European firms’ business confidence drops 3rd consecutive quarter.

Business confidence among European companies in Vietnam continued falling for the third consecutive quarter amid skyrocketing inflation and weakness of dong.

The latest survey conducted by European Chamber of Commerce in Vietnam (Eurocham) shows those European firms’ business confidence dropped 7 points further to 63.

Compared to the survey, there was a 10 per cent drop in respondents assessing their current business situation as ‘good’ or ‘excellent’ to 46 per cent down from 56 per cent before and 64 per cent in the first quarter of 2011. The number of businesses having a negative view on their current situation rose slightly from 12 to 16 per cent points.

“The further fall of the EuroCham Business Climate Index from 70 to 63 points shows an increasing uncertainty amongst investors. This appears to be largely due to continuing concerns about inflation and the weakness of dong,” said EuroCham chairman Alain Cany.

Vietnam’s inflation in July was 22.16 per cent, according the General Statistics Office. Predictably, 56 per cent of companies expect inflation to have a significant impact on their business and 37 per cent expected to be impacted in some way. Six per cent stated that inflation was actually threatening their business in the country.

In February, Vietnamese government depreciated 9.3 per cent of dong against US dollar. Analysts forecast dong will be further depreciated by the end this year. The dong weakness directly pushed production costs of foreign invested enterprises as they have to import input materials with higher prices. Meanwhile foreign investors’ profits shrink as they have to divert dong into dollars to send back to mother companies outside Vietnam.

Sliding confidence is also behind falling foreign direct investment (FDI) inflow in Vietnam during the recent months. The Ministry of Planning and Investment’s Foreign Investment Agency reported registered FDI fund in Vietnam in the first seven months of this year had declined 24.4 per cent year-on-year. Meanwhile the disbursement capital was down 1.6 per cent against the same period last year.

When asked about their investment plans for 2011, respondents have shown to be more cautious than in previous surveys. Most companies (32 per cent) wanted to maintain their level of investment and 31 per cent were looking to increase their investments in Vietnam by a little bit. This shows a continuation of the trend that businesses are getting more cautious about investing here.

But inflation and dong weakness are not the only reasons lowering confidence of European firms.

Despite ongoing initiatives like Project 30 to reduce the administrative burden on companies operating in Vietnam, these reforms have yet to have an impact on businesses.

When asked about the amount of bureaucracy affecting their business over the past year, 53 per cent responded that it had remained constant. More than one third reported an increase in bureaucracy and only 10 per cent reported a decrease.

“Administrative reform initiatives such as the completed Project 30 for simplification of Administrative Procedures have been a welcome step in the right direction. However,

there still appears to be room for improvement as companies in our survey are still looking forward to seeing an overall reduction the level of bureaucracy in their day-to-day business in Vietnam,” said EuroCham executive director Matthias Dühn. – VIR

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