BUSINESS REVIEW VIETNAM. Hoa Mai (Ochna) - the symbol of traditional Tet in Vietnam. SEIKO IDEAS CORPORATION Vietnam Business Review

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1 VIETNAM BUSINESS REVIEW Vol 06, February 11th 2015 Hoa Mai (Ochna) - the symbol of traditional Tet in Vietnam

2 INSIDE THIS ISSUE Highlights Agricultural Spring Fair 2015 opens in Hanoi Currency shops overcharge for lucky money Japanese firms eager to expand in Vietnam Economy Export plan looks to wipe out trade deficit by 2020 ANZ: Vietnam oil consumption growth fastest in region Banks & Finance Banks see liquidity rise despite Tet cash demand Foreign remittances remain robust in 2014 Investment Jan's on-year hike in FDI points to a bumper year ahead Indonesian firm to acquire Vietnamese food company Enterprises Customers boycott a Vietnamese drink producer over fly in bottle scandal Circle K convenience store chain opens 100th store in VN Market & Prices Fake labels on foreign alcohol flood Tet market Retailers despair as discounts fail to attract more customers Legal Updates New provisions on labor contract and salary Foreign employees may authorize the PIT finalization after their departure

3 1 ECONOMY Export plan looks to wipe out trade deficit by 2020 VNA - VN targets average export growth of 11-12% a year until 2020 and gradual reduction of imports to wipe out the trade deficit by then & achieve a surplus by Asia will account for 46% of the exports, EU for 20%, the America for 25%, Oceania for 4% & Africa for 5%. The establishment of the ASEAN Economic Community this year would strengthen investment and trade ties between countries in the bloc, Le An Hai, deputy head of the Asia-Pacific Market Department, told a meeting held in HCMC last week to collect opinions from companies, business groups, and official agencies about the plan. VN would strengthen trade promotion in ASEAN to ensure exports to the bloc increase by 10% a year on average to at least $31b by Besides, efforts would be made to boost exports to other Asian markets like Korea, Japan & China. The economic recovery in the EU along with the upcoming free trade agreement with it would open up opportunities for VN exporters. Exports to the EU are expected to rise by 15% a year to $58b by VN will also try to increase exports to the US and Canada by 15% a year & strengthen trade promotion to boost exports to countries in Africa, Latin America, and Oceania. The plan also contains measures to achieve the targets, including strengthening of international cooperation and communication to help businesses understand and capitalise on the opportunities brought by the FTA. VN will strive to improve the quality of its export items and boost exports of processed goods with high value-addition and key agricultural products like rice, foodstuff, coffee, rubber, and seafood and reduce exports of crude oil and coal. Delegates at the meeting appreciated the necessity for the plan, but urged the Government to take measures to help exporters, especially small- and medium-sized firms, to improve competitiveness. Le Thi Giau, chairwoman of Binh Tay Foodstuff JSC, said companies need policy support to facilitate exports. Nguyen Truc Van of the HCMC Institute for Development Studies said the plan drafters should research into demand as well as consumer tastes in foreign markets to enable businesses to create suitable export strategies. Tran Vinh Nhung, deputy director of the HCMC Department of Industry and Trade, said the plan should consist of concrete action programmes for each market and region to improve the efficiency of trade promotion programmes. VN has trade relations with over 200 countries and territories.

