Vietnam to remain one of fastest growing EMs under new leadership

Web Posted on : Mon, 28 Mar 2016


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The Communist Party of Vietnam (CPV) selected a new leadership at its 12th National Congress in January. The general secretary was reappointed while the outgoing reformist prime minister will be replaced by his deputy in July. The changes were cast as a victory for the conservative rather than reformist elements within the CPV. However, the consensus-based decision making process of the CPV and the appointment of a number of young technocrats to the politburo suggest that Vietnam is likely to press ahead with reforms. Indeed, statements from the CPV following the Congress committed to continued reforms aimed at the banking sector, state-owned companies and macroeconomic liberalisation. As a result, the outlook for Vietnam remains positive, in line with the forecasts we published in our December report for growth of 7.0% in 2016 and 7.5% in 2017 (Vietnam Economic Insight 2015).

Real GDP growth

(%)

Sources: General Statistics Office of Vietnam, Haver and QNB Economics

In 2015, Vietnam’s real GDP growth accelerated to 6.7% from 6.0% the previous year, making it one of the fastest growing emerging markets. Vietnam’s outperformance has been driven by strong export growth, despite a weak global environment, supported by a number of factors.

First, Vietnam is attracting strong investment in low-end manufacturing for exports, thanks to competitive wages and free trade deals. The latter grant foreign investors access to large markets. For example, an initial agreement on the Trans Pacific Partnership (TPP) was signed in July 2015 and a free trade agreement with the EU was concluded in December. TPP involves 12 Pacific Rim economies accounting for 37% of global GDP and 26% of world trade. It is the largest trade pact in two decades. An initial agreement was signed in July, but needs to be ratified by national parliaments. If approved, TPP would deepen Vietnam’s access to large markets (US and Japan), boosting exports. In anticipation, FDI is pouring into Vietnam. Samsung has announced USD6bn of investment in smartphone and display factories. LG, Microsoft and Intel are also expanding in Vietnam. In garments and textiles, FDI is rising from China, Japan, South Korea, Australia and US. One estimate expects the TPP to add, on average, 1.0% to real GDP growth and 2.5% to export volumes, each year for 10 years. We estimate that the boost from trade deals added 0.5% to real GDP in 2015, which will rise in 2016-17. However, TPP does still need to be ratified by national parliaments, notably Japan and the US. This poses a small risk that the benefits from TPP may fail to materialise.

Second, low-end manufacturing exporters are shifting from China to Vietnam as China shifts to higher-end manufacturing and as Chinese wage levels rise.

Finally, Vietnam’s exports have been resilient to the global slowdown as demand for some of its products is relatively inelastic (food, clothes and textiles, for example).

In addition to strong export growth, domestic demand has picked up, benefiting from rising real wages and a recovery in credit growth and real estate. Since 2011, inflation has fallen from high levels to almost zero, supporting growth in real incomes and driving domestic consumption.

We expect real GDP growth to pick up to 7.0% in 2016 and 7.5% in 2017. The positive forces driving exports (such as low wages and shifting supply chains) will persist. FDI has already risen after trade agreements were signed in 2015, but the strongest impetus to growth and exports will come once the TPP comes into force, likely in 2017. Domestic demand should remain strong. Incomes could be boosted by the strong export sector, while the housing recovery is in its early stages and may bolster investment and consumer sentiment. Finally, the smooth transition of power and continuation of reforms agreed at the National Congress should release investment that may have been held back pending the outcome of the Congress.

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