QNB Group: Vietnam’s Key Growth Engines Are Still Intact

DOHA, Qatar-Wednesday 28 December 2016 [ AETOS Wire ]

Vietnam stands out as an economic success story, having enacted major structural reforms over the last three decades to shift the economy from one that is centrally-planned to one that is market-led. Growth has averaged 6.9% since 1991, with exports acting as the key growth driver. The export share in the economy increased from only 2.9% in 1988 to 84.7% in 2015. The rising importance of exports has resulted in positive feedback loops with other growth drivers including foreign direct investment (FDI) and urban migration. Although global headwinds have slowed growth down in 2016, the recovery in global demand and the introduction of new trade deals are expected to push growth higher in 2017-18.

Real GDP growth has moderated to 5.9% in the first three quarters of 2016 from 6.7% in 2015. For the year as a whole, we expect growth to reach 6.0%. The slowdown was mainly due to softer import demand by Vietnam’s major export partners. In particular, the US, China and the Euro Area (collectively receiving approximately 45% of Vietnam’s exports as of 2015) have all slowed in 2016. Exacerbating the global headwind, growth in Vietnam was further hit by a major drought, which resulted in agricultural production contracting by 0.7% in the first half of 2016.

Going forward, we expect growth to pick up to 6.2% in 2017 and 6.4% 2018. This is projected to be driven by strong export growth, averaging 16.8% per year over the next three years. Exports are likely to pick up on stronger external demand as growth in Vietnam’s main trading partners accelerate. It is also expected to benefit from increased market penetration of Vietnam’s exports as new bilateral trade deals come into effect. In 2015, Vietnam finalised and ratified a trade agreement with South Korea and also agreed to terms with the European Union in early 2016, although this agreement still awaits ratification. South Korea, in particular, has been a rapidly expanding market for Vietnamese exports, with trade growing by 24.8% in 2015. Exports should also be supported by the devaluation of the currency. The State Bank of Vietnam maintains a policy of exchange rate management and a gradual weakening of the currency to support competitiveness. Finally, exports are also likely to  benefit from China’s continued move up the manufacturing value-chain and away from low value manufacturing industries that compete with Vietnamese exporters.

The pick-up in growth is expected to materialise despite the uncertain future of the Trans-Pacific Partnership (TPP). TPP, a trade deal spanning twelve pacific-rim countries including the US and Japan, was widely heralded to be a major boon to Vietnam’s exports. However, we do not expect TPP to be implemented, or at least in its current form, following the victory of Donald Trump in the US presidential elections. The President-elect has pledged to withdraw the US from the deal on his first day in office. While there has been speculation of proceeding with the deal without the US, none of the other TPP members have signalled clear intentions in this regard. But the exclusion of the US would substantially limit the benefit to Vietnam and other TPP members considering the sheer size of the US market.

In conclusion, Vietnam’s growth is tied to the performance of its export sector. Favourable factors point to a pick-up in export growth following a temporary slump in 2016. Furthermore, improvement in the outlook for exports is likely to result in positive feedback loop with foreign direct investment and urban migration. Expectations of a stronger export growth attracts FDI into Vietnam, which helps its growth. The demand for labour then drives urban migration providing a further boost to domestic demand. Vietnam’s key growth engines—exports, FDI and urbanisation—are still intact.

Disclaimer and Copyright NoticeQNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice.  The report is distributed on a complimentary basis. It may not be reproduced in whole or in part without permission from QNB Group.


QNB Group

Maha Mubarak Ali, +974-449-75704, PR@qnb.com.qa




QNB Economics Team:

Ziad Daoud, Head of Economics, +974-4453-4642, ziad.daoud@qnb.com 

Rory Fyfe, Senior Economist, +974-4453-4643, rory.fyfe@qnb.com 

Ali Jaffery, Economist, +974-4453-4423, ali.jaffery@qnb.com  

Nancy Fahim*, Economist, +974-4453-4648

*Corresponding authors





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Real GDP (% change, year-on-year) - (Graphic: ME NewsWire)

Real GDP (% change, year-on-year) - (Graphic: ME NewsWire)

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