RaboResearch - Economic Research

Country Report Vietnam

Country Report


Vietnam flag

Since 2012, Vietnam is slowly building up a track record of economic stability. Meanwhile, the government continues to work on needed reforms, but has not taken away the risks. External liquidity is very weak, but no longer critical.

Strengths (+) and weaknesses (-)

(+) Strong growth potential

A relatively young and motivated population, relatively low wages and an abundance of natural resources make that Vietnam has many comparative advantages

(-) Low level of development

Vietnam’s level of development and income per capita are low and its institutions relatively weak.

(-) Weak economic and monetary policy framework

Politically motivated and unsustainable economic and monetary policies have led to major economic instability. Policies remain unpredictable and not transparent.

(-) Weak external liquidity position

Although external liquidity is no longer critical, it remains very weak with FX reserves barely covering three months’ worth of imports.

Key developments

1. The track record of economic stability continues to lengthen.

Last year, real GDP growth was relatively slow at 5.4% and inflation was relatively subdued and stable at 6.6% in 2013, which allowed for another round of interest rate cuts early last year (see figures 1 and 2). As a result, the government could maintain the stability-focused economic policies that it first implemented early-2011 and Vietnam continues to build up a, still short, track record of economic stability. The government now seems quite determined to maintain such policies, although senior government officials acknowledge that the government will likely deviate from these policies if required to maintain sufficient employment levels or financial sector stability. Further helped by the fact that the problems regarding external liquidity are slowly abating (see paragraph 3), economic confidence is slowly returning. This was underlined by the sharp rise of FDI inflows from USD 8.3bn in 2012 to USD 10.5bn in 2013. 

Figure 1: Growth performance slow and stable
Figure 1: Growth performance slow and stableSource: EIU
Figure 2: Inflation and interest rates fall steeply
Figure 2: Inflation and interest rates fall steeplySource: Ecowin

As growth is forecast to accelerate slightly to 5.7% this year while inflation remains stable, (foreign) investor confidence will likely improve further in 2014. As a result, FDI inflows of roughly 13.7bn are forecast in 2014, also helped by the expected signing of the Trans Pacific Partnership (TTP) agreement this year. Still, the real test of policy resolve will come when the policy tightening is required, which has proven to be more difficult to implement given political considerations. Should the government drag tightening economic and monetary policies when this would be required, the slowly regained confidence will evaporate quickly, which undoubtedly could rapidly lead to a return to a critically weak external liquidity situation.

2. Reforms are underway, but risks remain.

As Vietnam is edging closer to signing the TTP agreement, the pressure to make the SOE sector more efficient and competitive is rising. The government has been categorising SOEs regarding their strategic nature, and plans to sell stakes – the less strategic the company, the bigger the stake to be sold - in all but the most strategic industries. Stakes in some major companies may thus be sold this year, among which Vietnam Airlines, Vinamotor and Vinatex, but no specific dates have been set as of yet. The government has also made headway regarding tackling the problems in the banking sector – namely a high ratio of non-performing loans (estimated between 8% and 16% of total loans). The Vietnam asset management company (VAMC) was set up. The VAMC buys up distressed debt, but not at nominal value, which makes banks reluctant to sell bad debt to the VAMC and does not recapitalise banks. A recent draft bankruptcy law would, however, allow credit institutions to fail. In all, the steps taken are in the right direction, but do not provide a full solution. SOE reforms still have to be taken beyond the planning stage, which can be problematic in Vietnam, while banks still face large write-offs that could prove to be unmanageable for some. 

Figure 3: Currency has been more stable...
Figure 3: Currency has been more stable...Source: Reuters Ecowin
Figure 4: ...and external liquidity has improved
Figure 4: ...and external liquidity has improvedSource: EIU, Rabobank


3. Impact of tapering has been limited.

Many emerging markets have felt the impact of the reduction of quantitative easing by the US Fed. However, the impact on the Vietnamese economy has remained fairly limited. Vietnam doesn’t have a very open financial system and, moreover, has experienced major, domestically induced, economic instability in the past years. As a result, the country hasn’t shared in the benefits from loose monetary condition in the West as much as other emerging markets and now doesn’t share in the pain. Downward pressure on the managed currency has thus been limited. If anything, the latest developments in the US have led to slightly rising yields on Vietnam’s international debt.

4. External liquidity has improved, but remains weak.

With the current account in surplus, Vietnam’s external liquidity situation has improved. However, at slightly less than three months of import cover, FX reserves are still at a very minimal level. Barring renewed domestic economic instability, external liquidity should continue to improve gradually in the years ahead. Domestic economic instability could lead to a rapid deterioration of Vietnam’s external liquidity position to critical levels.

Factsheet of Vietnam
Factsheet of VietnamSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

In 1986, the “doi moi” (renovation) policy, aimed at modernising the Vietnamese economy and producing competitive, export-driven industries was implemented. The policy has modernised the country’s economic structure and has led to rapid economic growth. Even so, income per capita remains far below the global average (both in nominal and PPP terms). Vietnam joined the WTO in 2007, which helped to more than double total trade since. With total exports and imports of goods and services amounting to over 160% of GDP in 2013, Vietnam is a very open economy. Exporting mainly to the US, China, Japan and South Korea, the country is vulnerable to economic downturns in these markets. Imports are largely related to Vietnam’s industry and, in spite of it being a crude oil exporter, the country needs to import refined fuel products, as it lacks sufficient refining capacity.

Since 1975, Vietnam has maintained one-party rule by the Communist Party of Vietnam (CPV). In July 2011, the CPV’s National assembly confirmed the country’s new leadership for five years. Truong Tan Sang was appointed a president, a largely ceremonial function in Vietnam, and Nguyen Tan Dung was reappointed to the far more powerful position of prime minister. Corruption remains a major problem. Freedom of expression is limited in Vietnam, as is freedom of press, and criticism on the government is not tolerated. In international relations, Vietnam will continue to work on improving relations with the US and the EU. Vietnam is a supporter of the US-backed Trans-Pacific Partnership (TPP). However, the country will also have to remain on relatively good terms with its large neighbour, China and thus walk a fine balance, also with regards to conflicts on sea borders. 

Economic indicators of Vietnam
Economic indicators of VietnamSource: EIU

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