Vietnam economy set to expand 6.7% in 2019

VIETNAM'S economy could expand by 6.7 per cent in 2019, powered by its transformation into a global manufacturing hub and amid gains from the fallout of the US-China trade war, economists from Moody's Analytics said in a report.

"The nation's record expansion has exhibited few signs of slowing, with real GDP (gross domestic product) growth exceeding 6 per cent for the past decade, a feat only a small number of emerging markets have achieved," the report said.

Prepared by Steven Cochrane, chief Asia-Pacific economist, and Steven Shields, associate economist, the report painted a rosy view of Vietnam's economic expansion, noting that it outstripped Chinese GDP growth for the first time in nearly three decades in 2018.

The report pointed out that small pockets of weakness are beginning to emerge, owing to the African swine fever outbreak and weaker external demand, but said these are likely to diminish as renewed export growth and steady inflows of foreign direct investment underpin continued expansion.

It said even though high inflation and the global financial crisis led a sharp drop in foreign capital entering the country in 2009, Vietnam's government and central bank have managed inflation well through the past decade despite a rapidly expanding economy, with year-to-date consumer price index (CPI) increasing just 2.6 per cent in July, its lowest growth rate in three years.

With manufacturing powering its transformation, the report noted that the manufacturing and processing industry is the largest single recipient of investment. Vietnam attracted US$22.6 billion in foreign direct investment through July, down 7.1 per cent compared with last year, according to the Ministry of Planning and Investment.

At the same time, the fallout of the trade war between the United States and China has proven advantageous for Vietnam as Chinese manufacturers shift production into the country to evade US tariffs, the report said, making it one of the few countries in the region to experience a pickup in exports in 2019.

"Not only are Chinese producers moving operations to Vietnam, but US consumers are also purchasing more Vietnamese-produced goods, evidenced by a 27% increase in US imports from Vietnam during the first six months of 2019," the report said, adding that these trends are also providing stability for the country's equity markets.

However, despite these positive developments, there may be growing pains ahead.

"Supply chains are not nearly as fleshed out as in China due to inadequate infrastructure. Development will be key as officials plan to invest in new expressways, ports, airports and railways," the economists said.

A relative shortage of workers could be another challenge, while tilting the trade balance between US and Vietnam in Vietnam's favour could make the country vulnerable to accusations of a one-sided relationship.

"Despite risks firmly leaning to the downside, Vietnam will remain one of the fastest growing global emerging markets as continued foreign direct investment, greater industry diversification, and strong domestic demand support continued economic expansion," the report concluded.