VIETNAM is expected to be one of the world's fastest growing economies in 2019, and a key destination for manufacturers relocating due to trade tensions between the United States and China, said UOB economists in a report last week.
While Vietnam also has a significant trade deficit with the US, it is unlikely to face major tariffs in the near term, said Fitch Solutions Macro Research in a separate note.
With robust domestic demand and increasing foreign direct investment (FDI), the UOB economists forecast 6.7 per cent growth for Vietnam in 2019, similar to the official growth target of 6.8 per cent. First-half growth was 6.8 per cent year on year.
The interest rate environment is likely to stay conducive, with the economists expecting the central bank to keep the policy rate steady at 6.25 per cent for the rest of the year.
As US-China trade tensions continue and tariffs take a toll on China exports, manufacturers have had to consider shifting production to other locations - including Vietnam.
"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," added the economists.
Labour costs in Vietnam also remain relatively low. Monthly minimum wages in Vietnam range from US$126 to US$180 across regions - 38 per cent to 54 per cent of China's, and also less than Thailand's US$274 rate.
For 2019, Vietnam's FDI is on track to exceed US$20 billion as multinationals divert operations from China, said the economists. They see the main sources of FDI as South Korea, China, Taiwan, and Hong Kong.
In 2019 so far, China has been the largest contributor to Vietnam's FDI, contributing nearly 25 per cent of flows, in a reversal from the previous two years when inflows were dominated by South Korea and Japan.
"This suggests that the impact from US-China trade tensions that arose in the first half of 2018 is having a tangible effect on China-based manufacturers," said the economists.
Unlike previous years, where FDI was more evenly distributed across industries, nearly 75 per cent of FDI inflows to Vietnam in 2019 so far has been concentrated in manufacturing.
A successful 5G trial is likely to draw more FDI in high-tech industries, with Vietnam planning to bring 5G into commercial operation in 2020.
In a separate Aug 21 note, Fitch Solutions Macro Research analysed the risk that Vietnam, too, would face tariff action from the US. It noted that Vietnam is the country with which the US has the sixth largest trade deficit - one that is also rising.
Nonetheless, Vietnam is unlikely to see major tariff action from the US in the near term, said Fitch Solutions.
First, with US-China trade tensions remaining elevated, "the US will likely keep its focus on China especially as (US President Donald) Trump gears up for re-election in November 2020", said the report.
"Second, Vietnam plays a key role in helping the US counter-balance growing Chinese influence in the region," it added, noting that the US has stepped up security relations with Vietnam in recent months.
- This article first appeared at aseanbusiness.sg, the go-to portal for business guides, information and resources by The Business Times, for all with an interest in Asean. Other articles exclusive to Asean Business that were published over the past week include a report on Malaysia's construction outlook and Thailand's tourism expectations.
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