The Vietnamese economy continued to show resilience overall in 2018. But Suiwah Leung warns the country’s challenges and risks are mounting and the government needs to continue with more ambitious reforms.
With world GDP growth initially predicted to peak at 3.1 per cent in 2018, the year looked to hold much economic promise for Vietnam. This held true initially, with first quarter real GDP expanding by almost 7.4 per cent, boosted by strong export growth in manufacturing and agriculture.
The service sector also saw robust growth in domestic demand and tourism. But global conditions became more worrying and uncertain as the year progressed, particularly with the continued structural slowdown in China and threat of a US–China trade war.
In the short term, changes in the supply chain away from China benefit Vietnam, provided there is sufficient dynamism in the domestic private sector to respond to rapid increases in external demand. For instance, it seems that Foxconn – the world’s biggest electronics contract manufacturer and a key Apple supplier – is trying to set up a Vietnamese base. Other manufacturers are reportedly doing the same.
The long-term impacts are much less certain though, with major powers moving away from the rules-based global trading system that has benefitted smaller open economies like Vietnam.
Despite these challenges, the Vietnamese economy continued to show resilience overall. GDP growth is estimated to be sitting at around 6.8 per cent, inflation at 4 per cent and the current account is projected to stay in surplus at 2.2 per cent of GDP. Real wages grew by 3.2 per cent in the first half of 2018 and the reported unemployment rate remained at 2.2 per cent.
The Vietnamese dong depreciated against the US dollar by 2.7 per cent but is constrained against further depreciation because of Vietnam’s relatively high level of public debt (around 45 per cent) denominated in US dollars. As a result, Vietnam’s real effective exchange rate actually appreciated by an estimated 2.5 per cent. Vietnam needs to focus on lowering trade costs to remain competitive in the medium term.
Credit growth in the second half of 2018 moderated to around 17 per cent, compared to 19.5 per cent in the same period last year. But the overall credit-to-GDP ratio remains high at over 130 per cent.
The growth in public debt is being contained by a combination of state asset sales and tighter fiscal policy. But Vietnam still needs substantial investment in infrastructure and energy generation. For this to happen the government must involve the domestic private sector and encourage its development through structural reform.
Vietnam seems to have slipped behind reform in other countries and has fallen in the World Bank ‘Ease of Doing Business’ rankings from 68 to 69 (of 190 economies).
One promising trade development this year was Vietnam’s ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in November. This is an important step for Vietnam as the CPTPP involves a significant reduction in tariff and non-tariff measures (NTMs) for participating countries.
According to World Bank analysis, the average trade weighted tariffs for Vietnamese exporters to CPTPP markets will fall from 1.7 percent to 0.2 percent and NTMs are expected to decline by 3.6 percentage points on average in ad-valorem tariff-equivalent terms. By 2030, this translates into estimated additional GDP growth of 1.1 per cent. The sectors that will reap the largest benefits are food, beverages and tobacco, clothing and leather, textiles, some manufacturing, and services.
The CPTPP’s rules of origin are likely to encourage investment and development of upstream industries and extend backward linkages to Vietnamese industries currently constrained by inefficient state-owned enterprises (SOEs). Reaping these benefits will require government policies that promote competition and reform of inefficient SOEs. Behind-the-border issues such as customs reform are also needed to reduce the costs of clearing and moving goods.
After a strong performance in 2017, Vietnam’s economy has continued to stay strong. The external buffer of international reserves is being managed through healthy export performance and foreign direct investment inflows. The internal buffer of public finance is being managed via more rapid privatisation of SOEs as well as gradual reforms of tax and expenditure systems.
But the challenges and risks are mounting and the government needs to continue with more ambitious reforms, including of the fiscal, public administration and higher education systems. If not, Vietnam will struggle to meet the significant infrastructure, energy and skills needs that are required to keep the country on a rapid growth path before its population begins to age in the next two decades.
Suiwah Leung is an Honorary Associate Professor of Economics at the Crawford School of Public Policy, The Australian National University. This article is part of an East Asia Forum special feature series on 2018 in review and the year ahead and can be assessed at https://bit.ly/2So3yMw