Vietnam’s Tiger Economy Still an Emerging Markets Star

Rajiv Biswas, Asia Pacific Chief Economist for IHS Markit

Key Points:

  • The Vietnamese economy remains one of the world’s brightest emerging market stars, as rapid industrialization continues to transform the economy
  • Vietnam’s total GDP is forecast to reach USD 320 billion by 2021, with rapid growth in manufacturing exports, international tourism, and fast-growing consumer expenditure being three key growth engines.
  • The Vietnamese economy is forecast to maintain strong growth over the medium term economic outlook, growing at over 6 percent per year over the 2017-2021 period.
  • The new EU-Vietnam FTA due to be implemented in 2018 will significantly improve Vietnam’s market access to the key EU market and is expected to boost bilateral trade with the EU significantly over the medium term. The EU is already Vietnam’s second largest export market and a major importer of garments and electronics manufactured in Vietnam.
  • The rapid growth of tourism is driving significant new construction of new hotels, with an estimated 60 new hotels due to open over 2017-2020, including Four Seasons Hanoi, Hotel Nikko Haiphong, Melia Ho Tram, Crowne Plaza Phu Quoc and Hilton Saigon.

 

Overview:

The Vietnamese economy is expected to maintain a rapid pace of economic growth of over 6 percent per year over the medium-term outlook. Rapid industrialization, fast-growing domestic consumer spending and buoyant growth in tourism are expected to continue to underpin economic growth momentum, helped by strong investment in infrastructure.

 

Key risks and vulnerabilities in the medium term include the potential impact of a Chinese economic slowdown or hard landing scenario, which would have transmission effects on Vietnam through lower Chinese demand for Vietnamese exports as well as declining Chinese tourism visitor flows. Despite significant progress in improving macroeconomic stability, Vietnam is also still vulnerable to risks of rising inflation due to higher external commodity prices as well as external account fragilities, since import cover is still modest.

 

The IHS Markit Banking Risk Service also rates Vietnam’s bank sector risk as very high risk. However, gradual progress is being made, notably through the creation of the state-owned Vietnam Asset Management Company in 2013 to absorb bad loans from the commercial banks, albeit at a modest pace. The Vietnamese government’s regulatory approval in April 2017 for the Saigon Joint Stock Commercial Bank to sell a majority stake to a foreign investor is another positive signal that the government may allow similar foreign capital injections into other domestic banks to help recapitalize its banking sector

 

In addition to these economic and financial vulnerabilities, the impact of climate change remains a risk to Vietnam due to its extensive low-lying river deltas, which are vulnerable to typhoons, with risk of flood damage and storm surges. Ho Chi Minh City and nearby industrial estates are vulnerable to certain extreme weather events such as typhoons, and Hanoi’s economy was hit by typhoons Kai-Tak and Son-Tinh in 2012.