Research and analysis

Vietnam - 2014 Economic Update and 2015 Outlook

Published 3 February 2015

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Vietnam

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk - Vietnam

Summary

Vietnam’s economic recovery is on a solid path as GDP growth increased to 6% in 2014, while inflation fell to a decade-low of 4.1%. Against this backdrop, the key themes for 2015 will include further strengthening of the foreign-invested manufacturing sector; sustained expansionary monetary policy stance; and continued slow pace of the restructuring process.

Detail

2014 growth beat expectations

Vietnam’s GDP expanded by 6% in 2014 (on the year before), up from 5.4% growth in 2013 – beating market expectations and the government’s 5.8% target. Manufacturing is the star-performing sector, with growth accelerating to 8.7% last year from 7.3% in 2013 and 5.8% in 2012. Construction, led by foreign investment, has also shown some signs of recovery. On the expenditure side, domestic private consumption continues to recover gradually, growing by 6.1% in 2014, up from 5.2% in the previous year.

Inflation fell further amid global commodity price drops, and the balance of payment position remains healthy. The trade balance recorded another surplus, while FDI inflows and overseas remittances stayed strong. Positive macroeconomic conditions prompted international agencies to upgrade Vietnam’s credit ratings, and helped the government to successfully issue $1 billion of bonds on the international capital markets at an annual interest rate of 4.8%, the lowest among its 3 offshore US dollar bond issues.

2015 outlook is positive, but not without potential headwinds

The manufacturing sector will likely remain the brightest spot of the economy in 2015. Electronics manufacturing, in particular, continues to expand rapidly, and growth of the shoe-making and garment industries are coming back to pre-crisis levels. The majority of those industries’ outputs are for overseas markets. Manufacturing attracted 70% of the $20 billion in total registered FDI into the country last year, signaling its sustained leading role in the success of Vietnam’s exports in the foreseeable future. Adding optimism into the picture is the concluded FTA negotiations with South Korea and the Eurasian Customs Union (Russia, Belarus and Kazakhstan), and the likelihood of concluding FTA talks with the EU in 2015, and perhaps TPP talks as well.

Meanwhile, the gradual pace of domestic demand recovery and very limited inflationary pressure indicate that monetary policy will likely remain supportive of growth this year. After two interest rate cuts in 2014, credit growth for the year met the government’s target of 12-14%. But retail sales growth has not been stellar. Most of new credit went into manufacturing. Moreover, imported inflationary pressures are expected to remain quiet in 2015 as global food and energy prices stay low. The relatively stable currency adds confidence to the central bank’s “proactive and flexible” monetary policy.

Falling oil prices may add, though, to existing difficulties in fiscal management as income from crude oil exports contributes about 10% to total budget revenue. Public debt has grown more burdensome in the past 3 years as the effectiveness of the ongoing expansionary stance is undermined by structural constraints. Nevertheless, as a small net importer of oil, a falling oil price is both trade-positive and helpful in relieving some budget burden from energy price supporting programs.

As such, the government’s 6.2% growth and 5% inflation targets for 2015 seem achievable. Downside risks to the export-driven improvement lie in the uncertain strength and sustainability of economic recovery in its trading partner countries (the Euro zone, China, and Japan); and regional geopolitical tensions. US policy tightening may result in a small depreciation of the Dong, but will unlikely create as big a market turmoil as elsewhere in the region due to limited portfolio capital inflows into the country.

More importantly, growth continues to be constrained by under-performing banks and state-owned enterprises (SOEs) – the reform of both will likely remain gradual. The root causes of financial sector troubles include fragile balance sheets, regulatory forbearance, connected lending and cross ownership, and weak risk management. Meanwhile, SOE restructuring efforts are focused on improving the legal framework, divestment from noncore areas, and equitisation. Enforcement of those has been difficult for various reasons, and there is limited fiscal space to cover potential costs of SOE reforms given the high level of public debt (60% of GDP).

Comment

2015 is an important year: It is the final year of Vietnam’s usual 5-year planning cycle, so the authorities at all levels will be keen to achieve targets set at the beginning of the period (2011) and to prepare for the next 5-year plan. The forthcoming race to the 2016 National Congress adds incentives to push through effective implementation of new regulations to improve the business environment, such as those in the revised laws on enterprise and investment. The short and medium term outlook is hopeful, bringing good news to the foreign business and investor community.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.