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SOURCING / BUSINESS DEVELOPMENT MANAGER - FERGUSON GLOBAL

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Is Vietnam Set To Be SE Asia’s Next Export Powerhouse?

2015-10-12 12:01:47

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Exports rose 9.6% in the nine months ending in September, a figure that contrasted sharply with the export performance of many of Vietnam’s neighbours. And the achievement was not unusual. World Bank figures show that export volumes have almost doubled since 2010.
 
So what accounts for this export boom? And can it continue? One reason for optimism is the success of official efforts at export diversification. Twenty years ago commodities made up about 50% of Vietnam’s overseas shipments. Today, that figure has been cut to less than 30%, thanks to increases in the sale of electronics, mobile phones, textiles and footwear. With global commodity prices weak, and likely to remain so for some time, such diversification is an obvious source of strength.
 
Vietnam has also been responding to slower growth in China, formerly its most important trading partner. In the first-quarter of this year Vietnam exported US$8.2 billion (RM33.95 billion) worth of goods to the US, compared to just US$4.9 billion to China.
 
Strong foreign direct investment (FDI), much of it focussed on export-oriented manufacturing, is yet another advantage. FDI inflows hit a record high of US$9.65 billion in the first nine months of this year. To lure in even more foreign companies, officials have allowed some companies to retain 100% ownership. Next year, the country is also planning to implement a two percentage point cut in corporate income tax.
 
The nation’s progressively weaker currency is helping. Responding to China’s devaluation of the yuan, Vietnam’s central bank weakened the dong’s reference rate in August for the third time this year. It also widened the currency’s trading band.
 
Meanwhile, the government has continued to receive foreign aid in order to overcome infrastructure deficiencies that could discourage investors. Vietnam has accepted development aid from Japan to open a new air terminal in Hanoi. It is also getting help with the construction of a metro system in Ho Chi Minh City.
 
Other major infrastructure works are also planned. The Ho Chi Minh City Institute for Development Studies recently submitted to the city administration a plan to develop a special economic zone of nearly 900 sq km (347 sq miles) just south of the city. Situated on the coast near major ports, the proposed zone would offer tax breaks and other incentives designed to attract foreign investment and thereby create thousands of jobs.
 
Such plans may seem overly ambitious, but they cannot be easily ignored. In July this year, Jones Lang LaSalle released a report ranking Ho Chi Minh City as the sixth most dynamic city in the world.
 
Meanwhile, free trade agreements are on track to open up more markets to Vietnamese goods. Apart from involvement in the US-led Trans Pacific Partnership (TPP), the country is also on track to conclude a free trade agreement with the European Union in 2016.
 
Some of Vietnam’s current advantages, of course, are merely the result of good luck. A net oil importer, the Vietnamese economy has recently been benefitting from cheaper international oil prices. And the current El Nino weather pattern could ensure that oil prices stay weak for some time. The warmer weather expected in North America in particular will help dampen international demand for energy, keeping prices low while putting pressure on Malaysian and Indonesian exports.
 
But while Vietnam is emerging as one of the most competitive destinations for FDI in the region, there are several factors that still need to be addressed. Critics point out that the local private sector requires better access to land and finance in order to join the export boom. The rapid development of locally-owned business would certainly help create a larger middle class and go some way towards reducing the 12% of the population who live below the official poverty line.
 
Meanwhile, the weaker dong will increase costs at companies with dollar-denominated debt. Some local analysts are already predicting that earnings of several major companies will fall this year despite the current export boom.
 
A rise in public debt servicing could also reduce the amount of money available for spending the capital works necessary to upgrade infrastructure and thus ensure continued foreign investment and export growth.
 
According to a World Bank report, Vietnam’s public debtto-GDP ratio rose to 59% of gross domestic product (GDP) last year, up from 47% in 2009. This level is still manageable (Malaysia’s debt-to-GDP ratio currently stands at 51% and falling). But the World Bank report also noted that much of the recent increase was in short-term debt. This is a worrying development which, if left unchecked, could make the country vulnerable to any sudden change in investor sentiment.
 
That said, Vietnam’s recent economic success is undeniable. It also represents a challenge to the economic dominance of the region’s more developed countries. If countries like Malaysia, Indonesia and Thailand cannot get their act together soon, they may one day be taking lessons in export promotion from a country once considered among the most backward in the region.
 
*Dr Bruce Gale is an expert on South-East Asian affairs and author of several books on the subject. He was the regional manager for Hong Kong-based Political and Economic Risk Consultancy and is currently based in Singapore.
 
Source: themalaysianreserve.