Favourable economic indicators, booming energy and oil & gas industries, and a strong export sector are the leading lights for lawyers in Vietnam as they look for the country to fulfil its potential.

Delivering on promise

The World Bank estimates that by the end of the second quarter of this year Vietnam will have posted GDP growth of 3.5–3.8% (almost 0.4–0.7% higher than the first quarter of this year) and will achieve an annual GDP growth of 4.5–5%. Infrastructure, power and the oil & gas sectors are all noted by the World Bank as exhibiting positive signs and stand as classic examples of how the government’s efforts to stimulate its command economy have proved effective. But where these sectors remain busy, activity in some of Vietnam’s once staple sectors – real estate, FDI and projects – have come to a grinding halt, lending credence to the assertion that such favourable economic indicators are evidence of only one thing: that Vietnam is yet to experience the full effects of the global financial crisis. However, rather than being pessimistic, lawyers are taking a philosophical approach to the downturn, relishing Vietnam’s isolation from the world economy instead of lamenting it. 

Positive outlook

“Vietnam is probably behind the rest of the world in terms of feeling the impact of the financial crisis,” says Dao Nguyen, managing partner of Mayer Brown JSM in Vietnam. “There is still reasonable activity in some sectors – power in particular remains busy – but in others that you would expect to have dropped off there has been only minimal impact.”

It is a trend noticed by the country’s domestic law firms as well. However, Truong Quang, managing partner of local player YKVN, remains optimistic, saying that, while it appears as if things are in a ‘sit and wait’ mode, the economy continues to exhibit strong fundamentals. The World Bank and the IMF both agree that the country’s industrial production, exports and services sectors will continue to drive macroeconomic development, and their projections reveal that within three years the country’s export performance will rival, perhaps even supersede, that of Indonesia and Thailand.

“The basics of the economy are quite strong. I think the reason [Vietnam] is doing better than other economies in the region at the moment is because it is slightly more diversified and not integrated into the global economy to the extent that others in the region are,” Quang says. “This is a good thing. It means that we are buffered from the effects of worldwide economic problems and also means that domestic stimulus packages offered by the government have more room to be effective. The real hope, I feel, is that banking & finance and capital markets bounce back, although this is more dependent on world trends then domestic stimulus.”

Depressed deal flow

It is in the most ‘international’ sectors of the Vietnamese economy – those that depend on FDI and FII inflows – where deal flow has been most affected. All the law firms that spoke to ALB claim that the mega-deals that were so commonplace over the past two years (such as GTEL Mobile’s US$1.8bn JV and partial acquisition of Russian-owned Vimpel Communications, and the US$237m financing for the Cai Mep-Thi Vai port complex) have dissipated almost overnight.
This doesn’t mean deals are not being struck; it is just that they are not the type of deals many lawyers have grown used to working on. “The real estate bubble that was driving huge investment over the past few years has well and truly burst and has affected the type of deals going through,” says Tim Fletcher, the partner in charge of Lovells’ Vietnam operation.

“Energy, oil & gas and infrastructure remain busy… but it’s a different type of busy. There are fresh investments coming in but these are deals with no crème on top, they are strategic investments. The exciting FDI and M&A deals that were in the pipeline for 2009 have stalled or been put on ice. There is enough work to go around and new instructions keep coming in but the really big projects that make it interesting as opposed to just ‘good’ have disappeared.”

Back to basics

Nguyen says that where deals are being pushed through clients now have a completely different set of demands. From deal structure and acquisition financing to the actual selection of deals, clients are now proceeding with a great deal more caution.

“In many ways, closing deals at the moment in Vietnam is about returning to the basics, it’s a return to how things were done in the past. Clients are proceeding more cautiously and being more selective in the deals they go ahead with,” he says.

What is particularly novel is the expanded role that lawyers are being expected to play on deals, with clients seeking more ‘value-add’ advice around the quality of deals and their commercial ramifications. Dang The Duc, managing partner of local firm Indochine Counsel, says that while some lawyers may equate this change in the role of lawyers directly with the global financial crisis, it has been ongoing through the last decade.

“When our clients come to us with a deal, they now expect us to give them whatever industry and market knowledge we have in addition to the usual legal advice we provide,” he says. “It’s more evident now because of the financial crisis but has been happening a lot over the last five years and has always been an important aspect of instructing international clients.”

