Assessing Vietnam's economy: key growth drivers and challenges

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.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Jean-Philippe Pourcelot, Economist

Date: August 28, 2016

Twitter @FocusEconomics

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