ICAEW Forecasts Vietnam’s GDP Growth at 6.7% in 2019

Vietnam’s economic growth is forecast to ease to 6.7% in 2019, although this would still place it as the fastest growing economy in South-East Asia (SEA), according to ICAEW’s latest Economic Insight: South-East Asia report, released on June 5 in Hanoi.

Across the region, growth is expected to slow to 4.8% this year, from 5.3% in 2018, as export growth eases amid increased trade protectionism and slower Chinese import demand.

Overall GDP growth across the region slowed to 4.6% year-on-year in Q1 2019, down from 5.3% recorded in H1 2018. This is a result of the slump in export growth across SEA economies due to weaker Chinese import demand, a slowdown in the global ICT cycle, and an increase in trade protectionism over the past year.

Similarly, the deterioration in export momentum across the region has continued into the second quarter, with only Vietnam bucking the trend, although the country’s growth has also decelerated from last year. While the rest of the SEA economies have recorded sharp falls in exports, Vietnam’s merchandise exports in US$ terms were 10.4% higher than a year ago in April. However, this still marks a deceleration from the 13.3% growth recorded in 2018.

Ms. Sian Fenner, ICAEW Economic Advisor & Oxford Economics Lead Asia Economist

“We expect exports and overall economic growth to continue to come under further pressure, as the reescalation of trade tensions between US and China is unlikely to ease any time soon,” said Sian Fenner, ICAEW Economic Advisor & Oxford Economics Lead Asia Economist. “With export volumes already on the downside since the start of the year, any further increase in trade tensions between the world’s two largest economies will likely see a much more prominent slowdown in regional growth.”

Foreign direct investment (FDI) and manufacturing to remain significant drivers of Vietnam’s growth

Economic momentum moderated to 6.8% year-on-year in the first quarter of 2019, below the 7.3% increase in Q4 GDP. Growth in the quarter was underpinned by ongoing strength in the manufacturing sector, solid service sector activity and improving agriculture output.

Despite an increase in exports, momentum is expected to trend lower given weaker Chinese import demand and increased trade protectionism. While trade diversion from the reescalation of US-China trade tensions may temporarily benefit Vietnam, the country is still highly exposed to China. Total exports to China in value added terms accounted for 10.3% of GDP in 2017, of which around 85% was used to meet Chinese domestic demand.

However, FDI and manufacturing production are expected to remain significant drivers of growth. According to the Foreign Investment Agency, disbursed FDI picked up 9.8% year-on-year to a three-year high of US$2.6 billion in the first two months of 2019, with the manufacturing and processing sector garnering the most interest from foreign investors. FDI inflows are likely to remain strong over the medium term due to its close proximity to China and positive labour dynamics, including low relative wages. Vietnam’s infrastructure metrics are improving and its participation in trade agreements, notably as part of ASEAN, and policies to attract foreign direct investment are also favourable.

Domestic demand will continue to remain healthy during 2019-20 with household spending remaining solid amid stable inflation and rising incomes, while sustained tourism should support the service sector. Overall, Vietnam’s GDP is forecast to grow by 6.7% this year, with a modest deceleration over 2020-21 to 6.1% per annum.

State Bank of Vietnam (SBV) to maintain its current monetary policy stance

SBV is expected to keep its refinancing rate unchanged at 6.25% in 2019. At the current policy rate, the monetary policy stance remains conducive to the continuation of economic growth. The inflation outlook remains moderate and strong GDP growth eases pressure on the central bank to add more stimuli to achieve its annual growth target of 6.7%. If economic conditions warrant further stimulus, Vietnamese authorities will likely raise the policy rate to 6.75% by late 2020, to reduce financial stability risks.

Mark Billington, ICAEW Regional Director, Greater China and South-East Asia, said, “Renewed trade tensions between the US and China come at a time when export growth across South-East Asia is already facing a difficult external environment. While Vietnam’s economy will still experience favourable growth amid these conditions, measures should be taken to ensure that FDI inflows remain supportive. Moving forward, structural reforms are needed to improve the ability for firms to do business in the country, as well as ensure adequate education and training are available to enhance the scalability of production.”

The full Economic Insight: South-East Asia report is available at: http://www.icaew.com/en/technical/economy/economic-insight/economic-insight-south-east-asia

Nam Pham