Assessing Vietnam's economy: key growth drivers and challenges
As many of the world's largest emerging economies were faltering earlier this year, namely China, Russia, and Brazil, Vietnam appeared to be one of the emerging market standouts. Since then, however, the Vietnamese economy has shifted into a lower gear as adverse weather conditions damaged a large share of agricultural output, which accounts for almost 20% of GDP. Following disappointing first and second quarter GDP readings, analysts now project Vietnam expanding 6.1% this year, which is substantially lower than the near 7% growth that was expected earlier in year. Despite the disappointing year thus far for Vietnam, FocusEconomics expects steady growth in the manufacturing and construction sectors to offset the impact of the lower agricultural yield and help the economy recover in the second half of the year. We recently sat down with our Vietnam expert economist Jean-Philippe Pourcelot to chat about how he views Vietnam's economic outlook, the key factors that will affect the country's economic growth in 2016 and how reforms could help Vietnam's government to improve FDI and foster a more business-friendly environment overall.
FE: What will be the key drivers of Vietnam’s higher growth in 2016 and beyond?
JP: As you know, Vietnam had a disappointing first half of the year, however, despite the slump in the primary sector, Vietnam’s macroeconomic fundamentals remain solid. The secondary and tertiary sector gained momentum in the second quarter of the year and will keep the economy on solid footing going forward. Vietnamese exports grew at a robust pace in the first two quarters of the year and FDI inflows also showed solid growth in H1. So, although the economy did slow a bit, overall the situation is far from dire.
FE: How do you see the slowdowns in some of the world's key economies affecting Vietnam's growth prospects?
JP: That's a good question - the ongoing economic deceleration in China coupled with heightened volatility and uncertainty in Europe, do certainly pose downside risks to growth. Over 30% of Vietnamese goods are sold to China and the European Union and most of the FDI inflows Vietnam receives are destined to export-oriented industries. The biggest factor may be the sustained deceleration that the Chinese economy is currently experiencing. Although the China's economy stabilized in Q2 after decelerating in Q1, our panel of 39 analysts estimates that the Chinese economy will decelerate from 6.9% growth in 2015 to 6.6% in 2016 and 6.3% in 2017. Given the important trade ties the countries share, a deceleration in China will likely weigh on Vietnam’s exports. China is not the only thing that Vietnam has to worry about, though, as increased political and economic turmoil owing to the Brexit vote threatens to derail the economic recovery of the Eurozone, affecting consumption in the bloc and consequently FDI inflows into Vietnam.
FE: Speaking of FDI, how do you see FDI inflow into Vietnam going from here in light of the current global economic environment?
JP: Unfortunately we don't forecast FDI inflows themselves into Vietnam, but our data does suggest that FDI inflows in the first half of 2016 increased, largely concentrated in export-oriented manufacturing. However, we have to keep in mind that the global economy is a little shaky at the moment. If the global economy, and particularly China decelerates further, FDI inflows into Vietnam could dry up.
FE: FDI is obviously an important aspect of Vietnam's economy and the government is now showing a determination to create a more business-friendly climate. What do you believe are the most important reforms the government should make to improve the business environment in Vietnam?
JP: The higher FDI inflows that we just talked about underscore the efforts the government has already made to improve the business climate, such as the reforms to cut the corporate income tax as well as improving the information available on accessing credit, among other actions.
Going forward, however, government reforms in a few key areas could work to improve the business climate:
First of all, focusing on state-owned enterprises (SOEs), which account for the 30% of Vietnam's GDP, is imperative. SOEs are becoming increasingly inefficient and deterring investment. Restructuring and privatizing SOEs is key along with reforms that focus on areas such as improving transparency, strengthening supervisory capacity and curtailing SOEs’ preferential access to credit and other resources. Liberalizing SOEs is paramount to boosting productivity and attracting FDI. Lack of SOE reform could aggravate macroeconomic imbalances in the country, reduce its export-competitiveness and deter FDI as a result.
On top of that, reforms need to be implemented in the banking sector. Analysts argue that Vietnamese banks are currently undercapitalized and saddled with non-performing loans, which makes the banking sector highly susceptible to shocks. In addition, ample credit growth in the domestic economy without strict regulations increases risks in the real estate market. Improving transparency, implementing disclosure requirements, loosening ownership regulation and continuing consolidation efforts are examples of steps needed to be taken in order for the banking sector to better withstand economic shocks and support growth.
FE: Well, it seems like there is a lot left to be done in Vietnam.
JP: Absolutely, despite the downside risks to the outlook, I'm fairly positive about the future of Vietnam and its growth prospects going forward.
FE: Great, thanks for sitting down with us Jean-Philippe.
JP: Any time.
Author: Jean-Philippe Pourcelot, Economist
Date: August 28, 2016
TagsIndustrial Metals Commodities Spain Japan precious metals Energy Commodities Colombia Vietnam Emerging Markets Inflation Portugal European Union Asia Fed Eastern Europe Canada Commodities Panelists Tunisia Latin America Company News Brexit OPEC Germany USA Australia G7 Precious Metals Commodities China Argentina IMF Banking Sector Iran France Trade United States Infographic Turkey Economic Growth (GDP) Oil Financial Sector Italy Ukraine Base Metals Commodities India Housing Market Agricultural Commodities oil prices World Bank Nordic Economies Consensus Forecast Euro Area Venezuela Mexico Investment Major Economies Africa Unemployment rate Forex UK Russia MENA Sub-Saharan Africa Brazil South Africa Greece Gold Exchange Rate
1 hour ago
1 hour ago
2 hours ago
3 hours ago
3 hours ago
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 18 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- Gold: The Most Precious of Metals (Part 3)
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- 2017 & 2018 Economic Outlook for the Top Oil Producing Countries
- Which countries will have the highest and lowest inflation in 2017?
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit