Significant reasons to be optimistic on growth

February 11, 2024 | 22:34

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It is certainly easy to be pessimistic about the Year of the Dragon in Vietnam. Inflation seems to remain stubbornly high, the real estate market appears to be in a holding pattern, the banking system has faced a major shock recently, and the stock market remains range bound – just to name a few of the significant reasons to be pessimistic about the economy and stock markets in Vietnam this year.

Dr. Christian Kamm, president, Kamm Investment Inc.

Not to mention, of course, the worldwide challenges that affect Vietnam. The world faces continuing military conflicts, a seeming considerable inflation problem, high interest rates, an unprecedented number of presidential elections and high-cost structures caused by supply chain issues - just to name a few challenges. On the surface, there does not seem to be a reason to be positive about the economy and stock markets in Vietnam.

Though I concede that there are significant challenges, they are, for the most part, surmountable. It is because of this that I feel that the economy will continue to improve in 2024. Further, the stock markets should notch positive returns.

One of the main drivers of my expectation is that I believe that inflation throughout the world is in a secular decline. Although headline numbers from around the world show that inflation remains stubbornly high, it is, in fact, moderating at a considerable pace below the surface.

If inflation in countries such as the United States, Germany, and the United Kingdom can moderate in the early to middle months of 2024, government bond yields will continue to fall around the world. Failing government bond yields portend economic growth and a more stable non-inflationary environment.

There are many positive effects of moderate inflation and lower interest rates. Lower rates promote investment in “risk-on” assets such as stocks in emerging and frontier markets. We can easily expect that foreign indirect investment into Vietnam will be robust in 2024 as inflation and interest rates decline. In fact, we can expect foreign direct investment (FDI) commitments to increase over the first half of 2024.

Specifically, a decline in interest rates also promotes FDI into countries such as Vietnam, as projects are considered more financially viable due to lower borrowing rates. Declining interest rates and inflation also promote increased consumption in these countries. Greater consumption in the world leads to more economic growth in net producing countries such as Vietnam.

From a domestic standpoint, the Vietnam stock markets are beneficiaries of lower interest rates. As bank interest rates decline, to seek a return, investors typically turn to other investments such as real estate and the stock market to receive a higher rate of return. Further, general consumption increases as consumers are more certain about their economic future and therefore increase consumption of goods and services.

Make no mistake, the world economic growth as well as that of Vietnam depend on continued moderate inflation and lower interest rates, internally and externally. Both direct and indirect investment into countries like Vietnam occur most consistently in times of moderate inflation and interest rates.

Many economists see the majority of the world sinking into a recession this year or, at least, experiencing economic turmoil to some degree. Though such an outcome is possible, I feel it is improbable. Around the world, GDP growth has remained largely positive – portending that the world may avoid a recession.

If this is the case, Vietnam, which is a net producer to many of the world’s largest markets – will be a likely beneficiary. As a beneficiary, Vietnam will enjoy export growth, which translates into domestic economic growth and a more robust economy. Solid export growth leads to sustainable increases in per capita wage growth, which further leads to GDP growth.

With some countries, growth will not be robust. For others, it will. But on the whole, the world should be able to avoid a recession as it moves to a more solid and consistent phase of economic growth.

Recessionary fears may be overblown – largely built on the premise of a false economy created during the pandemic years. Inflationary pressures mount, but a recession is not always the end result. Monetary and fiscal policy can be used to effectively limit a significant decline in economic growth. To that end, it appears that the world is succeeding. Countries have largely been proactive at limiting inflation. By keeping inflation in check, expectations of the world avoiding a recession is more likely.

There are other reasons to be optimistic. Vietnam continues to experience the production migration from China. As firms affected by continued supply chain issues and elevated cost structures in China have sought solutions, many have moved production to Vietnam. Although Vietnam may not be considered the first choice in such a migration, production shifts from other countries have occurred as well. This has provided a sustainable and consistent FDI into Vietnam.

Such direct investment provides a considerable boost to GDP. This migration is a secular trend and most likely will continue for the remainder of the decade, providing a significant economic advantage to Vietnam. With more international firms showing interest in initiating or increasing production in Vietnam, such growth is inevitable.

Lastly, with most technological advances in the workplace that have occurred in the world, the result has always been higher productivity. Considering the evolution of AI, we may not know precisely how it will shape our future, but most agree that it will shape our future in an economically positive way.

AI can easily be a catalyst that will propel significant and far-reaching changes in the way individuals work and engage around the world. It can be expected that even minor advances in AI will result in productivity advancements, which can translate into economic growth. And, although no-one is certain how far-reaching the development and implementation of AI will be, be assured that it will result in economic productive growth around the world, as well as in Vietnam.

The present argument is that AI will disrupt our economies; most significant technological advancements promote change as well as provide long-standing opportunities, and there is no reason to believe AI will not follow this pattern.

Geopolitical uncertainty persisting may be a cause for concern in the world, but if the world can face these issues and overcome them and resolve the current conflicts, it will likely be a driver for more certainty and growth. Any improvement in the geopolitical tensions will be the harbinger of better economic times to come. We should hope for, and expect, these tensions to lessen this year.

Vietnam does, even today, remain at a crossroads internally. Government policies must continually be revised to make investment in Vietnam favourable. Procedures must be simplified. Domestic policies must be carefully crafted to benefit the citizens. In other words, the government can and will continue to play an integral role in providing the backdrop of a strong economy.

Although Vietnam is in a strong position to continue to promote investment from foreign sources, it must remain vigilant to maintain its strong position in the Year of the Dragon.