4 2 ANZ: Vietnam oil consumption growth fastest in region SGT - Vietnam s oil consumption growth is the fastest in the region, overtaking China and rising by 7.5% annually over the last 20 years, according to ANZ Bank. The bank said in a report released on Tuesday that this dynamic has contributed to switching Vietnam to a net oil consumer since 2010 from a net oil producer. In light of the surge in electronics production over the last three years, we expect oil consumption to continue rising as total energy needs keep pace with the demands of manufacturing growth. The price of Brent crude oil has dived since July last year. After the Organization of Petroleum Exporting Countries (OPEC) decision to maintain production levels amidst an oversupplied market, the outlook for oil prices remains soft. Regarding impacts of the falling oil price on Vietnam, ANZ said the first obvious effect of the decline in oil prices is a further softening of headline inflation. Last year, consumer price gains averaged 4.1% year-on-year, undershooting early expectations by a wide margin. The persistent ECONOMY decline in fuel prices in the second semester exacerbated the alreadysoft price gains in non-food/non-oil items in the consumer price index (CPI) basket due to sluggish domestic demand. However, ANZ said the oil price will have marginal effect on budget deficit. Although the budget deficit continued to improve, the transfer pricing policy of various commodities in Vietnam costs the State at least VND103 trillion in 2013, or 2.9% of gross domestic product (GDP). Nevertheless, the cost of social subsidies has declined from a peak of 4.7% of GDP in Over the past four years it has been broadly unchanged at 2.96% of GDP. Due to the lack of complete breakdown of the State s subsidy bill, we assume that the marginal change in social subsidies in 2014 was due to the decline in oil prices. As of September 2014, we estimate that expenditure on social subsidies had slightly declined as a portion of GDP to 2.8%. Although the subsidy bill has marginally declined, ANZ projected that total tax revenues from crude oil exports have also decreased. Crude oil is a significant source of government revenues as the State collects various taxes including royalty tax, crude oil export tax and windfall tax. High risk priority projects which require heavy capital investment are usually taxed at higher rates than conventional projects. Besides, ANZ said the trade balance should not be at risk from low oil prices. Last year, Vietnam exported 9.2 million metric tons of crude oil while importing 8.4 million metric tons of petroleum products. With the largely un-hedged oil trading in Vietnam, this has yielded a narrow surplus of US$95.7 million in oilrelated external trade.

5 3 Banks see liquidity rise despite Tet cash demand VNS - A surge in deposits during the last few months has helped banks ramp up their liquidity, despite growing demand for Tet cash. Previously, both individuals and firms often experienced high cash demand during the months leading up to Tet, due to which banks' deposits often fell. Truong Dinh Long, deputy general director of the Orient Commercial Bank, told the Dau tu (Investment) newspaper that even though Tet is approaching, his bank's deposits in January had risen by more than 6% from the month before. He added that idle money deposited at his bank had also increased during the past few months through a reduction in deposit interest rates. Savings in banks, with an annual interest rate of 6-6.5%, are still considered more attractive than other investment channels. Deputy General Director of Nam A Bank Tran Ngoc Tam also said deposits at his bank had remained healthy during the last months of the lunar year, when both individuals and enterprises often reported high demand for Tet cash. Owing to this, his bank's liquidity has remained robust. BANKS & FINANCE Another reason for this is that banks have also launched more promotional schemes to lure depositors. Le Tham Duong, the head of the Business Administration Faculty under the HCMC Banking University, said the deposit interest rate is still positive, compared with inflation, so people still prefer to deposit their spare cash in banks. This year savings will remain intact in banks as annual deposit interest rates are still pegged at 5-6%, which is higher than inflation. According to ANZ bank, inflation this year is anticipated to hover around 3%. Experts also pointed out that deposits and savings are still seen as safe investments, as the central bank's monetary policy appears to be more supportive of the Vietnamese dong. According to the latest survey on business trends at credit institutions and foreign banks' branches during the first quarter of this year, liquidity in the banking system has continuously improved. Roughly 89% of surveyed credit institutions said their liquidity had improved from last year and is currently in a good condition. Strong liquidity will continue to be maintained this year as well, State Bank of Viet Nam forecasted. Under the survey, the institutions also anticipate that their deposits will rise by 4.5% on average during the first quarter this year and surge by 14.35% for the entire year. Foreign remittances remain robust in 2014 VOV - International remittances from Overseas Vietnamese (OVs) for 2014 remained strong for 2014 tallying in at US$12 billion from roughly four million transactions, according to the State Bank of Vietnam (SBV). Remittances were a key source of external cash inflows for the nation, far exceeding official development assistance & more stable than private debt & portfolio equity flows. These inflows acted as an antidote to poverty & promoted prosperity SBV said, adding that remittances for 2014 were principally channeled into business ventures. This was a change from prior years where they primarily went into real estate, stock and saving accounts.

