Vietnam’s transformation in the early 1990s toward a market-based economy ushered in a period of strong growth and attracted significant interest from foreign investors. However, the economy has underperformed in recent times. Per capita income remains less than half the regional average. But sustained recovery following the 2012 banking crisis is supporting growth.
The macroeconomic outlook is solid. A modest recovery has taken hold since a banking crisis in 2010 caused growth to slow below 6%. Annual growth is projected to average 6.3% over the next four years, due to firming global and domestic demand. Accelerating wage growth will support household spending, while ongoing deregulation will promote greater private investment. If implemented, Vietnam’s participation in the TPP trade agreement will add further upside to the outlook, particularly given its strong competiveness in low cost manufacturing. But modest global growth in 2016 poses risk for export oriented industries, while drought could stymie domestic agricultural output.
Inflation remains low consistent with lacklustre commodity prices and slack in the domestic economy. This will allow the State Bank of Vietnam (SBV) to maintain an easing bias over much of the next year.
Over the long term, Vietnam’s youthful population and low dependency ratio, along with its increasing shift into manufacturing, will drive growth. But the reliance on large, inefficient state-owned enterprises poses downside risks.
Greater industrialisation and a credit boom over the last decade have propelled Vietnam from a low-income country to one of lower-middle-income status. Vietnam would need to grow by over 10% per annum over the next decade to become an upper-middle-income country, which doesn’t seem likely.
Vietnam has an OECD country credit grade of 5 and speculative grade sovereign debt ratings from all three major ratings agencies. These ratings underline Vietnam’s vulnerability to business, financial and economic setbacks.
The World Bank gives Vietnam an ease of doing business rank of 90 out of 189 countries, meaning it outperforms most economies across Emerging Asia. It scores well on contract enforceability and access to credit. But paying taxes, protecting investors and getting electricity are all extremely difficult.
The World Bank ranks Vietnam in the bottom half of countries for almost all dimensions of governance: rule of law; regulatory quality; government effectiveness; and control of corruption. It is in the lowest quartile for voice and accountability. Vietnam elected its new President, Prime Minister and first female chairwoman of the National Assembly in January 2016. Policies under the new leadership are expected to remain little changed with a focus on macroeconomic stability and the reform agenda aimed at deregulation.
Vietnam is Australia’s 14th largest bilateral trading partner. Merchandise export receipts rose 19% to A$3.3b in 2014-2015, most of which were agricultural exports. Imports rose 8% to A$4.9b driven by crude oil and telecom items.
Australia exported A$1.2b of services in 2014-2015, mostly education exports. Vietnam is Australia’s fourth largest source of international students with over 29,000 enrolments. Royal Melbourne Institute of Technology (RMIT) has two campuses in Vietnam with a student roll of around 5,000.
Vietnam accounts for less than 1% of tourist arrivals, but arrivals have risen 16% annually over the last decade.
Bilateral investment between Vietnam and Australia lags behind blossoming trade relations. Australian investment in Vietnam is modest relative to the total stock of outward investment. Australian companies investing in Vietnam include ANZ, BlueScope Steel and QBE.