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Vietnam’s GDP development price moderated to a pace of three.three% year-on-year (y/y) in the initial quarter of 2023, just after fast GDP development of eight.% y/y in 2022. Vietnam’s manufacturing export sector has faced escalating headwinds due to slowing development in the US and EU, which are two important export markets accounting for more than 40% of Vietnam’s goods exports. Vietnam’s goods exports fell by 13% y/y in the 4 months of 2023.
Serious energy outages due to a protracted heatwave have compounded the close to-term challenges facing Vietnam’s manufacturing sector, with a lot of factories obtaining been hit by recurring energy blackouts.
In spite of the close to-term downturn in exports, Vietnam is anticipated to resume fast financial development more than the medium-term financial outlook, as exports rebound. Vietnam is anticipated to continue to be a important beneficiary of the shift in international manufacturing provide chains towards competitive Southeast Asian manufacturing hubs.
Vietnam’s GDP development softens as exports weaken
Vietnam’s genuine GDP grew by eight.% in 2022, as the economy rebounded strongly from the financial disruption brought on by the COVID-19 pandemic throughout second half of 2021. Having said that, financial development momentum moderated to three.three% y/y in the initial quarter of 2023, reflecting the influence of weakening development in industrial production and exports.
Vietnam’s goods exports rose by ten.six% in 2022. Having said that, the financial slowdown in the US and EU, which with each other account for 42% of Vietnam’s total goods exports, has resulted in a important weakening in exports throughout the initial 4 months of 2023, with Vietnam’s total goods exports declining by 13% y/y.
The US remains Vietnam’s biggest export industry, accounting for 29.four% of total merchandise exports. Vietnam’s exports to the US rose by 13.six% in 2022, with the bilateral trade surplus with US escalating to USD 95 billion. Having said that, in the initial 4 months of 2023, merchandise exports to the US fell by 21.six% y/y.
Exports to the EU have been also weak, declining by ten.eight% y/y in the initial 4 months of 2023. Exports to the EU of computer systems, electrical solutions and elements fell by 30% y/y in the January-April 2023 period, whilst exports of textiles and garments to the EU fell by ten.six% y/y.
Exports to mainland China also showed a important decline, falling by 12.9% y/y in the initial 4 months of 2023. Exports of computer systems, electrical solutions and elements as properly as mobile phones to mainland China fell by 14.9% y/y in the January-April 2023 period.
Reflecting the slump in exports, the manufacturing sector has slowed in early 2023, with industrial production contracting by 1.eight% y/y for the initial 4 months of 2023, compared with constructive development of 7.eight% y/y in the initial 4 months of 2022. Vietnam’s industrial production had risen by 7.eight% y/y in 2022, with manufacturing output up by eight.% y/y.
The downturn in Vietnam’s building sector has also hit manufacturing output for constructing supplies, with domestic cement sales down by 16% y/y in the January to April 2023 period. Building steel sales in April 2023 have been down by an estimated 15% y/y. For the initial 4 months of 2023, steel sales have been estimated to have declined by 23% y/y.
The challenges facing Vietnam’s manufacturing sector have been compounded throughout May perhaps and June by energy shortages resulting in electrical energy provide disruptions. A heat wave has driven up electrical energy consumption and decreased hydroelectric energy provide, causing widespread disruption to manufacturing output due to energy outages. Manufacturing production in industrial parks in northern regions of Vietnam have been specifically badly impacted, notably in Bac Ninh and Bac Giang provinces.
The S&P Worldwide Vietnam Manufacturing Acquiring Managers’ Index (PMI) dropped to 45.three in May perhaps from 46.7 in April, thereby signalling a third successive month-to-month deterioration in operating situations. In addition, the most current decline was the most marked because September 2021. There have been widespread reports of buyer demand weakness across the most current survey.
The influence of this was most clearly felt with regards to new orders, which declined swiftly and to the greatest extent in 20 months. New export orders remained weak, with new business enterprise from abroad decreasing for the third month operating.
With new orders continuing to fall, firms also decreased output midway by way of the second quarter of the year. Production was down for the third successive month, and at a marked pace that was the quickest because January. Output decreased across every of the 3 broad categories of manufacturing, with the sharpest decline at intermediate goods producers.
The May perhaps survey also showed that waning demand led suppliers to lower their rates. Input expenses decreased for the initial time in 3 years as a outcome. The drop in input rates offered some leeway for firms to lower their personal charges in a bid to enhance demand. Manufacturing output rates decreased for the second month operating.
The CPI inflation price moderated to two.eight% y/y in April 2023 compared with three.four% y/y in March and four.three% y/y in February. Core CPI inflation rose by four.six% y/y in April and was up four.9% y/y for the initial 4 months of 2023.
