Growth in Vietnam’s services sector has remained robust at 6.83 per cent year on year in the second quarter, as strong wage growth and growing urbanisation helped boost wholesale and retail trade.
Expanding manufacturing and external trade activity has also ensured strong growth for both the transport and warehouse sectors, while the financial services sector continues to benefit from growth in the overall economy.
The agricultural sector has been the laggard, with growth slowing to 1.95 per cent, the weakest in three years. A major factor was the detection of ASF in Vietnam in February and the disease has since spread throughout the country.
Vietnam was a relative late comer in terms of economic development in the region. Reforms only started in 1986 with Đổi Mới, ‘renovation’ in Vietnamese.
Growth really only started to pick up from the early 1990s, helped by the country’s diplomatic normalisation with the United States in 1995 as well as its entry into the Association of Southeast Asian Nations (ASEAN) as a full member that same year.
The 1990s saw Vietnam achieve an average compound annual GDP growth rate of 7.4 per cent, with very strong contribution from labour productivity which averaged annual growth of 4.5 per cent.
The rapid pace of growth continued in the 2000s and Vietnam attained reached the lower-middle income category in 2009.
Strong FDI inflows and the rapid shift in the mix of manufacturing towards higher-value-added products during the current decade has helped lift labour productivity growth, which is soon expected to average 6.4 per cent a year.
However, the slowdown in population growth means it will contribute less to growth in the coming decade. Sustaining strong productivity growth will be important to maintain sustainable growth.
ANZ Research believes with the government’s focus on attracting new-generation FDI, high rates of productivity growth can be sustained, though some slowing from the high rates seen this decade is likely.
The government’s commitment to broad-based reforms bodes well for the country’s longer-term prospects.
One area that will require increasing policymaker attention is demographics. Although the working age population is still growing in absolute numbers, it peaked in 2015 as a proportion of the total population.
Vietnam is aging, the number of people over the age of 60 will rise rapidly, resulting in the dependency ratio doubling within 20 years. This is one key reason why ANZ Research expects to see a slowing in Vietnam’s medium-term potential growth rate towards 6 per cent over the next decade.
Managing this structural change requires timely measures in areas such as the retirement age and pension reforms.
If successful, such reforms could be sufficient to move the country into the upper-middle income category.
Khoon Goh is Head of Asia Research at ANZ
This article was originally published on ANZ Institiutional's website. Click to read the full article: Vietnam’s growth here to stay