Vietnam is a very vibrant country, with a young population and is also the youngest member of the “Tiger Club Economies”.In my opinion, it is becoming more and more interesting as an export-oriented manufacturing base for foreign companies.
The objective of this document is to provide an overview of the macroeconomic trends and risks for the Vietnamese manufacturing export industry. In particular to elucidate potential investment opportunities for Small and medium-sized enterprises (SME).
Macroeconomic Situation and Key Institutional Framework
Vietnam’s GDP grew by 6.88%percent year-on-year in the third quarter of 2018. According to the World Bank, that is thanks to its broad macroeconomic stability. The recent growth is driven by a cyclical increase in global demand as well as an ongoing shift of labor away from agriculture into more productive manufacturing and service sectors, recovery of FDI inflows (USD 2.4b or 0.2% of global FDI in 2006 vs. USD 14.1b or 1% of global FDI in 2017)and investments in the private sector. Its trade balance continued to improve and contributed to the current account surplus of around 2.9%of GDP.
Looking at the data, the service sector (including Tourism) is still the largest contributor to GDP. In second place is the manufacturing sector followed by the agricultural sector. However, the largest growth contributor is the manufacturing sector.
The monetary policy objectives of Vietnam are quoted as follows, to:
“manage the monetary policy in a proactive and flexible manner in close association with the fiscal policy to control inflation, stabilize macro-economy, support economic growth at a reasonable level, and ensure the liquidity of credit institutions. Flexibly manage the reasonable interest and exchange rates in consistence with macro-economic and monetary developments, especially inflation; and ensure the value of Vietnam dong, continue to restrict the dollarization and goldarization. Implementing credit measures towards credit extension together with credit quality control; focusing on lessening difficulties to help boosting business and production; continuing to implement programs on connecting bank loans with economic policies, shifting credit structure towards focusing on the priority areas. Accelerating the progress of NPLsresolution and credit institution restructuring, ensuring the implementation of the roadmap of the Scheme on restructuring the system of credit institutions for 2011-2015 period which was approved by the Prime Minister. Strengthening the coordination with the other macro-economic policies.”
The monetary policy decision making power lies with the National Assembly (NA), President and the Government of Vietnam. The NA oversees the implementation of the national monetary policy and sets the inflation rate target by making decisions on the consumer price index (CPI). The President is involved in negotiating, signing, and acceding to international treaties on monetary and banking matters. The Government proposes annual inflation targets to the NA, while but the Prime Minister and the State Bank of Vietnam (SBV) Governor decide on the tools and measures to obtain the national monetary policy objectives according to the Government’s regulations.
In short, the dong-to-dollar exchange rate is set by the SBV, allowing to be traded within a 3%band. As the SBV is controlled by the NA, President and the Government, the Bank cannot act independently. The original text of the monetary objectives – quoted above – says “flexibly manage the reasonable interest and exchange rates in consistence with macro-economic and monetary developments, especially inflation; and ensure the value of Vietnam dong (VND), continue to restrict the dollarization and goldarization.”This shows clearly that the government does not practice a floating exchange rate regime but rather a flexible managed float.
However, restricting the dollarization reveals that the local population is likely missing trust in both their own currency and the authorities managing it. Since there is no real floating exchange rate regime in place, Vietnam has a vibrant black market especially for USD. It needs to be considered that traditionally, Vietnamese households prefer to keep cash or gold at their home. This is particularly so for households in rural areas. Cash in USD or EUR currency mainly comes from relatives living overseas in the U.S.A. and in Europe.
Having said that, the USD/VND official exchange rate has been kept relatively stable while the country’s USD reserves continued to rise (US$63b in Jan. to Apr. 2018 = about 3.6 months of imports). This is also why fixing the monetary policy in Vietnam around exchange rate stability is the most important target for achieving price stability. To be specific, according to the IMF, the authorities maintain the dong closely linked to the U.S. dollar.
Inflation rate is down from 3.46% to 2.98% and public debt has been stabilized since 2017, with an overall fiscal deficit of 3.5 percent of GDP.The public-debt-to-GDP ratio declined to 61.5%in 2017 from 63.6%in 2016. 2018 figures are not yet available.
Talking macroeconomic risks:
- Domestically, slower progress in restructuring state-owned companies and the banking sector could hold back growth;
- Externally, escalating trade protectionism and trade wars (currently Vietnam is profiting from the situation between China and the U.S.A., but this could change), increasing geopolitical tensions with China in particular, and a faster than expected monetary tightening could lead to uncertain financial market reactions.
According to the Ease of Doing Business (EoDB) Index of the World Bank, Vietnam is behind Malaysia and Thailand but ahead of the remaining Tiger Club Economies when it comes to ease of doing business.
Looking at the numbers, the fiscal deficit and public debt seem to be under control. This should be a good base for further reforms and increase the competitiveness of Vietnam even further.
The government’s recent reforms and stimuluses
If we look at the Asian Tigers, Vietnam is a latecomer, but having myself visited Vietnam the first time in 2007 and again several times annually since 2014, I can clearly see that Vietnam catching up fast. The growth of the economic capital of Ho Chi Minh City can be seen in the physical change of the city landscape.
One can literally feel the speed of change in Vietnam, the hotels are occupied by Japanese and South Korean business men, looking for investment opportunities. Many companies are moving factories from China to Vietnam. This might be caused by the current ongoing Trade War between China and the U.S.A., but has also to do with the fact that China has moved up to a different level of value creation and has become more expensive for the classical manufacturing industry.
A recent study conducted by the American Chamber of Commerce in South China, has shown that almost two-thirds of the participants are considering a relocation of their production from China to most likely Vietnam.
