Country Highlights
• Growth has outperformed peers, but remains susceptible to the risk of a global economic slowdown given the country’s high dependency on exports and the US market.
• Robust economic fundamentals and favorable trade agreements with major economies have helped Vietnam attract FDI capital and become an export-manufacturing hub for East Asian multi-national corporations.
• External stability is moderate with a balance of payments surplus and stable external debt. However, given Vietnam’s high external trade exposure, the level of foreign reserves needs to increase to help cushion against external uncertainties and accommodate debt service.
• The budget deficit has remained low and stable, and public debt is declining. Nonetheless, fiscal management could face challenges as revenue growth decelerates and public debt amortization rises.
• Financial conditions continue to ease through growth in banking credit supported by adequate domestic liquidity. However, domestic credit expansion could be constrained by the recent rise in inflation.
Overview
In the decade following the Global Financial Crisis, Vietnam has emerged as a rising star among emerging market economies – another ‘Asian Miracle’ success story. Capitalizing on the upturn of its economic cycle, Vietnam’s economy has grown with astonishing speed, driven by strong export performance among medium- and high-tech manufactured products such as telephones, computers and electronics, and machinery and equipment. Well integrated in the global supply chain, Vietnam has strategically positioned itself as a manufacturing hub for multinational corporations, especially those originating from East Asia, leveraging its strategic advantages to become a favored FDI destination. The keys to Vietnam’s success include:
(i) abundance of low-wage workers with strong work ethics;
(ii) strategic access to the international market and supply sources via trade pacts;
(iii) improving economic fundamentals: robust upward trend of real GDP growth, high trade surplus and improving domestic and external stability
(iv) open playing field and investment opportunities through privatization of State-Owned Enterprises (SOEs).
Globally, the share of Vietnamese exports almost doubled over the period 2013-2018. Vietnam has emerged as the most prominent beneficiary from the on-going US-China trade war as the supply chains for exports to the US are being re-aligned. While we have witnessed a sharp drop in US imports from China, Vietnam’s export sector has held up well over the past 12 months: Vietnam’s exports to the US in 2019 grew by 28.9%, a two-fold increase from the 14.9% growth recorded in 2018.
Economic Prospects
Outperforming economic growth amid threats of global economic slowdown
Vietnam’s real GDP growth outperformed ASEAN peers and even China for the first time in 2018. The disruption caused by US-China trade tensions has triggered a re-alignment of the supply chain for exports to the US. Vietnam has emerged as the top destination for the relocation of production bases from China. Leveraging its strategic advantages, including an abundance of relatively low-cost labor, strong work ethics and access to the international market and supply sources via trade pacts, Vietnam has successfully implemented an export-led industrialization strategy and become a manufacturing hub for East Asian multinational corporations. The export sector has become the crucial growth driver for the country: the share of real exports of goods and services in GDP increased from 72.0% in 2010 to 125.2% in 2018.
We expect the on-going US-China trade tensions and increasing geopolitical conflicts to have significant impacts on global trade activities. As Vietnam’s economy is predominantly driven by exports, we expect the country’s economic growth to decelerate slightly in 2020. We project Vietnam’s real GDP to expand by 6.8% in 2020, slightly down from the 7.0% growth recorded in 2019.
Growth engine slowing amid heightened uncertainties
The inflow of FDI capital has been a key growth engine of Vietnam’s economic and manufacturing boom. There was a big jump in registered capital inflows between 2016 and 2017, driven by improving economic fundamentals and the strategy to privatize SOEs. However, the growth has slowed since 2017, partly as a result of infrastructure constraints and uncertain global economic prospects.
The uncertainties of US trade policy with key trade partners will likely complicate trade flow predictions and consequently delay investment decisions. The growth of FDI capital, both registered and disbursed, is expected to decelerate further but remain positive. To sustain the trend of socio-economic development, the government aims to attract foreign capital via Public Private Partnership mechanisms for investments in transportation, power plants and water treatment projects.
The main sources of FDI have been the East Asian countries, led by South Korea and Japan, which are attracted by the strategic advantage of Vietnam’s international trade relations, especially with the US. In addition, the boom in processing and manufacturing through special economic zones and industrial parks has channeled FDI flows into other related sectors, including real estate and production and distribution of electricity.
