Viet Nam: a growing Tiger Cub

Viet Nam is the youngest member of the so-called “Tiger Cub Economies” – and it is the most vibrant.

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Busy street of Viet Nam

The economy grew by 7.1 per cent in 2018, underpinned by an open economy, foreign direct investment (FDI) and a youthful and literate population.

“Three areas have made Viet Nam stand out: trade liberalisation, foreign investment and demographics.”

The government National Assembly set a GDP growth target of 6.6 - 6.8 per cent for 2019 which ANZ research sees as achievable despite the continued uncertain global environment.

Of the Tiger Cubs – which include Indonesia, Malaysia, the Philippines and Thailand – Viet Nam is a relatively latecomer in terms of economic development in the region. However, it is forecast to be the fastest growing economy among the Tiger Cubs over the next five years.

Viet Nam achieved its remarkable growth performance through an FDI-led export-oriented strategy which was successfully used by other countries such as China and the Asian Tiger economies.

But three areas have made Viet Nam stand out: trade liberalisation, foreign investment and demographics.

Trading freely

Viet Nam has strongly embraced trade liberalisation. When Viet Nam joined the World Trade Organisation (WTO) in January 2007, it was part of only two free trade deals. Since then, Viet Nam has been involved in more free trade agreements (FTAs), both through its ASEAN membership and also from bilateral negotiations. At the time of writing, Vietnam has 11 FTAs which are in effect with countries that account for almost 40 per cent of global GDP. The latest FTA which came into effect was the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).

Viet Nam has also concluded negotiations on an FTA with the European Union which is now awaiting approval from EU members and the European Parliament, and is also in negotiations with three other trade deals. The FTAs under negotiations, waiting for approval or waiting to go into effect, cover 24 per cent of global GDP, giving Viet Nam huge access to the global market place.

Climbing the ladder

Viet Nam has also opened its doors to foreign investment and has made it easier to do business in the country. This has resulted in marked improvements in its ranking in the World Bank’s Ease of Doing Business score, where it came in at 69 in 2018, a big jump from its 104th placing in 2006.

During that time, Viet Nam has also improved in the World Economic Forum’s Global Competitiveness Report ranking, going from 77th place to 55th currently. Better governance, with the World Bank reporting a consistent rise in Viet Nam’s Rule of Law ranking over the past few years, has also helped attract multinationals.

But it is people who make Viet Nam stand out.

The country is home to 96 million people, the 15th most populous in the world and half of the population are under the age of 30. But more importantly Viet Nam has a very high youth literacy rate at 98.1 per cent. Its 15 year old primary school students achieved scores that are well above the average of advanced economies in science and maths, based on the OECD’s Programme for International Student Assessment (PISA). In addition, Viet Nam also boasts one of the highest female labour force participation rates in the world at 73 per cent.

Unsurprisingly Viet Nam has become a magnet for multinationals seeking to set up manufacturing production. Inward FDI into Viet Nam was $US2.4 billion in 2006, 0.2 per cent of global FDI inflows. This has grown to $US14.1 billion in 2017 which is equivalent to 1 per cent of global FDI inflows. The extent to which Viet Nam has become an important trading hub in the region is reflected in the rapid rise in the country’s total trade as a percentage of GDP, which was almost 200 per cent in 2017, up from 9 per cent before the reforms.

Product mix

But even more remarkable is the rapid shift in the composition of Viet Nam’s export mix. A decade ago, textiles and garments were the top export items, comprising around 15 per cent of the total value of exports. While textiles and garments remain an important export product, its top position has been replaced by phones and parts, which now account for a fifth of all exports. The rapid shift up in the manufacturing value added chain in Viet Nam in large part is due to the capability of its workforce.

Viet Nam is actually likely to benefit from the more fraught global geopolitical environment.

Escalating trade tensions between the US and China look set to accelerate the shift of manufacturing production by multinationals into Viet Nam. A survey of 219 companies from various countries by the American Chamber of Commerce in South China – conducted between 21 September and 10 October, after the latest round of tariffs were imposed by both the US and China – showed that almost two-thirds are considering relocating some production out of China. Southeast Asia emerged as the top choice and Viet Nam is likely to emerge as one of the main contenders for the production shift.

While Viet Nam is currently seen as a manufacturing hub, it will not be long before it emerges as an attractive consumer market as well. The country’s per capita income is still low at $US2,500, but set to double over the next ten years.

Given the high female labour force participation rate - which means a higher proportion of dual income households - and the third largest population in ASEAN, the mass consumer market is set to grow strongly and provide another driver for growth.

As a Tiger Cub, Viet Nam is growing up fast.

Khoon Goh is Head of Asia Research 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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