The sky is bright for Vietnam’s economy but the country urgently needs to work on underlying issues like low productivity and poor infrastructure.
Vietnam’s economy has the potential to thrive this year with more foreign direct investment (FDI) and export revenue, but low productivity remains a concern, economists said.
Last month, the Asian Development Bank (ADB) lifted its economic growth forecast for Vietnam to 6.7 percent in 2018 from its previous projections of 6.3 to 6.5 percent. The World Bank gave a more conservative forecast of 6.5 percent.
After a 10-year high GDP growth of 6.81 percent in 2017, the government expects the economy to expand 6.5-6.7 percent this year.
Being an export oriented economy, Vietnam’s somewhat surprisingly fast growth last year owed a lot to the recovering global economy, which expanded 3 percent in 2017, the highest rate since 2011.
This trend will continue, said economist Vo Tri Thanh.
Vietnam’s export revenue expanded by 21 percent last year against 2016 to $213.7 billion, the highest in the past five years. Following what Prime Minister Nguyen Xuan Phuc called a “year of records”, the country is targeting export growth of 7-8 percent this year.
Favorable investment climate
Investors are positive too, and the sentiment is forecast to continue in 2018 stemmed from confidence in Vietnam’s economic prospects, economist Nguyen Tri Hieu told VnExpress International.
The favorable investment climate will be aided by projected stable foreign currency, inflation and interest rates in 2018, Hieu said.
Following 10-year highs in the third quarter of 2017, the VN-Index, a capitalization-weighted index of all the companies listed on the Ho Chi Minh City Stock Exchange, surpassed 1,000 points on January 3 for the first time since the global financial crisis in 2007.
RongViet Securities Corporation in Saigon said in a report that the VN-Index will increase at least 17 percent this year or even 67 percent in its best scenario, meaning it could end the year somewhere between 1,170 and 1,640.
The market will be boosted by interests from the foreign sector, said Nguyen The Minh, a senior analyst at Saigon Securities Incorporation. Foreign investors made more than $1 billion of net purchases last year, the highest amount in five years, and they will continue to stick around for more privatization of public giants.
Foreign direct investment inflow in 2017 also fared well by reaching $35.88 billion, up 44 percent against 2016, according to the Ministry of Planning and Investment – another 10 year high.
“The FDI scene in the economy continues to thrive,” Forbes quoted Dustin Daugherty, senior associate in business intelligence with consultancy firm Dezan Shira & Associates in Ho Chi Minh City, as saying. “While a lot of attention is paid to big name deals, the number of small to medium-sized enterprises and smaller multinational company investors continues to tick up, and enthusiasm is very high.”
Foreign investors in the likes of electronics and polyester yarn factories still love Vietnam for its low costs, abundance of labor and matter-of-fact permitting process, analysts on the ground said.
“I think next year will be as good or better than this,” Daugherty said. “We are not yet at peak for the growth rate.”
A recent report by auditing firm PricewaterhouseCoopers (PwC) echoed the enthusiasm, saying: “Vietnam is at a tipping point in its economic development led by free trade agreements (FTAs) such as the EU-Viet Nam FTA and an increasingly deregulated business environment.”
Vietnam’s Greenfield FDI Performance Index has also topped emerging economies, surpassing Malaysia and Thailand on attracting foreign capital, the report found.
However, Vietnam still faces many challenges in boosting economic growth, as the economy still depends on low-cost labor force, outdated technology, and exhausting natural resources, said Hoang Quang Phong, vice chairman of the Vietnam Chamber of Commerce and Industry.
Most local enterprises remain small and uncompetitive, he added. Vietnam now houses some 700,000 operational firms, but 60 percent of them are not profitable.
There may also be a slow-down in structural reforms as the government is trying to cut down on spending and investment for a leaner budget deficit and to contain public debt, the World Bank has warned.
Public investment fell to 16 percent of total spending in the first nine months of 2017, compared with an average of 25 percent in recent years.
“Structural reform remains a central priority in view of tepid productivity growth” said Sebastian Eckardt, the World Bank Lead Economist for Vietnam, “Building on progress already made, Vietnam can further lift productivity growth through investments in needed infrastructure and skills as well as deeper reforms of the business environment, SOE [state owned enterprise] and banking sector.”