Thanks to robust domestic demand and increasing FDI, Vietnam’s economy is expected to expand 6.7% and inflation to rise around 3.4% in 2019, ranking the country as one of the fastest growing economies in the world, according to the latest report by the United Overseas Bank (UOB).
Vietnam is among fastest growing economies.
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Exports and industrial production remained significant growth drivers. Due to solid growth in the export of technological products and various free trade agreements, exports increased 7.3% year-on-year, while imports jumped 10.5% during the first half of 2019. Industrial production was boosted by continued opening of new multinational enterprises (MNEs) in labor-intensive, export-oriented manufacturing and processing industries.
Stronger FDI inflows into Vietnam since onset of US-China trade tensions among ASEAN (BOP basis): Comparison of quarterly averages.
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UOB pointed to Vietnam’s excellent network of trade agreements including 13 free trade agreements as an advantage for its export production base, meaning Vietnam’s exports to significant parts of the world are free from tariffs, offering opportunities for manufactures relocating to Vietnam to sell to more partners at minimized cost.
In terms of monetary policy, the State Bank of Vietnam (SBV) is expected to maintain the refinancing rate at 6.25% throughout this year. With the current policy rate, the monetary policy stance remains conducive to the continuation of GDP growth, while preserving price stability. The preservation of policy space is important given external uncertainties especially the ongoing US-China trade dispute.
The strong economic growth also eases pressure on the central bank to introduce more stimuli to achieve official growth target of 6.8%. Going forward, the report suggested the SBV to reiterate a modestly higher USD/VND trajectory, with point forecasts at VND23,400 in the third quarter and VND23,600 in the fourth quarter.
Multinationals eyeing production shift to Vietnam
The ongoing US-China trade tensions have caused significant uncertainties in global trade, dampening exports from countries facing additional tariffs. In particular, China as a global manufacturing hub and countries which are integrated within its supply chain, saw a slowdown in exports. The threat of high tariffs have forced manufacturers exposed to the additional tariffs, either directly or indirectly, to consider the most cost-effective strategies by shifting their production to alternative locations in order to mitigate the impact from the trade tariffs.
Vietnam’s labor costs are still cheaper than that of Thailand.
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Additionally, several public infrastructure development projects, including construction of new roads and expressways and development of the logistics sector which are expected to be completed before 2030, will enable Vietnam to compete with countries in Greater Mekong to become ASEAN’s logistics hub.
Vietnam's FDI.
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However, Vietnamese minimum wages are still 38% to 54% of those in China, whose minimum wages in some leading cities in Guangdong, its manufacturing-oriented province, now exceed US$330 per month. The minimum wage of US$274 in Thailand is also higher than those in Vietnam.
In addition, Vietnam’s demography is in a good position. According to United Nations, the population in Vietnam is estimated to be around 96 million, with about 70% of its population between 15 and 64 years old in 2019.
From a micro perspective, Vietnam will further attract FDI in high-tech industries thanks to its successful 5G trial program. The country plans to bring 5G into commercial operation in 2020.
