Higher capital inflows helped to write the latest chapter of Vietnam’s impressive growth story in 2015, with reforms aimed at boosting foreign direct investment (FDI) and a raft of newly signed trade deals setting the scene for another positive year.
Vietnam is expected to record GDP growth of 6.5% in 2015, according to the latest forecasts from the Asian Development Bank, the highest of all ASEAN countries and well above the 4.4% average projected for the bloc. The coming year is expected to bring more of the same, the bank said, with Vietnam’s economy on course to expand by 6.6%, ahead of the projected ASEAN average of 4.9%.
The World Bank and the IMF are also bullish on the short- to medium-term outlook for Vietnam’s economy, with the latter projecting 6.5% growth for the year.
“Vietnam is still transitioning to a market-based economy,” Sebastian Eckardt, senior economist for the World Bank in Vietnam, told OBG. “However, strong economic expansion has allowed the country to achieve significant poverty reduction and inclusive growth over the last 25 years.”
In a report issued in early December the World Bank said that the country had weathered the recent turbulence in the external environment reasonably well. Stronger domestic demand, robust export performance, low inflation and improved confidence had enabled Vietnam to create firmer foundations for mid-term growth, the bank concluded.
In particular, the report pointed to strong performance in the manufacturing sector, led by the technology segment, which helped generate a 9.2% boost in total exports. The World Bank warned, however, that delays in implementing reforms targeting fiscal consolidation risked weakening debt sustainability.
While the fiscal deficit was projected to reach around 5% of GDP in 2015 and 2016, government spending was already 10% above budget estimates in the first seven months of the year, according to local media reports.
Vietnam’s low inflation is also beginning to raise concerns. The country’s consumer price index rose by just 0.58% through 2015, the lowest increase in 14 years. While due in large part to lower energy prices, analysts have warned that the risk of deflation is growing.
Although lowering average interest rates from their current 8% could help return inflation to the country’s 5% target, in late November the State Bank of Vietnam announced it did not plan to lower interest rates any time soon.
Fostering trade ties
Key trade deals signed in 2015, many of which are expected to favour Vietnam, will set the scene for the country to strengthen bilateral ties with regional and international partners.
The Trans-Pacific Partnership (TPP) trade agreement, brokered in October and due to come into effect in 2017, is seen as holding considerable potential. Analysts, including the World Bank, have suggested that Vietnam could be the greatest beneficiary of the 13-nation deal, which accounts for a combined 40% of global GDP.
The TPP could boost Vietnam’s GDP by as much as 8% over the next two decades, the bank said in a recent report, while adding 17% to its real exports and 12% to its capital stock over the same period.
In early December Vietnam announced the signing of another free trade agreement with the EU, which will eliminate 99% of tariffs on traded goods over a 10-year period. Once ratified, the agreement is expected to come into force in late 2017 or 2018.
Vietnam is also likely to be a major winner from the ASEAN Economic Community (AEC), which came into force at the end of 2015. ASEAN already stands as Vietnam’s third-largest export market after the US and the EU, and Vietnam is also a major recipient of goods from other bloc members, importing more from its member states collectively than any other market, with the exception of China and South Korea.
The lowering of trade barriers and tariffs within the AEC, together with Vietnam’s rise as an industrial and technological production centre, is expected to support higher levels of intra-bloc trade and investment.
To further stimulate growth and investment, the government began introducing a series of reforms this year.
At the end of June it announced plans to reduce the number of sectors where foreign ownership is prohibited from 51 to six. Additional reforms were also enacted to ease criteria for investment and regulatory control.
The 49% cap on foreign ownership of most shares traded on the stock exchange was removed in late June, enabling international investors to fully acquire listed companies. Exceptions include the banking sector, where a 30% ceiling remains in place.
The reform programme looks to be having a positive impact, with FDI up 16.7% year-on-year as of late November, at $20.2bn, according to the General Statistics Office. Around $13.6bn of the total was channelled into new projects, with the remaining funds committed to existing project expansion. The manufacturing and processing sectors received the largest share of inbound capital, at $12.9bn, or 64% of the total.