majority (46) of companies wanting to maintain their current level of staff.  33% want to increase their staff which is 7% less than last quarter and 19% are planning to reduce the total number of employees in their company, up from 14% last quarter and only 3% one year ago.
Ongoing concern about inflation, while macroeconomic outlook eases slightly:
We asked all respondents to give us their estimate for the expected percent of VND depreciation. The average of all answers we received was 5.63%, down from an average of 8.33% last quarter hinting towards an increase in confidence towards measures to curb inflation by the government. However, 57% of respondents still saw inflation as a major concern or even threat to their business operations in Vietnam. Slightly less than the 61% who stated major effects of inflation on their business last time, but inflation remains a major concern. When asked about the difficult macroeconomic situation in Vietnam, we see a slight easing of the outlook. 45% of companies expects 'stabilization and improvement' of the current situation (up 10% from last quarter). That points towards an increase in confidence, but 55% of respondents still expect the overall economic situation to deteriorate further.
Minimum wage increase has little effect:
The recent minimum wage increase has had little to no effect on the respondents of this survey. 45% of businesses stated that it didn't affect them at all, while 39% expected the impact to be 'minor'. 16% expected a 'major' or 'threatening' impact of the minimum wage increase. We have to keep in mind however, that the majority of companies who participated in this survey are active in the services industry and are unlikely to be affected by minimum wage. Only 28% of respondents are active in the manufacturing sector that may be more effected.
EuroCham members would welcome EU-Vietnam FTA - hope for elimination of import tariffs:
With the recent completion of the scoping exercise and impending start of formal negotiations for a EU-Vietnam free trade agreement, we asked our members what this would mean for their business. A majority of 51% expect a positive impact on their business, 29% can see no impact and 16% were unsure what an FTA would mean for them. This points towards a positive sentiment in the business community, but a need to clarify what exactly a free trade agreement will include and how it will impact European businesses in Vietnam.
When we asked what parts of a free trade agreement would be most important for their business, the two most common answers were 'elimination of import tariffs' (56%) and 'enhancing the trade in services' (51%) this was followed by 'tackling non-tariff barriers (34%) and reaching 'agreement on intellectual-property rights' (27%). Issues regarding competition in each other's markets was also seen as an important part of a future EU-Vietnam FTA.
EuroCham Chairman Preben Hjortlund commented on the survey: "The continuing low level of the EuroCham Business Climate Index at 53 points shows ongoing concerns and uncertainty in the business community and amongst investors. While there are some encouraging signs, the overall business sentiment is stagnating at a relatively low level. EuroCham would welcome further progress on a Vietnam - EU Free Trade Agreement (FTA) as this will underpin an increase in business confidence and lay the foundations for future investment increases from Europe."
EuroCham Executive Director Paul Jewell added that: "The continuing low level of EuroCham's BCI can be explained by slow progress on many of the issues that were addressed in our Whitebook, coupled with some new issues that are eroding confidence in the business environment in Vietnam: Macroeconomic uncertainties, high rates of inflation, corruption and administrative burdens continue. European investors are increasingly looking for alternative investment destinations in ASEAN. Therefore Vietnam has to increase its efforts to remain competitive in the region. Tangible progress towards an EU-Vietnam free trade agreement will be a step in the right direction and help restore investor confidence."

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