Vietnam’s GDP Forecast to Grow at 6.5 Percent in 2017

By: Koushan Das

Vietnam’s GDP is forecast to grow by 6.5 percent in 2017 and at 6.7 percent in 2018, according to the 2017 Asian Development Bank (ADB)’s Outlook report. While the results remain largely upbeat, Vietnam’s first quarter growth, which came in slightly below prevailing estimates in March, has led to a more conservative outlook from the ADB. From the perspective of investors, however, aggregate GDP figures are likely to play a less significant role than the performance of key industries within the Vietnamese economy such as agriculture and manufacturing.

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Lackluster agricultural performance holding back growth

Agriculture, one of the major contributors to Vietnam’s GDP, slowed its pace of growth to 1.4 percent in 2016 due to one of the most severe droughts in a decade. Although the industry has been a significant driver of growth for the country since the removal of trade barriers and collective farming in the 1980s and 1990s, these initiatives have yet to lead to a significant increase in agricultural productivity per worker.

When compared to its ASEAN counterparts, Vietnam has one of the lowest levels of agricultural labor productivity with Indonesia leading the region, followed by Thailand and the Philippines. In light of agricultures large share of GDP and lagging productivity, Industry experts believe that Vietnam needs major policy changes and investment to be able to achieve its goal of becoming an upper-middle-income status economy by 2030.

The ADB’s report highlights that, in addition to the muted impact of reforms, farm incomes have reduced due to inefficient state-owned enterprises that control the supply chain, postharvest processing, marketing, and wholesaling. With this in mind, the report correctly points out the need to make several changes in the industry’s market structure, including a focus on developing rural infrastructure and the introduction of new farming technologies to increase productivity and efficiency.

Government officials and the ADB report also stress the need for more sustainable natural resource management and overall reduction of water pollution,  with existing government incentives aimed at attracting related greenfield investment. These initiatives, along with upbeat consumption estimates for the coming year, have resulted in grow projections of 2.8 percent for 2017 as a whole.

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Increased prospects for investment in services & manufacturing

Other sectors such as manufacturing and services will continue to grow in 2017 and 2018 despite a slowdown in agriculture. The increasing number of foreign-invested factories alone is projected to boost manufacturing in 2017, with increasing interest from foreign parties credited to the strengthening of the US economy and a new free trade agreement with EU, which is to go into effect from 2018.

As new manufacturing units are established and trade agreements come into force, merchandise exports are expected to rise 10 percent annually for the next two years. Imports are also likely to grow further owing to an increase in FDI, which will lead the current account surplus to hold at two percent of GDP in 2017 and 2.5 percent in 2018.

The services sector on the other hand, which witnessed strong growth in 2016, is also expected to continue to do so in 2017 and 2018. Unlike manufacturing, which has relied on trade and external demand, service growth is forecast to be led by consumer spending. Both increases in tourist arrivals and steady improvements to the size and spending habits of Vietnam’s emerging middle class are expected to boost consumption and propel the services sector.

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Vietnam’s macroeconomic drivers

Inflation

During the 2017-2018 period, Inflation is expected to hold at four percent in 2017 and five percent in 2018. External factors adding to the inflation will include, rising global food and oil prices, US interest rates, and a strong dollar. Internal factors will include the implementation of government plans on administered prices for education, health, electricity, water tariffs, and minimum wages.

Public debt

Growing public debt has forced the government to maintain the budget deficit target at 3.5 percent of the GDP in 2017 and four percent in 2018. The report highlights the vulnerability of the financial sector, which is exposed to growing non-performing loans (NPL). Once the Basel II standards are in effect from 2020, banks will face the challenge of maintaining the liquidity and would require foreign investment.

Factors to watch in 2017

Going forward, Vietnam will need to revitalize its agriculture sector and keep focused on export-oriented manufacturing. The country will also need to restructure its banking sector, divest from state-owned enterprises, and increase public investment to achieve its target of above six percent GDP growth for the years ahead. 2017 Q1 growth stood at 5.1 percent, which has made it an uphill task for the government to achieve above six percent growth for 2017.

However, even as the government faces the task of boosting growth of the economy as a whole, investors will likely be best served by developing a more nuanced view of growth, based on a clear understanding of relevant trends within specific industries. As part of this process, it will be important to gauge the level of interplay between each industry and the direction of the Vietnamese economy as a whole.

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