Vietnam’s growth here to stay

The shape of the Vietnamese economy is a rare good news story in Asia.

The country is riding high on strong growth, exports and foreign direct investment (FDI).  ANZ Research recently reiterated a growth forecast for Vietnam of 6.7 per cent in 2019. While lower than the rate achieved in 2018, such a result would still place Vietnam among the fastest-growing Asian economies.

The story is a very good one and in the near future it’s almost certain to persist - but could Vietnam become a victim of its own success? In the short term coming to the attention of a certain global trade recalcitrant is the main worry.

With Vietnam’s demographic dividend already at its peak, structural reorientation is needed - or maintaining growth through rising debt might just prove too tempting.

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“[Vietnam’s] story is a very good one and in the near future it’s almost certain to persist.”  

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Optimism

There’s a refreshing sense of optimism about the future in Vietnam at the moment, which is a nice change from the concern about secular stagnation gripping so many other parts of the world.

Twenty five years ago the US removed its trade embargo on Vietnam and, along with the economic reforms of the 1980s, this marked the beginning of what has led to today’s state of growth. 

Growth has been strong over the last few years alongside FDI and export growth. There are some short term worries, however, the trade war among them.

Additionally, there are concerns that if Vietnam’s growth profile is ‘noticed’ by the US - particularly around trade balance outperformance - it could find itself subject to tariff activity. All Vietnam can really do is wait and see what happens.

More structurally there are some important economic issues which will require action if conditions are to be sustained.

Strategically, Vietnam’s ongoing success will require a conscious policy focus on important issues such as the availability of power.

It’s almost as if you can't have a discussion in Vietnam without power coming up - not power prices, per say, but the availability of power and the ability of the system to cope with the increases in demand.

Added to increasing environmental considerations around power, this is one issue which will require substantial focus.

Dual

For a long time Vietnam has almost been running two economies. One is the domestic economy, largely supplied by domestic firms, while the other is an export sector, substantially supplied by firms with a long history of FDI.

The interlinkages between the two sectors are weak and there's not enough transfer of skills from the foreign firms which invest in Vietnam and the domestic sector. That needs to happen.

The skills of the domestic labour force need to continue to pick up in line with wages. Wages can grow for a substantial period of time through cheap production methods but eventually limits will be hit as living standards advance.

Vietnam is starting to face some of those limits, particularly as foreign direct investment really picks up - not just due to Vietnam’s strong fundamentals but also the trade war.

Unless these issues are addressed Vietnam risks falling back on the crutches many other countries have used - increasing public and household debt, along with relying on the demographic dividend to drive growth. Indeed, the demographic dividend in Vietnam is at its peak right now.

This need for structural reorientation is only going to increase in urgency over the coming years, even as Vietnam’s economy continues to perform well.

Richard Yetsenga is Chief Economist at ANZ