Investors may be sanguine about Vietnam’s potential, but the economy remains "fragile," HSBC said in its February monthly report.
Though the manufacturing gauge has risen to its highest level since April 2011 and industrial output is likely to expand in the coming months -- all giving cause for hope -- domestic export-oriented firms are struggling, meaning the outlook for the medium and long terms is somewhat bleak, the report said.
Manufacturing is expected to help the country push economic growth up to 5.6 percent in 2014 from 5.4 percent last year.
Vietnam's growth was relatively robust amid the turmoil in international markets and it recorded an impressive 81.7 percent increase in foreign investment last year.
The numbers reflect the labor and geographical competitiveness.
With rising external demand for Vietnamese goods, the country’s “high exposure” to the eurozone and the US, whose growth is expected to be stronger this year than in 2013, would buoy exports this year.
Vietnam is the only Asian country to see exports continue to grow in double digits since the global financial crisis.
The increased manufacturing exports were primarily driven by shipments of phones and spare parts, something that did not happen before 2011.
This means a few major foreign firms like South Korea’s Samsung have enlarged their roles in the manufacturing/export sector which, though not a “negative” sign, is a reminder that Vietnam remains a primarily agrarian economy.
“FDI alone is not enough. A concerted effort to maximize its benefits is required.”
While foreign invested firms are bouncing back from the global crisis, domestic export-oriented firms are still underperforming which shows a still “very fragile” Vietnam.
The foreign inflows, along with gradual improvement in building institutional capacity, can support the economy in the short term only.
Domestic firms, especially small and medium-sized businesses, are suffering from tough credit conditions and low domestic demand.
The report calls on policy makers to address issues hindering the domestic sector’s performance for sustained growth in the medium and long terms.
Since the hardest period is possibly over, Vietnam can now work out a concrete strategy to increase its economic efficiency and realize its potential, it says.