In response to increasing inflation and the strengthening USD versus the dong, Vietnam’s central bank, the State Bank of Vietnam (SBV), raised its policy price by 200bps in two 100bp measures throughout September and October 2022. Having said that, with Vietnam’s economy slowing considerably in early 2023, the SBV has began easing monetary policy. The SBV reduce its policy prices by 100bps on March 15th and once more by 50bps on April 3rd as issues have enhanced about the influence of increasing interest prices on the home sector, which has faced increasing liquidity pressures. A additional 50 basis points (bps) price reduce was announced on 23rd May perhaps as the economy has continued to slow.
Medium-term development drivers
More than the medium-term outlook for the subsequent 5 years, a quantity of important drivers are anticipated to continue to make Vietnam a single of the quickest increasing emerging markets in the Asian area.
Firstly, Vietnam will continue to advantage from its comparatively reduce manufacturing wage expenses relative to coastal Chinese provinces, exactly where manufacturing wages have been increasing swiftly more than the previous decade.
Secondly, Vietnam has a comparatively substantial, properly-educated labour force compared to a lot of other regional competitors in Southeast Asia, creating it an eye-catching hub for manufacturing production by multinationals.
Third, fast development in capital expenditure is anticipated, reflecting continued sturdy foreign direct investment by foreign multinationals as properly as domestic infrastructure spending. For instance, the Vietnamese government has estimated that USD 133 billion of new energy infrastructure spending is necessary by 2030, like USD 96 billion for energy plants and USD 37 billion to expand the energy grid. Serious energy shortages throughout 2023 have highlighted the important value of fast improvement of new energy infrastructure as a important financial policy priority.
Fourth, Vietnam is benefiting from the fallout of the US-China trade war, as larger US tariffs on a wide variety of Chinese exports have driven companies to switch production of manufacturing exports away from China towards option manufacturing hubs in Asia.
Fifth, a lot of multinationals have been diversifying their manufacturing provide chains throughout the previous decade to lower vulnerability to provide disruptions and geopolitical events. This trend has been additional reinforced by the COVID-19 pandemic, as protracted disruptions produced turmoil in international provide chains for a lot of industries, like autos and electronics.
Vietnam has been a single of the preferred destinations for South Korean and Japanese firms deciding upon to shift their production to the ASEAN area.
Free of charge trade agreements
Vietnam is also set to advantage from its increasing network of free of charge trade agreements. As a member of the ASEAN grouping of nations, Vietnam currently has benefited significantly from the ASEAN Free of charge Trade Agreement (AFTA), which has substantially removed tariffs on trade involving ASEAN member nations because 2010. ASEAN also has a network of free of charge trade agreements with other important Asia-Pacific economies, most notably the China-ASEAN Free of charge Trade Location which entered into force in 2010. This network of free of charge trade agreements has helped to strengthen Vietnam’s competitiveness as a low-price manufacturing export hub.
Vietnam is also a member of the Extensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) amongst 11 Pacific nations, like the G-20 economies of Canada, Mexico, Japan and Australia. In March 2023, the UK Government substantially concluded negotiations on the UK’s accession to the CPTPP. As the UK is the world’s fifth biggest economy, its accession would considerably improve the all round financial size of the CPTPP grouping, giving Vietnam with substantial competitive benefits for exporting to the UK industry as properly as attracting UK foreign direct investment.
A extremely significant trade deal that took impact in 2020 is the EU-Vietnam Free of charge Trade Agreement (EVFTA). The EVFTA is an significant enhance to Vietnam’s export sector, with 99% of bilateral tariffs scheduled to be eliminated more than the subsequent seven years, as properly as important reduction of non-tariff trade barriers. For Vietnam, 71% of duties have been removed when the EVFTA took impact on 1st August 2020. The scope of the EVFTA is wide-ranging, like trade in solutions, government procurement and investment flows. An EU-Vietnam Investment Protection Agreement has also been signed which will support to strengthen EU foreign direct investment into Vietnam when it is implemented. In 2022, Vietnam’s exports to the EU reached USD 56 billion, up ten.two% y/y.
Vietnam will also advantage from the Regional Extensive Financial Partnership (RCEP) free of charge trade agreement that was implemented from 1st January 2022. The fifteen RCEP nations are the ASEAN ten nations, plus China, Japan, South Korea, Australia and New Zealand. Vietnam has currently ratified the RCEP agreement and will hence advantage promptly from the date of RCEP implementation. The RCEP agreement covers a wide variety of places, like trade in goods and solutions, investment, e-commerce, intellectual home and government procurement.
US bilateral trade frictions
The US deficit for trade in goods with Vietnam reached USD 55.eight billion in 2019, with the deficit widening by 41.two% compared to 2018. This was slightly mitigated by the USD 1.two billion surplus in favour of the US for trade in solutions, but nonetheless left the all round bilateral trade deficit at USD 54.five billion in 2019.
In 2020, the US trade deficit with Vietnam for trade in goods additional widened, reaching USD 69.7 billion, with the all round bilateral trade deficit for goods and solutions at USD 68 billion. In 2021, the bilateral deficit for trade in goods widened significantly additional, reaching USD 91 billion, boosted by Vietnam’s increasing exports of electronics and machinery to the US. Vietnam had the third biggest goods trade surplus with the US in 2021. By 2022, the bilateral trade deficit for trade in goods had enhanced to USD 116 billion.
