Vietnam’s road to upper middle-income status
KHOON GOH, HEAD OF ASIA RESEARCH, ANZ | AUG 2019
The Vietnam government’s commitment to economic reform bodes well for the country’s longer-term prospects and look to have set the country on the path to upper middle-income status.
Vietnam’s gross domestic product growth in the first half of calendar 2019 was solid, particularly considering the downturn in global trade and the impact of African swine fever (ASF) on the agriculture sector.
As a result, ANZ Research maintains its full-year 2019 GDP growth forecast for Vietnam of 6.7 per cent. Although this is lower than the 7.1 per cent growth rate achieved in 2018, this should still see Vietnam reinforce its place as one of the fastest-growing economies in Asia.
Inflation is expected to remain manageable, averaging 2.8 per cent in 2019 which is below the State Bank of Vietnam’s 4 per cent target. ANZ Research sees monetary policy being on hold this year.
All of this adds up to a solid performance considering the headwinds from the external sector and the ongoing impact on the domestic agricultural sector from ASF.
As Vietnam continues to reap the benefits of past reforms and commit to further ongoing reforms, the country is on track to double its per capita gross national income from $US2,400 in 2018 to $US4,800 by 2028, graduating to upper middle income status.
“[Growth in 2019 should] see Vietnam reinforce its place as one of the fastest-growing economies in Asia.”
Vietnam has managed to avoid the deeper slowdown seen in other Asian economies thanks to continued foreign direct investment flows and export growth, which also bucks the regional trend.
While Vietnam is seen as a beneficiary of the US-China trade tensions, there is a need to manage the strong FDI inflows to ensure adequate resource allocation and to prevent overheating.
The government’s shift towards focusing on attracting new-generation FDI is essential to ensure sustainable economic development.
In addition, the rising trade surplus with the US is starting to attract attention. Vietnam has been placed on the US Treasury’s Monitoring List and there could be pressure to allow the Dong to become more flexible.
ANZ Research does not expect Vietnam to be labelled a currency manipulator as the VND has largely been moving in line with regional currencies. There is a need for the country to continue to build its FX reserves given the low adequacy level at present.
Growth in Vietnam’s services sector has remained robust at 6.83 per cent year on year in the second quarter, as strong wage growth and growing urbanisation helped boost wholesale and retail trade.
Expanding manufacturing and external trade activity has also ensured strong growth for both the transport and warehouse sectors, while the financial services sector continues to benefit from growth in the overall economy.
The agricultural sector has been the laggard, with growth slowing to 1.95 per cent, the weakest in three years. ASF was first detected in Vietnam in February and has since spread throughout the country.
Vietnam was a relative late comer in terms of economic development in the region. Reforms only started in 1986 with Đổi Mới, which means ‘renovation’ in Vietnamese.
Growth really only started to pick up from the early 1990s, helped by the country’s diplomatic normalisation with the United States in 1995 as well as its entry into the Association of Southeast Asian Nations (ASEAN) as a full member that same year.
The 1990s saw Vietnam achieve an average compound annual GDP growth rate of 7.4 per cent, with very strong contribution from labour productivity which averaged annual growth of 4.5 per cent.
The rapid pace of growth continued in the 2000s, with Vietnam attaining the lower-middle income category in 2009.
Strong FDI inflows and the rapid shift in the mix of manufacturing towards higher-value-added products during the current decade has helped to lift labour productivity growth, which is soon expected to average 6.4 per cent a year.
However, the slowdown in population growth means it will contribute less to growth in the coming decade. Sustaining strong productivity growth will be important to maintain sustainable growth.
ANZ Research believes with the government’s focus on attracting new-generation FDI, high rates of productivity growth can be sustained, though some slowing from the high rates seen this decade is likely.
The government’s commitment to broad-based reforms bodes well for the country’s longer-term prospects.
One area that will require increasing policymaker attention is demographics. Although the working age population is still growing in absolute numbers, as a proportion of the total population, it had already peaked in 2015.
Vietnam is aging, with the number of people over the age of 60 set to rise rapidly, resulting in the dependency ratio doubling within 20 years. This is one key reason why ANZ Research expects to see a slowing in Vietnam’s medium-term potential growth rate towards 6 per cent over the next decade.
Managing this structural change requires timely measures in areas such as the retirement age and pension reforms.
This could all be sufficient to move the country into the upper-middle income category.
Khoon Goh is Head of Asia Research at ANZ
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