The business confidence and outlook among European businesses in Viet Nam has fallen below the "œneutral" index midpoint of 50 for the first time in EuroCham's quarterly Business Climate Index survey done in July 2012 and released yesterday.
EuroCham members who were polled expressed increased concern about their current business situation and outlook as well as Viet Nam's overall economic outlook.
There was a 5 per cent drop from the previous quarter in the number of respondents assessing their current business situation as "good" from 34 per cent to 29 per cent. Only 1 per cent described their current situation as "excellent."
The neutral assessment of the current situation remained constant at around 30 per cent. But, worryingly, there was an increase in the number of businesses viewing their current business situation "very poor" to 10 per cent.
A total of 39 per cent had a negative view of their current situation. As for companies' business outlook, only 31 per cent stated "good" or "excellent," down from 38 per cent last quarter.
The shift has been towards a negative outlook with 31 per cent assessing their business outlook as "not good" or "very poor." One year ago only 20 per cent of respondents had a negative outlook. Respondents were roughly split into thirds about investment plans their year — whether to increase, maintain, or reduce it.
The 32 per cent looking to increase investment in the country represented a slight fall from 36 per cent in the last survey and a plunge from the 52 per cent a year ago.
A staggering 33 per cent are planning to reduce their investments, with 20 per cent stating they would "significantly reduce" their investments in Viet Nam this year.
One year ago only 4 per cent had anticipated a significant reduction in investment.
This showed a continuation of the trend that businesses are getting more cautious about investing and some are starting to plan a reduction of their activities in Viet Nam.
The number of companies looking to maintain their current level dropped marginally to 31 per cent.
Asked about the expected number of orders and revenues in the medium term, the replies were mixed. At 45 per cent, the share of companies expecting revenues to grow was down 13 per cent from last quarter.
A relatively consistent 20 per cent expected revenues to remain the same, meaning the number expect a decline shot up 12 per cent to 35 per cent. In line with this were recruitment plans, with 32 per cent expecting to hire more staff in the medium term, 41 per cent expecting to maintain the same level, and 26 per cent planning to reduce.
Only 19 per cent were planning to pare staff last quarter.While overall concern about inflation remained high, only 49 per cent expected inflation to have a significant impact on their business, down from 52 per cent last quarter.
Respondents were asked to forecast the inflation rate for this year, and the average of all the numbers was 5.82 per cent, down from 8.33 per cent forecast six months ago.
But predictions about the Vietnamese economy for the next six months were gloomy, with 60 per cent expecting a further deterioration of an already difficult situation and only 30 per cent thinking it would stabilise and gradually improve.
It indicated that the measures taken to stabilise the economy have not eased the business community's concerns.
Anxiety about Labour Code
The new Labour Code which comes into effect in May 2013 is causing uncertainty and concern among European businesses in Viet Nam. A huge majority of 42 per cent expected it to have a negative effect on their business. Another 28 per cent said they were unsure what the new legislation would entail, hinting at a lack of information available about it and what exactly it will mean for day-to-day business. Only 5 per cent thought it would positively affect their business.
The biggest concerns were the law's tighter restrictions on foreign workers (73 per cent), increase in maternity leave (46 per cent), and new overtime work limitations (34 per cent).
EuroCham chairman Preben Hjortlund said: "During 2012, EuroCham's [index] has declined from 56 to 48 points, indicating a declining confidence in Viet Nam as an investment destination.
"For the first time since we started this survey in the third quarter of 2010 the index has dropped below the mid-point of 50 pointing towards an overall negative business sentiment.
"It appears that businesses are losing their patience and this further underlines the urgency with which Viet Nam needs to improve its competitiveness and attractiveness as a place to do business."
EuroCham executive director Paul Jewell said: "The further drop … is caused by slow progress on many of the issues that were addressed in last year's Whitebook. Despite some progress on inflation there is a torrent of new and ongoing issues that are eroding confidence in the business environment in Viet Nam: macroeconomic troubles, lack of adequate infrastructure, and administrative burdens."
Of the companies polled, 38 per cent are in the services industry, 30 per cent in manufacturing, and the rest in trading and other activities.