With Viet Cong forces closing in, on 30 April 1975 the last American helicopter rose into the sky above Saigon—now Ho Chi Minh City—ferrying the remaining U.S. personnel to safety. The event marked the end of the devastating Vietnam war, which ravaged the country’s infrastructure and left millions dead. It also heralded the start of a period of economic isolationism, which would see Vietnam largely closed off from the West and adopting a state-run economic model.Today, however, the outside world is back with gusto. Since the Doi Moi reforms initiated in 1986 unshackled the economy, trade as a percentage of GDP has risen almost tenfold; FDI surged to a record USD 15.5 billion in 2018; and growth has averaged 6.5%—among the highest in Asia.
Contemporary Vietnam has been compared favorably to the China of 20 years ago, thanks to its supportive government policy, cheap labor and stable political environment. And the country is even turning potential economic headaches into opportunities; Vietnam is seen as by far the largest beneficiary of the U.S.-China trade dispute.
Our panelists are upbeat on Vietnam’s future. Irvin Seah, an economist at DBS, comments: “Vietnam is expected to join the ranks of some of the relatively more developed economies in the region in the coming decade, given its positive long-term economic prospects.”
Nevertheless, the economy still faces important challenges and could become a victim of its own success, as a protectionist U.S. grows resentful of the bulging bilateral trade surplus.
- Exporting its way to development
In recent decades, Vietnam has embraced free trade with zeal as a way of spurring the economy. The government has opened the door to foreign investors to help build productive capacity, and signed a raft of free trade deals to deepen access to overseas markets. The country joined ASEAN in 1995, the revamped the CPTPP deal between Pacific Rim economies in 2018, and is locked in discussions over the Regional Comprehensive Economic Partnership, which would wed ASEAN economies with regional neighbors such as China, Japan and South Korea. The government has also negotiated several bilateral agreements. The most recent, with the EU, will boost GDP by over 2% by 2023 according to official estimates.
The upshot has been rapid export growth—averaging 18% since 2000—and the emergence of entirely new sectors. Once, Vietnam relied on key agricultural cash crops such as coffee and nuts; now it ships electronics and garments. South Korean conglomerate Samsung for instance produces more than 150 million mobile phones a year from its Vietnamese factories.
Even in 2019, when exports flagged across Asia amid rising trade tensions and a downturn in the global tech sector, Vietnam powered on. This is partly due to trade diversion amid U.S. tariffs on China. Economists at Nomura state that over 2018, Vietnam “gained from US import substitution in electric apparatus for phones, parts for office and automatic data processing machines”. U.S. imports from Vietnam are up over a third this year.
This trend is likely to continue. In a July survey of FocusEconomics panelists, more than half expected Vietnam to be the main beneficiary of the U.S.–China trade conflict going forward. According to Nomura: “Vietnam is by far the largest beneficiary [of the trade war], gaining 7.9% of GDP from trade diversion, where trade diversion is mostly additional US imports”.
Further trade diversion, coupled with the country’s inherent attractiveness as a base for foreign firms, will drive export growth in the coming years. Analysts at Goldman Sachs state: “we expect Vietnam to continue to outperform in the region with double digit growth while exports of other small open economies remain subdued in comparison”.
This should feed through to strong economic growth, which is seen averaging 6.5% out to 2024—the fastest among large ASEAN economies—with little divergence in panelists’ forecasts. By 2024 Vietnam is forecast to be almost the same size as Singapore’s economy in nominal USD terms, up from about two-thirds of the size today. Other economic metrics also look rosy: Our panelists expect the current account to remain in surplus, favoring a build-up of international reserves, while external debt should fall as a percentage of GDP. All the economic pieces appear in place for Vietnam to continue its meteoric progression.
- The sting in the tail
“Almost the single worst abuser of everybody”: That’s how President Donald Trump described Vietnam earlier this year, in reference to the soaring bilateral trade surplus between the two countries, which has sparked ire among the authorities in the U.S. If his government decides to turn words into actions, labelling Vietnam a currency manipulator and imposing tariffs could be the next steps, which would hit the country’s external sector and see any gains from trade diversion rapidly melt away.
Moreover, the mere threat of U.S. tariffs could be enough to hurt FDI and encourage firms to set up shop in neighboring Asian countries. On the financial-sector impact of trade uncertainty, Francesco Pesole, FX strategist at ING, comments: “the risks seem skewed to the downside for Vietnamese assets and the dong, at least in the short term”.
The possibility of punitive U.S. tariffs also feeds a broader concern of whether one of the world’s most open economies can still prosper if the tide of global economic integration continues to turn, and protectionism becomes a permanent feature of the international political landscape.
Beyond trade concerns, the country has numerous other issues: The banking sector is fragile, access to land and credit could be improved, and breakneck development has led to familiar growing pains of resource depletion and air pollution. What’s more, the population will begin to age rapidly in a few decades, leaving only a narrow window to deepen economic reforms and prepare the country for the slowdown to come.
Nevertheless, our panelists see Vietnam successfully navigating future obstacles. As Irvin Seah stresses: “Vietnam has its slew of domestic issues that are yet to be resolved […] Yet, these pain points are common challenges for any emerging economy and Vietnam is no exception. […] policy direction is headed the right way, and underlying fundamentals within the economy are conducive”.