Vietnam at a glance: 2014: the year of exporters

04-Jan-2014 Intellasia | Press Release | 6:00 AM Print This Post

In the coming years, Vietnam may emerge as one of the countries benefiting most from improved Western demand. The reason is simple: its economy is export-dependent, with shipment of goods making up 81 percent of GDP in 2012. Despite faltering global demand in 2013 and declining commodity prices, exports managed a respectable expansion of 15.4 percent. Most of this was due to the rebound of garment and textile shipments as well as new foreign investment in electronics. With disbursed FDI rising 9.9 percent and registered investment increasing sharply, we expect exports to accelerate in 2014.

Once a country with persistent trade deficits, Vietnam had a USD900m trade surplus in 2013, following a marginal surplus in 2012. While this helped improve the country’s macro stability, it also exposes the weakness of the Vietnam’s domestic demand. Dampened appetite for consumption and investment dragged down import growth. While we expect exports to accelerate in 2014, domestic demand will likely stay lacklustre due to the overhang of bad debts over the economy. The State Bank of Vietnam established the asset management company, but the bulk of financial sector reforms remain largely unaddressed. The prime minister may raise the cap for foreign stakes in listed firms from 49 percent to 60 percent to attract capital inflows. While a positive step, further reforms are necessary to address non-performing loans and reduce the stress in the financial system. Without reforms to address its bottlenecks,

Vietnam will continue to perform below potential, with domestic firms affected by a frozen financial system in an increasingly competitive market. Banking sector reforms, infrastructure investment, and supply chain restructuring and human resource development are some of the reforms needed to kick the economy into high gear.

As Vietnam begins the year of the horse, the future is indeed looking brighter. Exports, especially foreign-invested manufacturing firms, will provide a boost to Vietnam’s growth.

The HSBC December PMI shows an acceleration of output for the manufacturing sector. It rose to 51.8, the highest level since April 2011. We expect output to continue to trend upwards in the coming months as inventories have stayed low while orders are picking up. Inflation trended downwards to an average 6.6 percent y-o-y in 2013 from 9.3 percent in 2012. We expect inflation to accelerate slightly in 2014 due to higher energy and food prices.

A stronger year

Manufacturing remains a key bright spot in the economy. The December manufacturing PMI index jumped to 51.8 from 50.3 in November. The PMI shows that the manufacturing sector enjoyed a solid expansion in Q4 2013, mirroring 6.0 percent y-o-y GDP growth in Q4 2013. What is positive about the PMI reading is the strength of the sub-indices, especially new orders and employment. The new orders sub-index rose to 52.5 from a slump in November of 48.8. This is impressive considering the drag from new export orders, which contracted from the previous month but at a slower pace.

The increase of new orders, coupled with reduced inventories, means that output will likely rise in the coming months to match the demand for goods. The sharp increase of quantity of purchases reflects anticipation of rising demand. With US and EU GDP expected to expand in 2014, which will increase demand for Vietnamese goods such as apparel and electronics, we expect the manufacturing sector to continue its upward trend. The most positive news from the PMI is the sharp rise of the employment sub-index. This reflects the country’s competitiveness in labour-intensive manufacturing, which attracted high inflows of foreign investment in 2013.

Chart 3 shows that despite dampened domestic demand, which resulted from an overhang of bad debts, the economy performed relatively well. Most of this was driven by the stability of the service sector and the celebration of manufacturing, helped by export growth. Demand for services in Vietnam tends to be sticky, as they generally are essential services. Services made up 43.9 percent of GDP in 2013 and expanded by 7.4 percent y-o-y in Q4 2013 and 6.6 percent in 2013. Its robustness helps offset the sluggish pace of the agriculture sector, which expanded by a mere 2.4 percent y-o-y in Q4 2013, resulting in 2.7 percent expansion for 2013. This was due to the decline in prices of major export items such as rice and coffee. The manufacturing industry, by contrast, expanded 8.9 percent y-o-y in Q4 2013, up from 8.6 percent in Q3, resulting in 7.4 percent expansion for the whole year. We expect manufacturing to continue to perform well in 2014, helped by improved external demand and stable domestic conditions.

Inflation accelerated in December to 6.0 percent y-o-y from 5.8 percent in November. This is largely due to higher transportation and food prices. The Ministry of Finance recently allowed retailers to raise gasoline and diesel prices. Looking into 2014, we expect further price hikes for energy commodities such as electricity and fuel.

While inflation will accelerate in 2014 to 7.9 percent (average), the SBV has scope to keep rates on hold in Q1 2014.

The main bright spots in 2014 will continue to be export-oriented firms. With global conditions improving and trade negotiations in the works, export-oriented firms will enjoy another year of robust growth. Chart 4 shows that the trade balance has been positive in the past two years thanks to rapid growth of exports and slowing imports. With high exposure to the US (18 percent of total exports) and the EU (14 percent of total exports), Vietnam is poised to benefit from improving Western demand. We expect exports to rise 20 percent in 2014 from 15.4 percent in 2013. This will help support GDP expand 5.6 percent in 2014, up from 5.4 percent in 2013.


Category: Economy

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