High value-added exports but exposed to market concentration
Vietnam’s key exports are telephones, computers and electronics, and machinery and equipment. The export-led growth strategy has attracted a number of prominent global multinational corporations to establish manufacturing bases in the country. For example, Samsung Electronics, a South Korean telecommunications manufacturing firm, accounts for most of Vietnam’s exports of telephones and parts.
The US was Vietnam’s top export destination accounting for a fifth of total export value during 2013-2018. Compared to its ASEAN-4 peers, Vietnam is more reliant on the US market. This means that Vietnam is relatively more susceptible to changes in US trade policies than its ASEAN-4 peers.
In October 2019 Vietnam signed trade and investor protection agreements with the European Union, a strategic move that will help diversify its export markets. However, Vietnam still needs to improve its institutional mechanisms in order to comply with EU standards, which is one of the key considerations of foreign investors.
External Stability
Relatively strong balance of payments position, supported by high trade surplus and FDI inflows, yet foreign currency reserves remain weak
Vietnam’s balance of payments recorded a moderate surplus of 2.5% of GDP in 2018. The level was second only to Cambodia and above all the ASEAN-4 countries. The improvement in the balance of payments was supported by recoveries in the trade balance and FDI inflows since the turbulence in the Chinese financial market in 2015.
Despite the high trade surplus and FDI inflows, Vietnam’s foreign currency reserves position has remained weak. As of 2018, the country’s foreign currency reserves were only able to cover imports of goods for 3 months, compared to at least 6 months for the ASEAN peer countries.
As a country energized by global trade activity, we view that the current level of foreign currency reserves is rather low given the increasingly volatile global trade environment and the degree of external trade dependency of Vietnam.
Relatively high external debt with stable outlook
Vietnam’s external debt is relatively high among ASEAN peers. The external debt trend looks stable given that public debt has been on a decline with the rise in public debt service in recent years, while private debt has shown a rising trend. Total outstanding external debt stood at 60.0% of GDP at the end of 2018. However, short-term external debt remained low at 8.0% of GDP, which was lower than that of Cambodia, Malaysia and Thailand. The majority of Vietnam’s external debt has been incurred by the public sector (government and SOEs), equivalent to 45.8% of GDP; whereas private long-term debt stood at 14.2% of GDP at the end of 2018.
There has been a significant leap in external debt service since 2015. This rise has been attributed mainly to the amortization of SOE debt. The debt service burden of the general government remained low at around 1.0% of GDP, while private debt service has risen moderately, in line with the recent economic expansion.
Fiscal Management
Budget deficit looks stable while public debt declines with rising debt amortization
Vietnam’s budget deficit looks stable at a low level while total public debt has declined with rising debt amortization. The government has managed its fiscal positions in a prudent manner. The official budget deficit (after interest payments) has remained stable at around 3.5% of GDP. However, the size of annual debt amortization in the fiscal budget has risen since 2017 while revenue growth has decelerated, resulting in an enlarged budget deficit after debt service. According to the FY2020 budget plan, the official estimated budget deficit stands at 3.4% of GDP; however, after debt amortization, the budget deficit rises to 7.0%.
Total revenues are seen to be growing at a slower pace than economic growth. The revenues are expected to come in at only 22.2% of GDP in 2020, the lowest rate in the decade. Apparently, the efficiency of tax collection will need to be significantly improved to attain revenue growth commensurate with the country’s economic growth to sustain long-term development.
The public debt level has been on a declining trend with respect to external debt, a factor attributed to ample domestic liquidity. The current public debt law also puts a cap on the government guarantee on debts incurred by SOEs and development banks.
Monetary Management
Adequate local liquidity supports credit growth
Financial conditions in Vietnam continue to ease in accommodating economic growth. The State Bank of Vietnam (SBV) cut the policy rates (refinancing rate and discount rate) by 25 bps in September 2019. The easing was justifiable in view of the ample deposits of resident economic entities and individuals, low annual inflation rate growth (CPI) and low dollarization rate. Deposits of resident economic entities and individuals were higher and grew faster than banking credit. The annual headline CPI stood at 2.8%, below the target of 4.0%.
However, increasing inflation at the end of 2019 driven by a rise in food prices is likely to put pressure on SBV’s monetary easing policy.
TRIS Rating Co., Ltd.
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