Eco Emerging

A resilient export sector

07/14/2019

Vietnam continues to report solid economic growth rates. Real GDP has increased at an average annual rate of 6.6% since 2014, higher than the 6.3% average recorded by Asian emerging countries as a whole. After peaking at 7.1% in 2018, the highest growth rate in the past ten years, economic growth has slowed slightly since early 2019. It reached 6.7% year-on-year (y/y) in H1 and is expected to slow further in H2. Given its high degree of trade openness, Vietnam is vulnerable to the weakening in global demand and the spillover effects of Sino-American trade tensions. The United States and China (including Hong Kong) each absorbed 20% of Vietnamese exports in 2018.

Yet economic growth prospects are still very favourable in the short and medium terms, driven by a strong domestic demand and the continued expansion of the export sector. The sector could even benefit from new foreign direct investments (FDI) by corporates seeking to establish production centres outside of China.

Sino-American tensions: a damper on exports…

Forecasts

Vietnam’s export performance has deteriorated over the past year due to the weakening in global demand and the knock-on effects of higher US tariffs on imports of Chinese goods. Merchandise exports (in current dollars) rose only 7% y/y in H1 2019, vs. 13% in 2018 and 22% in 2017 (chart 2). US tariff measures have had a sharp impact since fall 2018, mainly via the spillover effect on regional supply chains, as well as through the indirect negative effects on global confidence, investment and demand. As a result, Vietnamese manufacturing growth slowed to 11% y/y in real terms in H2 2019, from 13% in 2018 and 14.4% in 2017.

A mild deterioration in export performance

However, on the whole, the manufacturing and export sectors are still posting relatively solid performances compared to the region’s other economies, and Vietnam continues to win international market share (it accounted for 1.3% of total world exports in 2018). After hitting a low in Q1 2019, export growth has regained a bit of vigour in Q2. This slight upturn has also benefited the other countries integrated within Asian supply chains, but Vietnamese export growth has maintained its lead.

Vietnam’s manufacturing export base has expanded steadily over the past ten years, largely supported by FDI inflows. Merchandise exports as a percentage of GDP increased from 67% in 2012 to 100% in 2018. Moreover, this expansion was accompanied by the diversification and continued rise in the value-added of exported products. Computers, electronics and phones now account for 33% of total exports, up from 17% at year-end 2011.

… but also an opportunity

Vietnam could benefit from the current troubles of Chinese exporters: in the very short term, by partially replacing Chinese exports by shipping manufactured or semi-manufactured goods directly to US companies seeking to avoid the new tariff barriers, and, then, by attracting investors seeking to move their production centres outside of China.

As a matter of fact, the slowdown in total export growth since November 2018 has been mainly due to the contraction in shipments to China and Hong Kong (down 4.5% y/y over the period November-May) while exports to the United States surged by 24.7% y/y over the same period. This suggests that Vietnamese manufacturers have benefited from some carry-over effects.

Moreover, the recent increase in the number of FDI projects in the manufacturing sector (mostly initiated by China’s and Hong Kong’s corporates) also suggests that the relocation of some production centres outside of China should benefit Vietnam. Major Japanese and Korean groups have also recently expressed interest in increasing their production capacity in Vietnam.

Vietnam maintains several comparative advantages that should enable it to continue to attract foreign investors. It is already well integrated in Asian supply chains, wages costs are still competitive, and the authorities are slowly pursuing reforms that aim to consolidate macroeconomic stability, strengthen the institutional framework and improve the business environment (for the sake of illustration, Vietnam improved from 99th in 2013 to 69th in 2019 in the World Bank’s Doing Business rankings).

Vietnam has also participated in many trade agreements, demonstrating the authorities’ determination to promote free trade policy. Two examples are the Trans-Pacific Partnership (TPP), which partially took effect in early 2019, and the free trade agreement with the European Union, which should take effect by 2020. Vietnam is also participating in talks to harmonise all of the bilateral trade agreements between the ASEAN countries in order to create a broad regional partnership.

The external position is strengthening gradually but some vulnerabilities persist

Vietnam’s current account balance has been in surplus since 2011. The trade surplus is the main component: it has averaged 5.7% of GDP since 2013 and peaked at 6.8% in full-year 2018 (chart 3). After rising in the first three quarters of 2018, the trade surplus has narrowed since Q4 2018 due to the erosion of its export performance. Given the high import content of exports, import growth also weakened, but continued to outpace exports, thanks to robust domestic demand.