He believes the ability to offer this type of advice will only increase in importance. “This may become a prerequisite for closing deals as the global financial crisis worsens. I think it’s local law firms who are best able to do this – they have been here the longest and know the market probably better than international firms,” The Duc says.

Foreign firms tread carefully

Dang’s views are by no means isolated. All the domestic firms interviewed by ALB are bullish about their growth prospects for the remainder of the year and are equally as assertive in their assumption that if things get worse for law firms in Vietnam, it will be the country’s 25 international players that will be the hardest hit.

“Local law firms here are all-rounders,” Quang says. “We can handle all types of work and we are compact enough to move with trends without having to lay off staff. This cannot be said of some foreign law firms in the country, as management influence from the US or UK often extends to their operations here.”

Dang agrees, saying that the downturn in staple projects and infrastructure work could make foreign firms among the first casualties in Vietnam. “International law firms will be the first affected, since larger projects and cross-border work will be reduced. In the last six months, foreign law firms have seen a decrease in the volume of work and new inquiries,” he says.

Foreign law firms, Dang says, can no longer be as selective as work becomes more scarce. “The downturn will up the ante between law firms for work,” he says. But are foreign firms in Vietnam in such dire straits? Times are tough, foreign lawyers roundly concede, but not tough enough for them to throw the towel in.

Sai Ree Yun and Eric Eunyong Yang, the partners charged with overseeing Korean law firm Yulchon’s Vietnam practice, say that although there has been a drop off in work over the past six months, Korean interest in Vietnam remains strong. Among Korean firms, Yulchon has the largest Vietnamese operation, while Horizon Jisung, Logos and Justice MP have a smaller presence. “In my experience, it is the larger companies who remain most active in the downturn – the smaller companies are the ones that suffer the most. Korea remains one of the largest investors in Vietnam, particularly in construction, real estate development and project financing,” says Yun, whose firm has acted for Lotte – the largest retail business in Korea – on its recent expansion in the Vietnamese retail sector.

The strength of some of Vietnam’s domestic companies means that Korean interest in the country is unlikely to abate despite the economic climate. “The majority of our work is for Korean companies looking to enter the Vietnamese market, but as companies in Vietnam mature they are appealing as well and I think over the next two years there will be more activity here,” Yang says. “We are working with clients now to prepare them for these opportunities as they arise.”

Lovells’ Fletcher says that his firm’s international clients also haven’t lost interest in Vietnam – even though it may appear that way to outsiders. “What we have seen is constant interest from Japanese, German and British companies, but their focus has changed from the FDI grab to oil & gas and utilities, which tends to be less in terms of dollar value but has a higher churn. This would suggest why some claim that things have dropped off,” he says.

Challenges

Striking deals in a depressed economic climate presents its own set of unique challenges, especially given the  Vietnamese economy is still in the process of marketing its economy and erecting effective regulatory frameworks. Dealing with the legal issues here is where foreign lawyers can rightly claim to have the upper hand on their Vietnamese counterparts. “There are some hurdles with M&A transactions that remain difficult to negotiate,” says Yulchon’s Yang. “The typical purchaser in Vietnam usually goes after assets and not necessarily shares in acquisitions, but there are measures in place which means achieving this is permitted only in limited circumstances,” he adds, pointing out that this has only been allowed by the Vietnamese Government on a handful of occasions.

The choice of governing law is another challenge, Yun says, and has the potential to make dealing with disputes arising from transactions a hard task for even the most astute lawyer. “It is very difficult to obtain a judgment and have it enforced in Vietnamese courts when a contract’s governing law is not Vietnamese,” he says. “The court system in Vietnam is improving but still relatively underdeveloped. We advise our clients to use Vietnam law as the governing law in contracts just in case disputes arise, but this is limiting on some occasions.”

Although the system is far from ideal at the moment, international lawyers roundly applaud the government’s recent efforts to revamp regulation in these areas and activity here is set to speed up as bold measures, including stimulus packages and the acceleration of the disbursement of capital for construction projects, are introduced to curb any further slowing of the economy.

The task facing the business of firms is just as pressing. The Duc says that just as clients are proceeding with caution and being selective in terms of the deals they work on, so too will law firms need to make difficult decisions about growth and development over the coming months. “Firms will have to be more careful with expansion plans and more flexible in the way they operate. They may find it necessary to adjust their plans, the types of work they take on, recruitment strategies, office expansion, and even fee structure and rates,” he says. ALB

This is a HTML version of the feature which appeared in ALB 9.6