6 4 Jan's on-year hike in FDI points to a bumper year ahead VIR - FDI accelerated in VN in Jan both in commitment and disbursement capital, highlighting the growing momentum of inward investment inflows into VN. The Ministry of Planning and Investment s (MPI) Foreign Investment Agency last week reported that foreign investors had poured $505m of fresh investments into VN during Jan, up 8.6% from a year earlier. Meanwhile, the new commitment of investment in the period reached $663m, strongly increasing 67% YOY. The industrial manufacturing remains the largest recipient of FDI, accounting 91.3% of the total FDI commitment in the month, followed by retail & distribution. China s garment and textile firm Shenzhou Int'l Group Holdings Limited, through its affiliate Worldon Company, last month registered to build a $300m factory in HCMC. Another Chinese garment and textile company, Regina Miracle International, also decided to invest an additional $90m to its existing INVESTMENT factory in the northern port city of Haiphong. The rise in FDI disbursement highlights the growing momentum in foreign investment expansion in VN during Last year, the total commitment of inward investments in the country reached $20.2b, with disbursement of $12.3b. Hong Sun, secretary general at Korea s Chamber of Business in VN said many South Korean companies were studying investment opportunities in VN, esp SMEs, following electronic giants like Samsung and LG. In addition, he said, the upcoming free trade agreements with the European Union, South Korea and Customs Union of Russia, Belarus and Kazakhstan would also boost investments into VN. Sun added that FDI this year would benefit from the amended laws on Investment and Enterprises, which will take effect from the middle of this year. India s Tata Group, for instance, is thinking of producing its Titan watch in VN this year, and also expands its investments in car manufacturing. The Indian group is now negotiating with the Ministry of Industry and Trade for a $2b coalfired power plant in the southern province of Soc Trang. Indonesian firm to acquire Vietnamese food company Indonesian food firm PT Tiga Pilar Sejahtera Food Tbk (AISA) plans to pour $80m into VN and Malaysia to purchase stakes in two food companies this year. AISA's move aims to help the firm become a regional player in the industry. According to The Jakarta Post, AISA Finance Director Sjambiri Lioe said that they had set a target of acquiring a % stake in a VN food company & a majority stake in a Malaysian food company. He added that his firm's negotiation with the VN partner will be completed soon, and that the negotiations with the Malaysian firm were still at an early stage. Lioe declined to reveal the names of the two companies, but disclosed that one of them is a biscuit manufacturer. He also said that AISA will sell the products of the company in Indonesia, and still maintain its share in that country.

7 5 Customers boycott a Vietnamese drink producer over fly in bottle scandal DTI - Thousands of people are calling for a boycott of a popular soft drink after a consumer complained of finding a fly in a sealed bottle and was arrested for attempting to extort compensation for keeping it a secret. Pages have been opened on Facebook to generate support for the boycott of "Number One" and other products made by the Tan Hiep Phat company, with thousands of "likes" to date. Tan Hiep Phat contacted police when a customer demanded the company pay VND500m in compensation to keep quiet after finding a fly inside a bottle of "Number One" soft drink. Vo Van Minh, 35, was arrested on January 27 by police in Cai Be District, Tien Giang Province, for attempted extortion. Minh, a restaurant owner, told the company he spotted the fly inside ENTERPRISES the bottle when serving a customer on December 3. A member of the company was sent to check the claim. At that meeting, Minh allegedly asked for VND1bn, threatening to go to the media if he was not paid. A final sum of VND500m was agreed after negotiations. The company then informed the police and Minh was arrested at a café as the money was handed over. Several Facebook sites alleged customers who attempted to seek redress from Tan Hiep Phat for problems with its products have ended up in jail. Vu Van Dung, of the Hanoi Lawyer Associaiton, said aggrieved customers are entitled to inform the media or complain to a producer to seek compensation if a product can be proven to be defective. Whether Minh's actions, and the amount of compensation he demanded, constitute a crime will be up to the courts to decide. Circle K convenience store chain opens 100th store in VN VNS - US-owned 24-hour convenience store Circle K has opened its 100th outlet in Viet Nam and expects to have 150 by the year's end. Viet Nam CEO Tony Yan was optimistic about achieving the target, saying Viet Nam's modern retail industry was in the initial development phase. While modern retail represented only 13% of the total market share in the country compared to 50% elsewhere in Asia, Viet Nam was a promising market of 90 million people with rising incomes. Other int'l retailers have been strengthening their presence here, including Japan's Aeon, which has four supermarkets in HCMC and Binh Duong Province and expects to open a new one in Hanoi this year. The company also acquired major stakes in successful local retailers Fivimart and Citimart. BJC of Thailand made an abortive attempt to buy German-owned Metro Cash & Carry Vietnam, but instead bought a convenience store chain, which it plans to turn into a 94 B Mart chain.

