Vietnam set to outperform Southeast Asia in 2019 GDP growth

Looking ahead, Vietnam will benefit from positive trade diversion effects, albeit at a lower momentum, as well as healthy domestic demand and solid foreign direct investment (FDI) inflows that will support investment.

Overall economic growth across the region in the first half of 2019 slowed to 4 per cent on the year compared to the 4.5 per cent in the second half of 2018. This is the result of spillovers from the US-China trade war, slower Chinese domestic demand, and a downturn in the global electronics cycle.

Indeed, only Vietnam and Malaysia have outperformed the region, reflecting a more modest deceleration in export growth and resilient domestic demand. Meanwhile, slower export momentum weighed heavily on the growth of trade-dependent economies such as Singapore, Thailand, and the Philippines.

Sian Fenner, ICAEW economic advisor and Oxford Economics Lead Asia economist, said, “Amid ongoing global headwinds and uncertainty around the outcome of US-China trade talks, we expect to see a further deterioration in economic prospects across the region, particularly amongst more trade-dependent economies. Overall, regional Southeast Asian GDP growth is expected to moderate to 4.5 per cent this year, and stabilise at the same rate in 2020.”

Exports, domestic demand, and solid FDI inflows underpin Vietnam’s growth

As the escalation in US-China trade tensions and slower Chinese domestic demand weigh on exports and growth across the region, Vietnam appears to be one of the few beneficiaries.

Indeed, a 33 per cent on-year increase in exports to the US in the first half has helped to offset slower trade with China and other countries in the region, allowing Vietnam to outperform other economies in the region. Supported by solid exports and industrial production in export-oriented manufacturing and processing industries, the economy rose to 6.7 per cent in the second quarter, which is slightly lower than the 6.8 per cent growth recorded in the first quarter.

Meanwhile, domestic demand is expected to remain healthy in 2019-2020. Household spending is expected to remain solid amid stable inflation and rising incomes, while sustained tourism should support the service sector. In addition, medium-term prospects for FDI flows remain bright, with solid FDI inflows expected to continue supporting investment. As a result, the State Bank of Vietnam (SBV) is expected to keep its refinancing rate unchanged at 6.25 per cent over the next year.

Modest deceleration expected amid increased trade protectionism

Although Vietnam’s economy is expected to continue to benefit from positive trade diversion effects, trade momentum will continue to trend lower given weaker Chinese import demand and increased trade protectionism generally.

Potential tariffs from the US also present a key risk to Vietnam’s growth. On top of the higher duties on several steel and aluminium products already in place, three product groups – computers and parts, textiles, and fisheries – are at risk of higher tariffs, covering around $18.4 billion or nearly 39 per cent of Vietnam’s exports to the US in 2018. It is estimated that if the Trump administration were to raise tariffs by 10 per cent on $18.4 billion of Vietnamese exports to the US, Vietnam’s GDP growth would slow to around 5.9 per cent per annum in 2020-2021.

“We expect the challenging external conditions to continue weighing heavily on the overall growth across Southeast Asian economies, as well as on regional trade flows. Looking ahead, Vietnam’s growth will moderate to 6.3 per cent in 2020 and then about 6 per cent per annum in 2020-2021. In addition, we are also cautious of potential tariffs placed on the country by the US and the impact of increased trade protectionism in general,” said Mark Billington, ICAEW regional director, Greater China and Southeast Asia.

Other findings in the report include Myanmar’s GDP growth reaching 6.4 per cent in 2018-19, buoyed by higher infrastructure investment and increased manufacturing and wholesale and retail services activity.

Myanmar’s economy is forecast to expand by 6.4 per cent in 2018-2019, before picking up to 6.8 per cent in 2019-20, as the market opens up to foreign investment, with infrastructure, manufacturing, and wholesale and retail services expected to be the greatest beneficiaries. Indeed, after a 14 per cent drop in FDI to $5.7 billion in 2017-2018, FDI inflows are improving.

According to the Myanmar Investment Commission, FDI inflows rose to over $3.5 billion over the 10 months to August 2019, with a sharp rise in investment channelled into the transportation and communication sector and the manufacturing sector. This should lead to a rise in manufacturing activity and, as production comes online, support exports over 2019-2020 despite the backdrop of weaker Chinese import demand.

However, escalating US-China trade tensions and the ongoing humanitarian crisis in the Rakhine state and slow progress in the repatriation of refugees is a key risk to the economy. Looking further ahead, given its relatively low wage workforce, Myanmar is set to benefit from strengthening FDI inflows as global supply chains adjust to higher costs in China. Nonetheless, structural reforms are needed to improve companies’ ability to do business in the country.