Official statistics show pledged foreign direct investment (FDI) into Vietnam in the first four months of 2011 was $4.02 billion, down almost 48 per cent  from a year earlier. Disbursed FDI gained 0.6 per cent to $3.62 billion.

The newly-registered  FDI drop underlines the downward trajectory of FDI commitments during the past two years.

According to the Ministry of Planning and Investment (MPI), the biggest decline was seen in the real estate sector, which was the most attractive to foreign investors during 2007-2009.

“Foreign investors are showing less interest in  Vietnam’s real estate market which has been slowing down over past two years,” said Prof. Nguyen Mai, chairman of the Vietnam Association of Foreign Invested Enterprises.

Notably, apart from skyrocketing land compensation costs due to Decree No. 69/2009/ND-CP dated August 13, 2009 which provides that land compensation is based on market land prices and the adjustments to devalue the dong against the US dollar, the Vietnamese government’s on-going tightened monetary policy has dealt a blow to real estate developers.

On the bright side, according to the MPI, half of the projects registered during January-April involve the industrial manufacturing and processing sectors, followed by the construction and service sectors. Only four property projects were licenced during the period, capitalised at $234.6 million.

Vietnam now faces some tough policy questions on how to deal with the consequences of a tanking economy. Rising inflation, which reached 9.64 per cent in April against the end of  2010 and currency pressures top the government’s agenda in getting the economy back on track.

Foreign investors, however, believe the government’s policy focusing on fighting inflation and trimming away trade deficit should help stabilise the macro-economy. Foreign investors would keep sight of Vietnam’s medium and long-term prospects.

“The solid fundamental advantages like a young population and workforce, political stability, an abundance of various natural resources and a favourable geographical location close to China are attracting foreign investors,” Ray Ferguson, chief executive of Standard Chartered Bank in South East Asia, told VIR.

He said the domestic market expansion was also a reason for investors to continue to invest in Vietnam.

According to Credit Suisse, the average urban income in Vietnam is more than double rural incomes and Vietnam’s urbanisation has had a profound impact on domestic consumption.

“It is easy to see why Vietnam remains an attractive investment destination for global companies in spite of the recent global crisis and its short term challenges,” said Lito Camacho, vice chairman for Asia Pacific at Credit Suisse.