8 6 MARKET & PRICE Fake labels on foreign alcohol flood Tet market DTI - Market authorities are cracking down on illegally labelled foreign wines and spirits being sold as discounted expensive brands ahead of the Tet holiday. Tran Hung, deputy head of the Market Surveillance Agency under the Ministry of Industry and Trade, said more and more fake products are being put on sale during the year-end season. He said certification stamps on fake wines from China look like the real thing. "It's very difficult to distinguish fake and real stamps with the bare eye and consumers could be cheated," Hung said, adding that shoppers should only use reputable retailers or those authorised by the maker. On February 4, the Hanoi Market Surveillance Department seized shipments of imported wine bearing fake certification stamps. Retailers despair as discounts fail to attract more customers VNS - Consumers do not seem to be excited about promotional schemes offered by stores and supermarkets in major cities, in Tet (Lunar New Year) holiday. Along busy shopping streets in Hanoi & HCMC, eye-catching banners with discount rates of up to 50-70% or buy 1 get 1 free, have been hung, esp by fashion stores and electronics supermarkets. Their aim is to attract buyers, stimulate purchasing demand and clear stocks. However, the results have not been as good as expected. Several shop owners said their sales were still very slow. Nguyen Mai Ngoc, the owner of a clothing store in Hanoi, said her store's revenue had not been very good last year, which she said "was much lower than previous years." She had even announced a discount of 50% on all items to boost sales and recover capital ahead of Tet, but sales were still not very good. Several electronic shop-owners said purchasing power was low last year, forcing them to offer promotions to boost sales during the weeks approaching Tet. However, customers were more cautious with their spending this year. Le Viet Hong, a consumer, said she is not as interested in discounted products as in previous years, partly due to products' quality & because she had bought discounted products several times already. A representative from VN Standard & Consumer Protection Association said consumers must check the quality of discounted products carefully before buying. Another consumer said her bonus for Tet was not as high as previous years and that she needed to spend even lesser this Tet holiday, even when it came to buying discounted products. While many shop-owners are worried about their sales for the forthcoming Tet holiday, Gov't data showed consumer demand is up. The total retail sales and service value touched above VND275.4 trillion ($13b) in Jan, up 13% YOY. Economic expert Nguyen Minh Phong said the extraordinary fall in CPI in Jan was not due to the drop in aggregated demand, but could be mainly attributed to plunging oil prices.

