Why Vietnam’s economy is outperforming its Southeast Asian peers
SINGAPORE: A global trade recession and a slower-growing China have hobbled economic growth in most parts of Southeast Asia this year, except in one country which has seemingly managed to defy gravity.
Vietnam’s fourth quarter gross domestic product (GDP) grew at its fastest pace in five years, rising 7.01 per cent compared to the 6.9 per cent growth over the same period in 2014, government statistics released on Saturday (Dec 26) showed. The growth rate was an increase from the 6.87 per cent in the third quarter and easily surpassed the government’s official target of 6.2 per cent.
This puts Vietnam at the top of the GDP growth leaderboard in Southeast Asia.
While second-placed Philippines, picked up somewhat to see 6 per cent growth in the third quarter, economists generally expect the country to miss its full-year GDP target of 6 per cent when it releases fourth-quarter growth data next month. Meanwhile, other regional countries such as Indonesia, Thailand, Malaysia and Singapore have endured slower growth rates in 2015, largely due to the economic woes in China. Malaysia, in particular, logged its lowest GDP growth rate in more than two years over the July to September period.
Vietnam usually releases growth estimates before the end of the quarter, weeks ahead of its regional peers.
One area in which Vietnam is faring better that its peers is exports.
According to official figures, the country's exports rose 8.1 per cent in the 12 months through December, while imports climbed 12 per cent.
Mr Rajiv Biswas, the chief economist for Asia-Pacific at IHS Global Insight, attributed Vietnam’s trade resilience to the country’s success in diversifying its exports towards electronics and garment manufacturing.
Apart from the types of goods produced, Vietnam also has diversification in terms of export markets, said Mr Glenn Maguire, ANZ’s chief economist for Asia-Pacific.
“The regional trade and growth slowdown is emanating from China’s rebalancing and a recovery in the US and high-income economies that is spilling over more to demand for services rather than goods. This means that undiversified commodity exporters are bearing the brunt of the regional trade and growth slowdown such as Indonesia and Malaysia,” the Singapore-based economist said in an email interview.
Secondly, the Southeast Asian country of 89.7 million is also getting a lift from record foreign direct investments (FDI), underpinned by the country’s growing attractiveness as an investment destination, thanks to geographic advantage, low labour and operating costs, as well as Vietnam’s participation in regional trade pacts. This flurry of international interest helped FDI inflows to hit a record high of US$14.5 billion thus far in 2015, up 17.4 per cent year-on-year, according to IHS’ Mr Biswas.
Economists also point to a recovery in credit growth, as the government made progress in clearing up bad debts that have been a major drag on economic growth.
According to a statement from the State Bank of Vietnam (SBV) on Dec 24, annual credit growth is expected to quicken to 18 per cent in 2015, outperforming a previous government target of 17 per cent. Meanwhile, bad debts in the banking system fell to 2.72 per cent as of Nov 30, down slightly from 2.93 per cent at the end of September, the central bank said.
A “measured depreciation” of the Vietnamese dong over the course of 2015 has also helped, according to Mr Vishnu Varathan, a senior economist at Mizuho Bank in Singapore. The SBV has devalued the Vietnamese currency three times this year, the latest being in August, pushing the dong down nearly 6 per cent against the US dollar thus far.
“Rather than doing an abrupt depreciation, the moves have been slow and well-communicated. This helped to ease the pressure in the economy,” Mr Varathan said in a telephone interview.
MORE GROWTH TO COME IN 2016
Moving forward, analysts believe that Vietnam’s success story has further room to run, even as inflation eased to a 14-year low in December.
Vietnam’s consumer price index (CPI) rose just 0.6 per cent on-year in the final month of 2015, marking its lowest level since 2001, thanks to tumbling crude oil prices. On a month-on-month basis, headline CPI inflation nudged up a meagre 0.02 per cent.
Persistently low inflation amplifies the risk of outright deflation, but analysts say this is less of a threat for an emerging market such as Vietnam.
“Given Vietnam’s demographics and development cycle, low inflation doesn’t edge into the psyche of consumers that prices will remain on a downward spiral. Low to zero inflation will be taken as a relief instead,” said Mr Varathan. “This is one of the nuances in developing economies where ultra-low inflation do not evoke fears that are commonly seen in developed economies.”
Mr Biswas from IHS echoed these sentiments, noting that benign inflation will allow interest rates to stay low and curb pressures for inflation-linked wage increases. These in turn help to shape a stable economic environment that is attractive for foreign investors.
Nonetheless, analysts said the factors which have thus far helped to speed up Vietnam’s GDP growth will not insulate the country entirely from external risks such as a lacklustre global trade environment and China’s economic slowdown.
“Lingering external risks will mean that Vietnam won’t be in a very sweet spot with rapid acceleration in growth in 2016,” said Mizuho’s Mr Varathan. “It is a positive picture, but just nothing too dramatic.”
Analysts Channel NewsAsia spoke to expect Vietnam’s economy to expand between 6.5 and 6.9 per cent in 2016.