UOB forecasts Vietnam's economic growth to continue, boosted by trade and FDI

At the "Gateway to ASEAN" conference held on September 6 in Ho Chi Minh City, Heng Koon How, head of markets strategy, global economics and markets research at UOB, shared his insights on Vietnam’s economic strength, pointing to rising trade and increasing foreign direct investment as major factors driving growth this year.

Vietnam's share of ASEAN's GDP has grown significantly over the past two decades, rising from under 6 per cent in 2000 to around 12 per cent as of September 2024, a testament to the country's rapid economic expansion.

In the first half of 2024, Vietnam saw a robust recovery, with GDP growth accelerating to 6.9 per cent in the second quarter, up from 5.8 per cent in the first quarter, fuelled by strong performances in manufacturing and trade.

“Both the manufacturing and service sectors showed impressive growth over the past two quarters,” Heng observed. In the second quarter of 2024, manufacturing expanded by 10 per cent on-year, compared to 7.2 per cent in the first quarter. The services sector also strengthened, posting 7.1 per cent growth in Q2, up from 6.2 per cent in Q1. Together, these sectors account for approximately 75 per cent of Vietnam's GDP. Foreign trade also sustained its momentum, with exports increasing by 14 per cent and imports rising by 16.6 per cent in the first half of 2024 compared to the same period in 2023.

Heng acknowledged external risks, including geopolitical tensions, volatility in the semiconductor market, and uncertainties surrounding China's economic recovery. However, he projected that Vietnam’s GDP will grow by 6 per cent for the full year 2024, up from 5 per cent in 2023. “This positions Vietnam as one of the fastest-growing economies in ASEAN,” Heng said, noting the resilience of Vietnam’s economy despite these global headwinds.

Vietnam’s long-term outlook is underpinned by favourable demographics and strong macroeconomic fundamentals. With a burgeoning middle class and the third-largest population in ASEAN, at nearly 100 million people, Vietnam is poised to see increased consumer spending in the coming years. As the population grows and becomes wealthier, the country is transitioning from a low-cost manufacturing hub to a higher-value, technology-driven economy with an increasing focus on services, retail, and tourism.

Heng further highlighted Vietnam’s strategic position within ASEAN, noting that the country is well-placed to benefit from the region’s growing trade and foreign direct investment (FDI). ASEAN’s trade competitiveness is bolstered by longstanding free trade agreements with China, Japan, South Korea, India, Australia, and New Zealand, as well as its central role in the Regional Comprehensive Economic Partnership (RCEP).

"ASEAN is the 'beating heart' of RCEP, facilitating trade between North Asia and other regions, and Vietnam is in a prime position to capitalise on this dynamic," Heng remarked.

Vietnam is also set to gain from record FDI flows into ASEAN. In 2023, FDI inflows to ASEAN reached a record $226 billion, up from $120 billion during the COVID-19 pandemic, making ASEAN the second-largest destination for FDI globally, behind the United States but ahead of China.

"ASEAN is expected to see FDI inflows grow to $370 billion by 2030," Heng added, signalling long-term growth prospects for the region.

However, Heng cautioned that ASEAN faces three key challenges as it looks to the second half of 2024 and beyond. The first is China’s uneven and slow economic recovery, with the latest data showing weak retail sales and softening manufacturing activity.

China's economic growth is expected to slow to around 4.8 per cent in the second half of 2024, down from 5 per cent in the first half. This slowdown presents both risks and opportunities for ASEAN, as weaker Chinese demand may impact the region, but increased investment by Chinese firms seeking growth outside of China could benefit ASEAN.

The second challenge is the potential for policy shifts following leadership changes in key ASEAN economies, including Indonesia, Thailand, and Vietnam. These transitions could lead to changes in fiscal and economic policies, which businesses and investors will need to navigate.

The third challenge relates to the upcoming US presidential election, which could escalate US-China trade tensions. Depending on the outcome, this could result in higher tariffs not only for China but also for ASEAN countries.

"These developments will require careful navigation by businesses and governments alike," Heng said.

On the monetary front, Heng expects the State Bank of Vietnam to maintain a cautious stance, keeping the refinancing rate at 4.5 per cent while focusing on promoting credit growth to support the economy. The VND is also forecast to strengthen, supported by the country’s economic recovery and a projected weakening of the US dollar. Heng expects the VND to appreciate to 24,100 per USD by Q2/2025.

In conclusion, Vietnam’s economic recovery in the first half of 2024 is expected to extend into the second half, driven by strong trade and FDI inflows.

"In the long term, Vietnam’s favourable demographics and solid macroeconomic foundations will help cement its position as a rising economic star within ASEAN," Heng concluded.