9 7 New provisions on labor contract and salary VLO - Decree No. 05/2015/ND- CP dated January 12, 2015 of the Government on detailing and providing guidance on the implementation of a number of contents of the Labor Code. This Decree prescribes rights, obligations of employers, employees, representative organizations of labor collective as well as agencies, organizations, individuals involving in the implementation of a number of articles of the Labor Code regarding labor contract, collective negotiation, collective labor agreement, salary, labor discipline, material responsibility and the settlement of labor disputes Accordingly, the reason of changes in the mechanism, technology which is used as the basis for enterprises may unilaterally terminate the labor contract LEGAL UPDATES specified in Clause 1 Article 44 of the Labor Code 2012 includes these changes 1. Changes in organizational structure, labor reorganization; 2 Changes in products, structure of products; 3. Changes in production and business process, technology, machinery, equipment attached to business and production line of the enterprise. Regarding economic reasons, enterprises are just allowed unilaterally dismissing employees in case of economic recession or crisis, or implementation of the State's policy upon restructuring the economy or performing international commitments This Decree takes effect from March 01, 2015 To replaces Decree No. 196/CP dated December 31, 1994; Decree No. 93/2002/ND- CP dated November 11, 2002; Decree No. 41/1995/ND-CP dated July 06, 1995; Decree No. 33/2003/ND-CP dated April 02, 2003; Decree No.11/2008/ND- CP dated January 30, Foreign employees may authorize the PIT finalization after their departure VLO - Official letter No. 322/TCT- TNCN dated January 27, 2015 of the General Department of Taxation regarding the submission of personal income tax (PIT) finalization. Under Clause 2 Article 16 of Circular No. 156/2013/TT-BTC, resident foreigners shall themselves make PIT finalization before their departure. Time limit of the finalization is the forty day, as from the date the working contract terminates (Clause 5 Article 32 of the Law on Tax admin No. 78/2006/QH11). However, under this Official letter, if a foreign employee (internally transferred to Vietnam) cannot directly make the tax finalization because he/she does not have enough time to prepare the dossier and the enterprise commits to take responsibility for the payable PIT amount, this individual may authorize the enterprise to make the tax finalization. Time limit for the tax finalization to be made on behalf is within 45 days after departure date.

10 8 Agricultural Spring Fair 2015 opens in Hanoi VOV - It s the Lunar New Year holiday season and time for the annual Hanoi Agriculture Spring Fair so it s time to get your ticket to this wonderful event taking place from February 8-16 in Hanoi. This year s fair is set to be the biggest yet with nearly 200 enterprises displaying their wares in more than 300 pavilions on opening day with an exciting line up of new products and plenty of inspiring home and garden ideas for the year ahead. With so much to see and do this year, we suggest you plan your day in advance to avoid missing out on any favourite finds. The fair showcases a raft of quality and intriguing products from the moretraditional products and house wares to beautiful artisan handicraft items, ornamental plants and gemstones. HIGHLIGHTS Many businesses have showcased their products for the first time at the event, giving them a crucial opportunity to test them in the marketplace, while many prior year favourites have returned for a repeat performance. Currency shops overcharge for lucky money VNS - Currency changers are taking advantage of the Tet occasion to charge exorbitant fees for crisp, newly minted notes, despite the State Bank of Viet Nam (SBV)'s warning that it is a violation of law, Tuoi Tre newspaper reported. The money changers are enjoying a brisk business as consumers rush to exchange banknotes online and at shops for the holiday. The most wanted notes are newly minted bills of VND500 to VND50,000. The fees to exchange such bills are 12 per cent, 10 per cent and 8 per cent of the total value. The smaller the denomination, the higher the commission. Fees are higher if the note has a "nice series number", the newspaper reports. Thanh, an online currency changer, said people change new banknotes not only to use as "lucky money" for Tet but also for donations to pagodas, and for "money trees", which are made of new small notes. Money changer Vo Minh Tu in Tan Phu District is offering several "money trees" of many different sizes for sale. One tree, which has many folded VND10,000 "flowers and leaves" sells for VND690,000 each. Tu said many well-off customers had ordered "money trees in USD" as a gift or an ornamental tree for Tet for VND2.5 million each. If customers bring their own notes for the tree, they will be charged VND300, ,000, depending on the design they choose. Online searches for "lucky money" reveal many online sources advertising the notes on the internet. The website "doi tien li xi moi" (exchange new lucky money), for example, shows images of 10,000, 20,000 and 50,000 dong notes. The customers then request the amount of money they want to exchange

