Country Report Vietnam
According to the official data economic growth in Vietnam has strengthened over the course of 2014, without any signs of renewed overheating. However, problems in the banking sector remain sizeable, which limits credit growth.
Strengths (+) and weaknesses (-)
(+) Strong growth potential
A relatively young and motivated population, relatively low wages and an abundance of natural resources underpin Vietnam’s growth potential.
(-) 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.
1. Economic growth increases, but no signs of overheating
Vietnam’s economic recovery from the 2010/2011 financial crisis has continued, while there are no signs that the economy is once again starting to overheat. According to data released in late December, the Vietnamese economy grew by 6% in 2014, up from 5.4% in 2013. The industrial sector was the driver of the higher growth, as industrial production growth increased from 5.6% in 2013 to 7.6% in 2014. Economic activity growth strengthened in the course of the year, with growth in the fourth quarter being particularly high, as GDP grew by 7% year-on-year and industrial production by 10.1% year-on-year. There are some doubts though about the reliability of Vietnam’s GDP data, growth data are for example published before the end of the year. However, other indicators also suggest that the economy is continuing to de well. The HSBC manufacturing PMI increased to a 8 month high in December and the economy of the US, Vietnam’s most important export market, is likely to continue to do well. However, the recent fall in oil prices is likely to have a negative impact, as Vietnam remains an oil exporter, even as the share of oil in exports has decreased strongly in recent years.
There are no clear sign of macroeconomic imbalances. It is estimated that the country has continued to run a sizeable current account surplus in 2014, as especially the export sector has continued to perform well. This means that the anti-Chinese protests of May 2014 that broke out after China had transported an oil rig to waters claimed by Vietnam, which not only affected plants owned by Chinese companies, but also companies from other Asian countries, do not seem to have had much of an impact. Meanwhile, inflation has fallen significantly in 2014 from 6% year-on-year in December 2013 to just 1.8% year-on-year in December 2014. While lower energy and food prices explain a large part of the fall, underlying inflationary pressures seem low. An overheating of the economy, which has occurred regularly in Vietnam’s recent economic past, thus does not seem to be a big risk right now. In 2015, the current account surplus is likely to fall somewhat, as domestic demand is forecast to strengthen, but foreign direct investment is likely to remain strong. However, Vietnam’s stock of foreign exchange reserves is still relatively low. According to the IMF and the World Bank, foreign exchange reserves have grown strongly in recent years, but in terms of months of imports reserve, coverage remains rather low.
2. Banking sector remains weakness
The government has committed to reform the banking sector, but progress has been slow, which has had a negative impact on credit growth. Vietnamese banks are still struggling with impaired balance sheets. According to Moody’s, non-performing loans (NPLs) were 10-15% of gross loans in 2014, while the government reported an NPL rate of 4.1% in April 2014. Moody’s noted some progress, as banks had restructured some loans and transferred others to the Vietnam Asset Management Company, the bad loan bank. Nonetheless, capital and provisions within the banking system appear to be insufficient to cover expected losses. The government has committed to partially privatise large state owned banks, but progress has been slow so far. The banks’ problems are related to their exposure to inefficient state-owned enterprises (SOEs). Unfortunately, SOE reform has also hardly progressed. This was highlighted in November 2014, when the partial privatisation of state-owned flag carrier Vietnam Airlines failed to attract any foreign bidder.
Due to these problems, the banking sector seems unable to extend as much credit as the government would like. There has been some monetary easing, as the State Bank of Vietnam (central bank) lowered its policy rate in a number of steps, the last one was implemented in March 2014. However, according to the World Bank, credit growth has remained below expectations in the period up to October (though a central bank official stated in late December that the credit growth had been 12.6%, which suggests the government in the end managed to achieve its 12-14% credit growth target). Given that deposit growth has remained high, liquidity does not seem to be the binding constraint to growth, which suggests that monetary easing may not have much impact on credit growth. So far, the weakness of the banking sector seems to have limited the recovery of the domestically oriented part of the economy, though the claimed recent increase in credit growth may have changed this picture somewhat.
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 165% of GDP in 2014, 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.