Vietnam: Investment opportunities in renewable energy

01 February 2018

Investors will benefit from a relatively low risk security environment in 2018, despite environmental protests. The Vietnamese economy will sustain robust growth in 2018, as foreign investment drives activity in the manufacturing sector and enhances the external position. The government is keen to expand private investment in renewable power generation, although an underdeveloped regulatory environment and rigid pricing will weigh on investor interest.

Security Environment

There are no known terrorist groups operating in Vietnam. Whilst the government designated the US-based Viet Tan a terrorist organisation in 2016, there is no evidence to suggest that it has any terrorist capability. In April 2017, police foiled a plot to detonate two improvised explosive devices in Tan Son Nhat International Airport. A group of 15 Vietnamese nationals linked to the planned attack were subsequently imprisoned in December 2017. The government accused the Temporary Vietnam Government, a group based overseas, of planning the attack. However, the absence of support from Viet Tan suggests that the plot is an isolated incident. Firms operating in the country are not likely to be affected by terrorist activity.

Over H2 2017, there was a modest rise in the risk of protests linked to environmental damage. In September 2017, the Vietnamese police deployed water cannons and electric rods to end a five-month protest by locals who were blocking access to the Pacific Crystal Textiles mill. Around 200 villagers, who were protesting the discharge of waste water, were dispersed. Two people were injured and a tent was set on fire. The protest had disrupted production at the plant for a number of months, impacting Japanese clothing firm UNIQLO. The incident indicates the moderate risk of altercations with the security forces during protests, although incidents are likely to remain localised, targeting environmentally unsound commercial assets.

Trading Environment

Vietnam’s economy is estimated to have grown by 7.65% y-o-y in Q4 2017, supporting full-year growth of 6.7% in 2017. Following a confirmed Q3 growth figure of 6.45% y-o-y, this underscores the underlying growth momentum in the Vietnamese economy. Recent growth has been driven by the services sector, which expanded 7.44% y-o-y in 2017.

Vietnam has been gradually opening up its economy in recent years, and robust foreign direct investment levels are enhancing the external position. The country achieved a trade surplus of USD 2.6 billion in 2017, as the value of merchandise exports grew by 21.4% y-o-y. Foreign investment in Vietnam’s manufacturing sector has been a significant contributor to this, allowing a gradual move up the value chain, with exports of electronic devices frequently higher than lower-cost goods. For example, the release of the new Samsung smartphone in 2017 contributed to the significant uptick in manufacturing activity and exports in early 2017. In 2016, the foreign-invested sector accounted for 71% of merchandise export earnings.

Investment Environment

Vietnam’s power sector will offer significant opportunities for private investors, as elevated public debt levels force the government to seek alternative financing sources. The government has taken a series of steps to encourage investment, introducing a competitive generation market in July 2012. In 2016, the government announced its 2016- 2030 Power Master Plan, highlighting plans to increase renewable energy generation from wind, solar and biomass to 7% of total generation by 2020. In 2017, non-hydropower renewables accounted for just 0.5% of total generation.

Despite this, the non-hydropower renewables sector remains underdeveloped and investors may be deterred by a weak regulatory environment. Whilst wind-power tariffs introduced in 2011 led to the registration of 48 potential projects, by 2014 only 3 projects had been commissioned due to regulatory inefficiencies. Solar projects are likely to attract more interest in the coming years, following the introduction of new feed-in tariff regulations in June 2017. In September 2017, South Korea’s Dohwa Engineering began construction of a 49.5 MW solar array in Quang Binh, investing USD 55 million in the project, which will be part of a 550 MW solar power project.

Despite efforts to boost private interest in Vietnam’s power generation through liberalisation, state-owned entities continue to dominate the sector. Moreover, electricity tariffs are only slightly higher than generation costs, weighing on profitability. Prices are strictly controlled by the government, meaning that any rise in input costs cannot easily be passed on to purchasers.

Vietnam

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Egypt, Nigeria, Mongolia, and Angola all of which have been the subject of recent enquiries from JLT's client base.

JLT WRR Feb 2018

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

Download Risk Outlook

For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com

video

Read more of our credit, political and security risk insights

Read more