In the coming years, Vietnam may emerge as one of the countries benefiting the most from improved Western demand largely thanks to its export-dependent economy in which overseas shipment of goods comprised 81 percent of GDP in 2012.
Despite weak global demand in 2013 and a decline in commodity prices, exports managed to grow by 15.4 percent. According to the report, this growth was largely due to a rebound in the garment and textile sectors as well as an increase in foreign investment in the electronics sector.
Escalating demand for Vietnamese goods such as apparel and electronics is expected to drive continued growth in the manufacturing sector. The increase of new orders, coupled with reduced inventories, means that output will likely rise in the coming months to meet the demand for goods. The sharp increase of quantity of purchases reflects anticipation of rising demand.
Demand from the U.S. and EU, which accounts for 18 percent and 14 percent of Vietnam’s exports respectively, will purportedly help exports grow at 20 percent this year from 15.4 percent in 2013.
Despite having a history of trade deficits, Vietnam had a US$900 million trade surplus in 2013, following a small surplus in 2012. Export businesses, especially foreign-invested manufacturing firms, will provide a much needed boost to Vietnam’s growth.
Over the past year, FDI rose by more than 50 percent to US$21.6 billion. Pledged FDI also saw a sharp increase – mostly funneled into the manufacturing sector – and is expected to further accelerate exports in the coming year.
This reflects the country’s competitiveness in labor-intensive manufacturing, which may drive Vietnam to become an alternative to China as a manufacturing base.
“As production costs in China continue to rise, Vietnam, with its low wages and land costs, is increasingly being seen as an attractive destination for the manufacturing of products for resale back into the China market – whose consumer class is expected to double to 600 million by 2020,” says Rao Nguyen, Manager of Dezan Shira & Associates‘ Ho Chi Minh Office.
“The signs are already there that manufacturing is on the move,” continues Nguyen. “Over 5,000 manufacturing companies in Guangdong, China, have packed up and relocated to Vietnam in the past three years alone, according to the Hong Kong General Chamber of Commerce.”
Another motivating factor may well appear in the form of the Trans-Pacific Partnership (TPP) Agreement which is likely to bring Vietnam funding and technologies to significantly improve its textiles industry, thus upgrading it to meet American import standards and further positioning the country to directly compete with China in this sector.
With increased investment in manufacturing and trade negotiations in the works that will bring Vietnam closer to the U.S. and the EU, export-oriented firms are expected to enjoy another year of robust growth. However, domestic demand will likely stay lackluster due to the overhang of bad debts in the economy.
HSBC’s economist Trinh Nguyen said that without reforms to address its hindrances, Vietnam will continue to perform below its potential, with domestic firms affected by a frozen financial system in an increasingly competitive market. Banking sector reforms, infrastructure investment, supply chain restructuring and human resource development are some of the reforms needed to kick the economy into high gear.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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