Infrastructure, manpower hurdles to slow down Vietnam’s economy: Fitch Solutions

15-Jan-2020 Intellasia | The SaigonTimes | 6:02 AM Print This Post

Economists at Fitch Solutions maintain their view that Vietnam’s 2020 real gross domestic product (GDP) growth will moderate to 6.8 percent due to infrastructure and human capital bottlenecks.

The general Statistical Office of Vietnam reported that real GDP growth came in at 7 percent year-on-year in the fourth quarter of 2019, easing from 7.5 percent year-on-year in the third quarter and 7.3 percent previously. This took the 2019 real GDP growth to 7%.

“Transport and logistical infrastructure and human capital bottlenecks will continue to weigh on the growth of the manufacturing sector, which accounts for around 16.5 percent of the Vietnamese economy,” noted Fitch Solutions in a statement.

The US-based research firm explained that the US-China trade war had accelerated the structural shift of low-end electronics and textile manufacturing out of China and into Southeast Asian nations, with Vietnam being a major beneficiary.

However, the rush to step up exports has put considerable stress on the existing road and port infrastructure, resulting in severe traffic congestion in and around major cities, such as Hanoi and HCM City, as well as week-long delays at the ports.

The lack of adequate highway connections to the ports has further exacerbated delays. A shortage of qualified labour, as suggested by high year-on-year wage growth of between 12 percent and 18 percent across occupational skill levels, will weigh on manufacturing growth. The lack of skilled labour will also weigh on production efficiency by inhibiting the integration of better technology with work processes.

“Vietnam’s manufacturing production growth slowed sharply to 6.5 percent year-on-year in November 2019, its lowest level since 2017, from 10.8 percent year-on-year in October 2019,” pointed out the experts.

Separately, growth of the agriculture sector (14 percent of GDP) will also be under pressure in 2020, due to hydroelectric dam projects upstream of the Mekong River in Laos, as well as diseases, such as African swine fever.

Fitch Solutions cited a study by the Mekong River Commission in early 2018 as indicating that the dam projects could reduce Mekong fish stocks by up to 40 percent and cause a 97 percent reduction in sediment flowing downstream, adversely affecting soil fertility and agriculture.

African swine fever has affected all 63 provinces and cities in Vietnam and reduced the country’s hog herd by 25.5 percent year-on-year in December 2019.

“The spread of the disease across the rest of Asia will further inhibit Vietnamese farmers’ ability to rebuild their hog herds, and thus informs our view that agriculture growth will remain subdued,” remarked the economists.

Therefore, they expected stronger growth in construction and services, which make up 5.9 percent and 41.6 percent of the GDP, respectively, to partially offset the slowdown.

The Vietnamese authorities aim to build another 900 kilometers of highway roads by 2021, almost doubling the 1,000 kilometers presently in use, and Fitch Solutions expected the pursuit of this goal to support construction activity.

In particular, the construction of the North-South Highway, which began in September 2019 and is expected to be completed by 2021, will be a key project supporting the construction sector.

They also saw upside risks to construction growth if construction on the proposed $55.8 billion North-South Express Rail begins in 2020 as planned.

Tourist arrival growth going strong

Fitch Solutions expected service growth to be underpinned by four key subsectors. A strong increase in real wages, in part driven by the skills shortage, would support the continued rise of Vietnam’s middle class.

This wage increase, together with the ongoing trend of robust tourist arrival growth, bodes well for further growth in retail as well as hospitality services, according to the firm.

They explained that the country’s retail sales growth has been relatively stable above 10 percent over the past three years, growing by an average of 11.7 percent year-on-year over the period.

The influx of companies to Vietnam to circumvent the United States’ tariffs on China will also support the growth of transport and warehousing services, especially with the shortage of these services being likely to push up prices and drive profitability in this subsector.

The firm noted that despite the probable slight softening of economic growth in 2020, still-robust economic activity will continue to support the growth of financial services.

Risks to the growth forecast are on the upside. Completion or possibly even partial completion of infrastructure construction projects could help ease existing bottlenecks that are restricting growth in the manufacturing sector.

“Combined with a chance of Vietnam ratifying the EU-Vietnam Free Trade Agreement early in 2020, the deceleration in manufacturing sector growth could be less than we expect,” said the economists, adding that the many tailwinds could also see service sector growth come in stronger than expected, pushing headline growth higher.


Category: Economy, Vietnam

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