Reflecting the persistent substantial bilateral trade surplus that Vietnam has with the US, the Workplace of the US Trade Representative (USTR) announced on 2nd October 2020 that the US government has launched an official investigation into acts, policies, and practices by Vietnam that might contribute to the undervaluation of its currency and the resultant harm brought on to US commerce, beneath section 301 of the 1974 Trade Act.
As component of its investigation on currency undervaluation, USTR consults with the US Division of the Treasury as to problems of currency valuation and exchange price policy. The US Treasury has informed the US Division of Commerce that Vietnam’s currency was undervalued by four.7% in 2019, partly due to intervention by the Vietnamese government. In December 2020, the US Treasury named Vietnam as a “currency manipulator”.
USTR also launched an investigation into Vietnam’s acts, policies, and practices connected to the import and use of timber that is assessed to be illegally harvested or traded.
Having said that, in its April 2021 semi-annual Report on Macroeconomic and Foreign Exchange Policies of Important Trading Partners of the United States, the US Treasury determined that with reference to the Omnibus Trade and Competitiveness Act of 1988, there was insufficient proof to make a obtaining that Vietnam manipulates its exchange price for either of the purposes referenced in the 1988 Act, and dropped its labelling of Vietnam as a “currency manipulator”.
Nonetheless, constant with the 1988 Act, the US Treasury considers that its continued enhanced engagements with Vietnam, as properly as a much more thorough assessment of developments in the international economy as a outcome of the COVID-19 pandemic, will allow the US Treasury to superior figure out no matter if Vietnam intervened in currency markets to stop successful balance of payments adjustment or acquire an unfair competitive benefit in trade.
US government issues about currency manipulation have been additional addressed following a bilateral agreement in July 2021 involving the US and Vietnam whereby Vietnam has committed to refrain from competitive devaluation of the dong. The agreement was announced in a joint statement by US Treasury Secretary Janet Yellen and State Bank of Vietnam Governor Nguyen Thi Hong. In its December 2021 and June 2022 semi-annual reports, the US Treasury stated that it continues to engage closely with the State Bank of Vietnam to monitor Vietnam’s progress in addressing the US Treasury’s issues and is as a result far happy with progress created by Vietnam.
Financial outlook
Due to the extreme financial influence of lockdowns triggered by the COVID-19 Delta wave in mid-2021, the pace of Vietnam’s financial development moderated to two.six% in 2021, compared with the two.9% development price recorded in 2020. There was a sturdy rebound in GDP development momentum in 2022, at a pace of eight. % y/y, as domestic demand and manufacturing export production returned to much more typical levels. Having said that, in 2023, Vietnam’s economy has shown moderating development momentum as the slowdown in important export markets, notably the US and the EU, has hit Vietnam’s manufacturing exports.
In spite of close to-term headwinds to Vietnam’s financial development, more than the medium-term financial outlook, a substantial quantity of constructive development drivers are developing favourable tailwinds and will continue to underpin the fast development of Vietnam’s economy. This is anticipated to drive sturdy development in Vietnam’s total GDP as properly as per capita GDP. The financial outlook from 2023 to 2026 is for fast financial expansion.
With sturdy financial expansion projected more than the subsequent decade, Vietnam’s total GDP is forecast to improve from USD 327 billion in 2022 to USD 470 billion by 2025, increasing to USD 760 billion by 2030. This translates to extremely fast development in Vietnam’s per capita GDP, from USD three,330 per year in 2022 to USD four,700 per year by 2025 and USD 7,400 by 2030, resulting in substantial expansion in the size of Vietnam’s domestic customer industry.
Vietnam’s function as a low-price manufacturing hub is also anticipated to continue to develop strongly, helped by the additional expansion of current important business sectors, notably textiles and electronics, as properly as the improvement of new business sectors such as autos and petrochemicals. Vietnam currently has a domestic automaker of electric automobiles, Vinfast, which launched its initial EV in Vietnam in 2021. In March 2022, Vinfast announced a USD two billion investment to develop an auto manufacturing plant in North Carolina, for manufacturing EV buses and SUVs, as properly as EV battery manufacturing, with building anticipated to commence in 2023.
For a lot of multinationals worldwide, important provide chain vulnerabilities have been exposed by the protracted disruption of industrial production in China as properly as some other important international manufacturing hubs throughout the COVID-19 lockdowns. This will drive the additional reshaping of manufacturing provide chains more than the medium term, as firms attempt to lower their vulnerability to such intense provide chain disruptions. With US-China trade and technologies tensions nonetheless remaining higher, this is probably to be a additional driver for reconfiguring of provide chains. A important beneficiary of the shift in international manufacturing provide chains will be the ASEAN area, with Vietnam anticipated to be a single of the most important winners.
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Editor’s Note: The summary bullets for this short article have been selected by In search of Alpha editors.