For 2019, FDI in Vietnam is on track to hit above US$20 billion with a 4.7% year-on-year increase, as MNEs divert some of their operations to bypass higher tariffs resulting from the US-China trade conflicts. The main sources of FDI would likely come from South Korea, China, Taiwan and Hong Kong. 

UOB pointed to Vietnam’s excellent network of trade agreements including 13 free trade agreements as an advantage for its export production base, meaning Vietnam’s exports to significant parts of the world are free from tariffs, offering opportunities for manufactures relocating to Vietnam to sell to more partners at minimized cost. 

In terms of monetary policy, the State Bank of Vietnam (SBV) is expected to maintain the refinancing rate at 6.25% throughout this year. With the current policy rate, the monetary policy stance remains conducive to the continuation of GDP growth, while preserving price stability. The preservation of policy space is important given external uncertainties especially the ongoing US-China trade dispute. 

The strong economic growth also eases pressure on the central bank to introduce more stimuli to achieve official growth target of 6.8%. Going forward, the report suggested the SBV to reiterate a modestly higher USD/VND trajectory, with point forecasts at VND23,400 in the third quarter and VND23,600 in the fourth quarter.

Multinationals eyeing production shift to Vietnam

The ongoing US-China trade tensions have caused significant uncertainties in global trade, dampening exports from countries facing additional tariffs. In particular, China as a global manufacturing hub and countries which are integrated within its supply chain, saw a slowdown in exports. The threat of high tariffs have forced manufacturers exposed to the additional tariffs, either directly or indirectly, to consider the most cost-effective strategies by shifting their production to alternative locations in order to mitigate the impact from the trade tariffs. 

 

Vietnam’s labor costs are still cheaper than that of Thailand.

Vietnam, with its strategic location for production and distribution of goods by land and sea, is one such country for the world’s export production activities, stated the report. 
Additionally, several public infrastructure development projects, including construction of new roads and expressways and development of the logistics sector which are expected to be completed before 2030, will enable Vietnam to compete with countries in Greater Mekong to become ASEAN’s logistics hub. 

 

Vietnam’s FDI.

Apart from its geographic proximity to China, one of Vietnam’s comparative advantages in attracting FDI is its relatively low labor cost, especially compared with China and Thailand. The 2019 minimum wage hikes in Vietnam resulted in new monthly minimum wages ranging from US$126-180 across different regions.

However, Vietnamese minimum wages are still 38% to 54% of those in China, whose minimum wages in some leading cities in Guangdong, its manufacturing-oriented province, now exceed US$330 per month. The minimum wage of US$274 in Thailand is also higher than those in Vietnam. 

In addition, Vietnam’s demography is in a good position. According to United Nations, the population in Vietnam is estimated to be around 96 million, with about 70% of its population between 15 and 64 years old in 2019.

From a micro perspective, Vietnam will further attract FDI in high-tech industries thanks to its successful 5G trial program. The country plans to bring 5G into commercial operation in 2020.