VIETNAM is expected to be one of the world’s fastest growing economies in 2019, and a key destination for manufacturers relocating due to trade tensions between the United States and China, UOB economists said in an Aug 20 research note.

With robust domestic demand and increasing foreign direct investment (FDI), they forecast 6.7 per cent growth for Vietnam in 2019, similar to the official growth target of 6.8 per cent. First-half growth was 6.8 per cent year on year.

The interest rate environment is likely to stay conducive, with the economists expecting the central bank to keep the policy rate steady at 6.25 per cent for the rest of the year.

Manufacturing hub

As US-China trade tensions continue and tariffs take a toll on China exports, manufacturers have had to consider shifting production to other locations — with Vietnam as one key alternative.

“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,” added the economists.

Labour costs in Vietnam also remain relatively low compared with China and Thailand. Monthly minimum wages in Vietnam range from US$126 to US$180 across different regions; 38 per cent to 54 per cent of China’s, and also less than Thailand’s US$274 rate.

Strong FDI numbers

FDI inflows rose 9.1 per cent in 2018 to reach US$19.1 billion. For 2019, Vietnam’s FDI is on track to exceed US$20 billion as multinationals divert operations from China, said the economists. They see the main sources of FDI being South Korea, China, Taiwan, and Hong Kong.

In 2019 so far, China has been the largest contributor to Vietnam’s FDI, contributing nearly 25 per cent of flows, in a reversal from the previous two years when inflows were dominated by South Korea and Japan. “This suggests that the impact from US-China trade tensions that arose in the first half of 2018 is having a tangible effect on China-based manufacturers,” said the economists.

They also observed that unlike in previous years, where FDI was more evenly distributed across industries, nearly 75 per cent of FDI inflows to Vietnam in 2019 so far has been concentrated in manufacturing.

A successful 5G trial programme is also likely to draw more FDI in high-tech industries, with Vietnam planning to bring 5G into commercial operation in 2020.

Tariffs too?

In a separate Aug 21 note, Fitch Solutions Macro Research analysed the risk that Vietnam, too, would face tariff action from the US.

It noted that Vietnam is the country with which the US has the sixth largest trade deficit — one that is also rising. Since mid-2018 when trade tensions began, Vietnam’s exports to the US have been growing faster than its overall exports.

Nonetheless, Vietnam is unlikely to see major tariff action from the US in the near term, said Fitch Solutions. First, with US-China trade tensions remaining elevated, “the US will likely keep its focus on China especially as Trump gears up for re-election in November 2020”, said the report.

“Second, Vietnam plays a key role in helping the US counter-balance growing Chinese influence in the region,” it added, noting that the US has stepped up security relations with Vietnam in recent months.