Vietnam on the rise

Disruptions to global supply chain increase the country’s share of trade

Ten years since its economic challenges, Vietnam again is on the upward trajectory despite worries about the trade war between China and the United States. The question now is what reforms and goals need to be achieved to make the country a true manufacturing star in the Asia-Pacific region.

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27 Aug 2019

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In the midst of the ongoing trade war between China and the United States, Vietnam has attracted a lot of attention as global supply chains look to circumnavigate the rising tensions by setting up manufacturing hubs within the country.

For the last few years, companies such as Samsung have been setting up major operations within Vietnam. For instance, in Thai Nguyen, a city in northern Vietnam, Samsung is reported to employ more than 60,000 people in a facility that makes smartphones.

The impact of the trade war was just one of the major topics discussed by a panel at The Asset Events’ Fitch on Vietnam Forum held in Hanoi this summer.

When asked about the impact of the trade war on Vietnam, one speaker said that it would affect Vietnam’s economy. “Of course Vietnam could be impacted negatively when the Chinese economy slows down because of the drop in domestic demand. We export a lot to China,” says Hoang Viet Phuong, head of institutional research and advisory at SSI Securities.

Others believed that the trade war was just acting as a catalyst to what was already happening in the past few years. “The trade war just reinforces a trajectory that we were on anyhow,” highlights Michael Kokalari, chief economist at VinaCapital. “Manufacturing in Vietnam probably contributes to 20% of the economy. We are already on this trajectory of firms moving product lines from China to Vietnam because wages are two-thirds below what they are in China.”

A polling of audience members was undertaken at the forum, with the majority  feeling that slowing global growth was the biggest drag on Vietnam’s GDP growth. According to the General Statistics Office of Vietnam, the country’s economy grew at 7.08% in 2018, the highest since 2011.

“Vietnam will suffer from a trade war if there is a global slowdown in trade. But its share of global trade should increase as disruptions to the global supply chain encourage more entrance into Vietnam,” explains Kevin Snowball, CEO & CIO at PXP Vietnam Asset Management.

The key support for Vietnamese manufacturing and production has been foreign direct investment (FDI). The Asean Investment Report 2018 says that Vietnam was the third-highest destination for FDI in 2017, receiving around US$35.5 billion from various nations.

“All of this investment that is coming into Vietnam is only likely to increase its bilateral surplus with the US,” warns Stephen Schwartz, head of APAC sovereigns at Fitch Ratings. “I think Vietnam’s surplus with the US ranks sixth globally.”

However, Fitch Ratings, earlier in 2019 upgraded Vietnam’s credit outlook to positive from stable.

The country’s banking sector is still something that experts are cautious about with calls for better oversight and distribution of financing risk across multiple market segments. “Due to regulations, Vietnamese banks are now being forced to carry more capital. The buffers are expected to be much more robust,” observes Jonathan Cornish, head of APAC financial institutions at Fitch Ratings.

It’s a similar sentiment shared by Dan Svensson, head of fixed income at Dragon Capital, who believes that “the Vietnamese banking sector has improved tremendously in the last few years. But banks still have a huge exposure to corporates.”

Other areas of improvement include improving regulatory oversight particularly in the areas of disclosure and transparency.

The need for better transparency is something that often holds investors back from the country.

While growth is expected to be lower in 2019 than in 2018, Vietnam continues to experience strong upbeat sentiment with the World Bank recently stating that the country’s outlook remains positive.  

Date

27 Aug 2019

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