According to my research, Vietnam has adopted an FDI led export-oriented strategy which was successfully used by China and the other Asian Tigers before. In particular, there are 4 areas where Vietnam’s government has conducted the right reforms:
- Vietnam has seriously embraced trade liberalism. When it joined the WTO in 2007, it was part of 2 FTAs only. Today Vietnam has 10 FTAs covering 35% of global GDP. And it has signed further 2 FTAs waiting to take effect soon. Moreover, it has finalized negotiations with the EU and has 3 more trade deals under negotiation (with China, India and Russia);
- It has opened its doors to FDIs and has continuously made it easier for others to do business with them (2019 EoDB rank 69 from 2006 EoDB rank 104);
- Vietnam was and is further improving its rule of laws, in particular to meet CPTPPcommitments to:
- Permit labor unions beyond the single union currently run by the government;
- Strengthen IP rights;
- Review emergency restrictions on food safety;
Regulate services related to insurance business like financial advisory and risk assessment;
- Outlaw corruption among business people and not just among state officials.
- Vietnam has a total population of 96m people (15thmost populated country in the world), with a median age of 30.4 years. But more importantly, the youth literacy rate is at 98.1%. Its primary school students achieved scores that are above the average of developed economies in science and math. Vietnam also has one of the highest female labor force participation rates in the world, at 73%.
Thanks to the upgraded capabilities of its work force, Vietnam has shifted from textile & garments up to the high-quality manufacturing value-added chain. While Vietnam’s per capita income is still low at USD 2,500, it is set to double over the next 10 years, although it remains for now a great location for export-oriented industries and FDIs.
Vietnam has achieved this success not only by conducting the right reforms, but also by government stimulus through heavy investments in human and physical capital, namely “global integration, domestic liberalization, and investing in its people and infrastructure”.
It is important to mention that Vietnam is a relatively politically stable country, where little to no riots and demonstrations are seen. The government is investing into its own people and provides most basic public services, health care, education, communication, transportation and of course law and order.
Business aspects for SMEs
Backed by the general macroeconomic situation and political stability, I believe that Vietnam is a great place to invest in manufacturing capabilities; especially in combination with the strategic trade agreements in place and those in the making (especially with the EU, China and India). Combining this with the improving institutional framework, declining bureaucracy and the country’s effort in dissolving red tape, Vietnam must be considered as a serious target for potential future investments.
Vietnam is literally growing talents to match the demand and has great underlying demographic data for this. Companies like Bosch are building a German-inspired apprenticeship system to train young people on the job, an initiative that even the Ministry of Labour has shown interest in. We should also take the low labour costs (average industry worker in China USD 428 vs. Vietnam USD 204 per month)and Vietnam’s richness in raw materials in to consideration. Moreover, Vietnam’s growing local supply chain of industrial base products is definitely giving the country a great foundation for a production location, not just for Multi-National-Corporations but especially for SMEs.
cf. Khoon Goh, “Vietnam – the Coming of Age of a Vibrant Tiger Cub Economy,” The Business Times, Opinion, December 20, 2018.
Trading Economics, “Vietnam Current Account,” 2019, accessed January 04, 2019, https://tradingeconomics.com/vietnam/current-account.
cf. The World Bank, Taking Stock – an Update on Vietnam’s Recent Economic Developments(worldbank.org: The World Bank, 2018).
Oxford Business Group, “Vietnam’s Central Bank Moves to Currency Basket Peg,” Oxford Business Group,, 2018, accessed January 05, 2019, https://oxfordbusinessgroup.com/analysis/remaining-flexible-central-bank-steadily-moving-currency-basket-peg.
The State Bank of Vietnam, “Monetary Policy Objectives.”
cf. The World Bank.
cf. Allan Dizioli, Jochen M. Schmittmann, and International Monetary Fund. Asia and Pacific Department., A Macro-Model Approach to Monetary Policy Analysis and Forecasting for Vietnam,IMF working paper WP/15/273(Washington, D.C.: International Monetary Fund, 2015), http://www.imf.org/external/pubs/cat/longres.aspx?sk=43491.0.
The World Bank.
cf. The World Bank, “Ease of Doing Business Score East Asia and Pacific,” The World bank, 2019, accessed January 04, 2019, http://www.doingbusiness.org/en/rankings?region=east-asia-and-pacific.
cf. Goh.,and cf. The Economist Intelligence Unit, Creative Disruption – Asia’s Winners in the Us-China Trade War(The Economist Intelligence Unit, 2018).
The World Bank, “Ease of Doing Business Score East Asia and Pacific.”
CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) or TPP11 called. FTS between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam)
cf. Lien Hoang, “Vietnam Now Looks to Changes in Ip, Labor, Corruption Laws,” International Trade News, 2018, accessed November 13, 2018, https://news.bloomberglaw.com/international-trade/vietnam-now-looks-to-changes-in-ip-labor-corruption-laws.
cf. Sebastian Eckardt, Deepak Mishra, and Viet Tuan Dinh, “Vietnam’s Manufacturing Miracle: Lessons for Developing Countries,” Future Development, Brookings & The World Bank, 2018, accessed January 04, 2019, https://www.brookings.edu/blog/future-development/2018/04/17/vietnams-manufacturing-miracle-lessons-for-developing-countries/.
cf. Sabine Donner et al., Bti 2018 Country Report – Vietnam(Guetersloh: Bertelsmann Stiftung, 2018).
cf. AHK Vietnam, 2017 Vietnam Pure Dynamik(Delegation der Deutschen Wirschaft in Vietnam, 2018).