A very comfortable basic balance

Transfers (international aid and remittances from the diaspora) are the second key contributor to the current account surplus. Despite a slow structural decline in recent years, net transfers are still solid and accounted for 3.6% of GDP in 2018. In contrast, the balance of primary income is negative and has deteriorated rapidly since 2017 (-6.5% of GDP in 2018), notably due to the increase in earnings repatriated by foreign enterprises. The services deficit is moderate (1.5% of GDP in 2018) and has improved slightly since 2017 thanks to the development of the tourism sector.

All in all, the current account surplus narrowed from 2.9% of GDP in 2017 to 2.4% in 2018 and is projected at 2.1% in 2019. This mild deterioration is due to both external shocks (slowdown in merchandise exports) and structural factors (increase in earnings repatriated by foreign groups, which the export sector depends heavily on). Assuming the export base continues to widen, the current account surplus should stabilize or even pick up slightly in 2020.

Vietnam has benefited from a largely positive basic balance (current account balance + net FDI) for several years, and its reliance on external debt has thus remained very moderate. Yet its foreign debt stock has increased in recent years, mainly due to private-sector debt, including inter-company loans. The external debt-to-GDP ratio rose from 40% in 2012 to 48% in 2018, and the debt servicing burden has remained all the more moderate since export revenues have increased strongly (it was estimated at 5.3% of exports of goods and services in 2018).

The external liquidity position has also improved but remains fragile. Foreign exchange reserves have more than doubled since 2012 to USD 55 bn at year-end 2018, but they do not yet cover more than three months of imports of goods and services. Therefore, foreign exchange reserves do not provide a comfortable buffer against external shocks. But they are projected to continue to increase in 2019-2020.

THE EXPERT ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

Global
Growing concerns on economic growth

Growing concerns on economic growth

Growth concerns for both advanced countries and emerging countries have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty [...]

Read the article
China
Hard blow

Hard blow

With the export sector hard hit by US tariff measures and private consumption growth weakening, investment growth has slowed [...]

Read the article
India
A big victory for Modi in the midst of a tougher economic environment

A big victory for Modi in the midst of a tougher economic environment

Narendra Modi won a major victory in the general elections, further bolstering his legitimacy [...]

Read the article
Brazil
On a slippery slope

On a slippery slope

The Brazilian economy has hit a wall. Real GDP contracted in the first quarter and signs of weaknesses are accumulating: investment and exports have retracted, while consumer spending – despite being supported by credit – has slowed down [...]

Read the article
Russia
Sluggish economic growth

Sluggish economic growth

Economic growth slowed sharply in the first 5 months of the year and the central bank has revised downward its forecasts [...]

Read the article
Turkey
Avoiding a relapse

Avoiding a relapse

Mired in stagflation, the Turkish economy might have to forego its “stop and go” tradition given the need for deleveraging in the private sector and a less favourable international environment [...]

Read the article
Romania
Mixed bag

Mixed bag

Counter powers and institutional watchdogs have proved to be quite effective in stemming the government’s business-unfriendly measures and attempts to undermine the Rule of Law [...]

Read the article
Mexico
Disappointments

Disappointments

Mexico’s economic growth prospects are deteriorating: slower growth in the US, fiscal austerity and low investment levels have dragged down growth in the last two quarters. The slowdown is likely to continue, despite support from consumer spending [...]

Read the article
Indonesia
Strong resilience

Strong resilience

Economic growth slowed in Q1 2019, but for the moment the economy seems to be fairly resilient to the decline in world trade [...]

Read the article
Saudi Arabia
First signs of recovery

First signs of recovery

The Saudi economy has recorded weak performances over the past three years [...]

Read the article
United Arab Emirates
In search of a second wind

In search of a second wind

Economic growth has slowed for the past three years. OPEC+’s restrictive policy is curbing oil production. Non-oil GDP has been hit by sluggish tourist traffic, which has eroded domestic demand, notably in Dubai [...]

Read the article
Tunisia
A fragile stabilisation

A fragile stabilisation

The Tunisian economy has begun to show signs of stabilisation. Inflation is falling, exchange rate pressures are easing and the government finally managed to uphold its commitment to fiscal consolidation in 2018 [...]

Read the article