Vietnam's economic growth is forecast to accelerate to 6.1 percent this year thanks to stronger US demand, lower input costs, and better domestic spending, according to a report of HSBC on Vietnam’s macroeconomic development issued Tuesday.
At first glance, 2015 may appear to be a daunting year, with the country's export oriented growth hurt by slowing global demand is slowing. Oil prices have fallen, limiting the country’s key fiscal revenue and export income. Domestic demand, although improving slowly, is still dragged down by the banking sector’s high non-performing loans (NPLs) and the private sector’s conservatism.
However, its economy and export composition have become more diversified, less reliant on raw commodities and more reliant on manufacturing. The HSBC Purchasing Managers' Index (PMI) rose to 52.7 last December from 52.1 last November.
In 2014, the economy attracted $12.4 billion of disbursed and $20.2 billion of registered FDI. Most of the investment flowed into manufacturing, transforming Vietnam’s export structure. In 2006, crude oil made up 21 percent of total exports and phones were zero percent. By 2014, crude shipments declined to 4.8 percent while handsets rose to 16.1 percent of total exports.
In addition, the US, Vietnam’s largest export market, is gaining strength, which will drive demand for Vietnamese goods in 2015, according HSBC.
Both trade liberalization efforts and composition of Vietnam exports, primarily food, seafood, textile and footwear, will boost shipments to markets such as the Eurozone and Japan, where consumers will likely trade down to cheaper goods, it added.
HSBC expects export value to expand 12 percent in 2015, said the report.
“Are we suggesting that the economy will roar in the years ahead? No, but its short-term outlook is indeed brighter,” said economist Trinh Nguyen of HSBC.
Demand for its goods will continue to rise globally, thanks to cheap labour costs, low commodity prices, better connectivity, steady inflow of investment, and improving demand from the US.
Coupled with improving demand for its goods externally, domestic demand should also stage a gradual recovery in 2015 and 2016. The deleveraging process is on-going as banks repair their balance sheet and borrowers demand less credit, but sentiment is gradually improving. This means that demand will gradually pickup, albeit slowly, in the years ahead, as income and demographic transitions are favourable to consumption and investment growth, said HSBC.
“In the medium term, Vietnam will need to address the issue of limited linkages of domestic firms to foreign enterprises and develop a clear strategy of how the economy will compete when labour cost competitiveness disappears,” said Trinh Nguyen. “Whether the economy will roar in the years ahead will depend on the strategy that the government adopts in the short term to systematize and build up capability.”