Latest News

Home > News > Latest News

19th December 2019

Vietnam: An Economy On The Rise

Vietnam’s economy has witnessed a remarkable transformation over the last four decades. According to World Bank data, per capita GDP has mushroomed from a paltry $231 in 1985 to $2,564 in 2018. Adjusted for purchasing power parity, the figure is almost three times higher, standing at $7,435.

How has Vietnam grown at such a rapid pace? What factors have contributed to the Southeast Asian country’s economic miracle?

Vietnam derived great benefits from “Doi Moi”, a series of reforms that the government introduced in 1986. The economy was opened up to foreign investment and business-friendly rules were implemented to encourage growth in local businesses.

The impact of “Doi Moi” was felt almost immediately. The country’s GDP, which was about $14 billion in 1985, climbed steadily over the next 35 years. It currently stands at $245 billion.

International trade has really helped the economy to grow. The boom in exports lies at the heart of Vietnam’s economic success.

The country has signed free trade agreements (FTAs) with a large number of nations and trading blocs. The Asian Development Bank lists Vietnam as having 26 FTAs either in effect or under discussion. By agreeing to terms of trade with countries across the world, Vietnam’s government derived significant benefits, not least of which was becoming an integral part of the global supply chain.

The FTAs have also helped to lower tariffs on merchandise imported into the country, as well as the goods that are exported. Over the last two decades, the average tariff rate has dropped from approximately 17% to its current level of about 2%.

Today, Vietnam’s export markets include the United States, China, Japan, Korea, among over a hundred other countries. Total exports in 2016 stood at $176 billion.

Vietnam’s success in the textile industry

The textile and apparel industry has performed exceedingly well in Vietnam. Today, there are roughly 6,000 manufacturing companies in this sector, employing over 2.7 million workers. This employment-intensive industry plays a crucial role in providing work to the young and rapidly growing population.

In 2017, Vietnam became the world’s third-largest exporter of textiles and clothing, overtaking Germany, Italy, and Bangladesh. According to a report in the Financial Times, 2018 saw the country take the second position. Only China’s textile and apparel exports exceed those of Vietnam. To put this remarkable growth in perspective, 22 years ago, Vietnam ranked as the eighth largest exporter of textiles and garments. In a little over two decades, it has overtaken a host of other countries including India, the Philippines, and Thailand.

So to which countries does Vietnam export clothing and textiles? The U.S. is the largest importer, accounting for 47% of the value of Vietnam’s exports. The EU, Japan, and South Korea are other key markets — collectively buying another 36%.

Textile and apparel exports stood at $36 billion in 2018. In 2019, this figure is expected to rise to $40 billion.

Vingroup - A Vietnamese success story

Nothing exemplifies the coming of age of Vietnam’s industrial sector better than the story of the country’s homegrown industrial conglomerate, Vingroup.

Modelled on South Korea’s sprawling chaebols, Vingroup has interests in real estate, hotels, agriculture, education, and manufacturing. Founder Pham Nhat Voung has a net worth of $7.7 billion, coming in at number 239 on Forbes Billionaires list.

The group’s latest venture is VinFast, a Vietnamese automotive manufacturing brand that plans to launch 12 models of cars and electric motorbikes in the next two years. Annual production is expected to reach 500,000 units by 2025. The venture is headed by Jim DeLuca, an auto industry expert who spent over 16 years with General Motors.

Vingroup has come a long way since it got its start in 1993, selling noodles in Ukraine.

What could go wrong?

Everything seems to be working in favour of Vietnam’s economy. The country’s GDP growth rate is among the highest in the world. In 2018, the economy expanded by 7%. The World Bank expects growth of 6.6% in 2019. In the medium term, this could fall to 6.5%, which is still relatively high.

The country’s population is also increasing. In 1986, it stood at about 60 million. This has shot up to 97 million, and it is expected that by 2050, it will be 120 million. A vast majority (70%) is under the age of 35. Despite the increase in the number of people, poverty has been dramatically reduced. Over the last 20 years, the poverty headcount in the country has fallen from 60% to 21%.

However, the economy does face some potential headwinds. The manufacturing sector has benefitted from the abundance of low-cost labour. But this advantage is disappearing as the minimum wage in Vietnam continues to rise steadily.

A government rule stipulates that manufacturers are required to increase wages by more than 10% every year. However, wages are still low by standards in the developed world. A million Vietnamese dong is equal to $43.

Rising wages aren’t the only problem that Vietnam faces. The country has found itself on the wrong side in President Trump’s effort to rectify America’s balance of trade problem. In 2018, Vietnam exported goods and services worth $47.8 billion to the U.S., while its imports from the country were only $10.5 billion.

In a recent interview, President Trump said, “Vietnam is almost the single worst — that’s much smaller than China, much — but it’s almost the single worst abuser of everybody.”

If Vietnam is to continue having unfettered access to the world’s largest market, it will have to manage its economic and political relationship with the U.S. The country’s trade surplus with America in the first five months of this year was $17 billion. In the same period last year, the surplus was far lower, $12.9 billion.

The bottom line

Vietnam’s economy has registered impressive levels of growth ever since it implemented its “Doi Moi” reforms. Will the country’s economic expansion continue?

Eric Sidgwick, the Asian Development Bank’s Country Director for Vietnam, seems to think so. In a recent ADB report, he says, “The economic performance in Vietnam reached a sweet spot in 2018… Economic growth will hold up well in the near term.”

International Investor Magazine is an online publication that provides insights, news and visual informative pieces with topics ranging from world markets, investing opportunities, industry analysis and so much more. All content is dedicated to the global investment community that wants to take a step ahead.

Vietnam: An Economy On The Rise