11 9 HIGHLIGHTS on normal days, but only for the and are t hen quoted a fee ranging from 5 to 12 per cent. One customer, Trang, from Phu Nhuan District said a website had quoted fees of 12 per cent for notes worth VND1 million and 11 per cent for notes worth VND2 million. Trang said she paid a 9.5 per cent fee for notes worth VND5 million and 9 per cent for notes worth VND10 million. Another website "Doi tien li xi Tet 2015" (exchange lucky money 2015) offers a lower fee of 6 per cent, but the customers have to exchange at least 100 notes. Le Thi Thanh Hang, deputy director of the SBV's HCM City branch, admitted that people's demand for exchanging new notes to use as "lucky money" was legitimate, but said that it was not an essential task of the bank system. HCM City has a fairly large supply of new notes but the amount is limited; as a result, not all customers will be able to change money. Hang added that the highest demand for lucky money were notes worth VND20,000 and VND10,000. However, after Tet, customers will return these small notes in exchange for larger denomination notes. "Banks are under pressure to meet demand because the customers don't want to use these small notes end of the lunar year," Hang said. For Tet, people also buy US$1 and $2 notes to use as lucky money despite being charged exorbitant fees. Fees can be as high as VND28,000 for one dollar. For a $2 note, VND50,000-55,000 is usually charged. Notes issued in 1976, 1963 and 1953 sell for up to millions of dong. Besides dollars, Uganda's 1,000 note shillings and Nepal's 50 note rupees, which have images of goats, are sought the most. Currently, a 1,000 shilling note sells for VND40,000, six times higher than the real value, while a 50 rupee note sells for VND70,000 instead of the real value of VND10,400. Violators The central bank has said demand for newly minted small denomination notes is too high, and will have a negative effect on circulation of money. SBV has asked the Ministry of Industry and Trade and Ministry of Police to work together to identify and fine violators, including individuals and organisations. SBV

12 10 has asked bank officers to remain uninvolved. Hang pointed out that if businesses and customers hoarded new notes in the pre-tet period and exchange notes near the end of the lunar year, the bank would not be able to manage the situation. SBV said this was a form of speculation and added that "money trees" were a violation of law as the notes are being used for wrong purposes. Japanese firms eager to expand in Vietnam ANN - About 66 per cent of the 458 Japanese firms based in Vietnam, plan to expand their business during the next one or two years, a recent survey pointed out. The survey was conducted by the Japan External Trade Organisation (JETRO). The JETRO survey of Japanaffiliated companies in Asia and Oceania in 2014 showed that 32.4 per cent of the enterprises want to HIGHLIGHTS maintain their existing level of business, while only 1.3 per cent want to scale back their operations. The most common reason for business expansion is expected sales growth of 85 per cent, followed by sizeable growth potential of 45 per cent and greater receptivity for high-value added products at 17 per cent, the survey said. It also noted that 51.4 per cent of Japanese firms in Vietnam expected their operating profits to surge in 2014, compared with the year before, while 54.8 per cent hoped their profits in 2015 would surpass those reported in When asked to identify the problems or challenges of doing business in Vietnam, most Japanese firms outlined wage increases as the top concern. This was followed by difficulty in procurement of raw material and spare parts, complicated customs' clearance procedures and the challenges involved in ensuring quality control and quality of employees. Meanwhile, Japanese enterprises in Vietnam also expect simplified customs clearance and they want to avoid double taxation and correct irregular withholding tax rates. Japanese firms in Vietnam are also seeking mutual duty exemption among CLMV (Cambodia, Laos, Myanmar and Vietnam), integration of interpretation and management concerning the rules of origin and a reduction in nontariff barriers, such as license requirements and mandatory standards, as the Asean Economic Community is expected to be assembled by the end of this year. The survey, which was conducted from October 10 to November 14 last year, was intended to understand the business activities of Japan-affiliated companies in Asia and Oceania. The surveyed firms operate in wide range sectors, including automobiles, machinery, chemical and pharmaceutical, as well as food, textile, retail and transport, ICT and finance.

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