Vietnam: a 20 year growth story

Vietnam’s economy has managed to grow by an average of almost 6.5 per cent per annum over the past 20 years. 

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Growth was particularly strong in 2017 at 6.8 per cent and ANZ Research forecasts this strong growth to be maintained in 2018 and 2019.

"Although the outlook for Vietnam’s economy is positive, it is important to manage strong growth and avoid the build-up of imbalances to ensure the sustainability of the expansion.”

In fact, actual GDP growth in the first half of this year came in stronger than expected at 7.1 per cent. Strong activity in the industrial sector and a continual broadening of the manufacturing base on the back of ongoing foreign direct investment inflows will sustain strong growth. 

While the effects of the US-China trade tensions are starting to be felt in some countries in the region - particularly in the drop off in new export orders and a moderation in manufacturing PMI indicators - Vietnam has been bucking the regional trend.

Vietnam’s manufacturing PMI remains firmly in the expansionary zone and has even seen its new export orders pick up. Overall, rising trade protectionism is unfavourable for global trade but its effects on Vietnam are likely to have less of an impact when compared to other countries.

Vietnam has been successful in attracting inward foreign direct investment (FDI), totalling USD14 billion in 2017 -an increase of 12 per cent from the previous year. ANZ Research expects this trend to continue as Vietnam remains an attractive FDI destination for multinationals. There could even be acceleration in the shift of manufacturing production into Vietnam for export to third markets. 

Vietnam is a signatory to the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) and is currently negotiating the Regional Comprehensive Economic Partnership (RCEP) and free trade agreement with the European Union.

The successful conclusion and implementation of all these agreements will only enhance Vietnam’s attractiveness as a destination for FDI, as well as boosting the country’s medium-term growth potential. 

Although the outlook for Vietnam’s economy is positive, it is important to manage strong growth and avoid the build-up of imbalances to ensure the sustainability of the expansion.

In February 2011, the Vietnamese dong (VND) was devalued by 8.5 per cent to restore macroeconomic stability. Inflation was running at double digits, credit growth was expanding at over 30 per cent year-on-year (y/y), and the current account deficit had blown out to 11 per cent of GDP a few years earlier.

The current situation is very different. Although inflation is currently 4.5 per cent y/y - above the State Bank of Vietnam’s (SBV) inflation target of 4 per cent - this is expected to moderate later in the year. Inflation is expected to remain contained.

While the country’s trade balance swings between surplus and deficit, the main cause for the deficit is large imports of capital equipment for the construction of new manufacturing plants. Once these are completed, the imports will reduce and the exports will rise as the new factories ramp up production.

Vietnam is expected to maintain current account surpluses, as the majority of FDI that it attracts are in the manufacturing sector for the production of goods for export. Credit expansion is now at more manageable growth rates but there is still a need to ensure the private sector credit to GDP ratio, currently 132 per cent, does not rise too far.

Apart from anchoring inflation expectations and addressing excessive credit growth, allowing the Vietnamese dong to be more flexible has been an important move towards better macroeconomic management.

The authorities changed the exchange rate regime in early 2016. Previously it had been fixed to the USD but with frequent bouts of devaluations. Allowing the dong to adjust ensures changes in the global economic environment can be captured and a more rapid adjustment in the currency ensures the country’s relative competitiveness is maintained.

In terms of further efforts to sustain strong growth, deeper integration by domestic private-sector firms into the supply chain of multinationals operating in Vietnam is crucial.

Accelerating the knowledge spill-overs of FDIs into domestic firms, including the development of management skills to enable Vietnamese firms to progress from supplying intermediate inputs into engaging in direct exports themselves will help take Vietnam’s economy to the next level.

Khoon Goh is Head of Asia Research, Institutional at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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