Vietnam’s Economy on an Ascending Trajectory: Attractive Destination for Foreign Investment

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Despite some hiccups due to many contextual factors Vietnam’s economy has maintained a steady growth since 1986 when the new economic policy was introduced. Termed as Doi Moi (change and newness) the economic reforms were instrumental in achieving an average economic growth rate of 6.3 percent for over a period of more than two decades. The Vietnam’s economy has further stabilized as reflected in the positive macro-economic indicators.

The GDP growth rate has improved; there is only limited increase in in the current year Consumption Price Index (CPI) which went up only by 4.61% compared to the same period of 2013 and 2.25% compared to 2013-end, the lowest level in the last 12 years.  Exports for first nine months of the year show a growth of 14.2 percent (US dollar 9.6 billion).   Further, the currency rates remain stable and bank interest continues to go down enabling households and enterprises to get easy access to sources of financing for production and business activities. The growth rate for 2015 has been forecast as 6 percent by the World Bank and it is expected to rise to 6-7 percent in the period of 2016-2017.

In addition, the trade balance is favourable;   FDI inflows continue to increase and the ODA loans remain stable. Besides this, the  increased foreign exchange inflows from tourism and remittances have led to swelling of  foreign exchange reserves  to the current level of $US 35 billion that is the highest level ever.

 The number of households living below the poverty line has reduced by almost 22 percent compared to the same period of previous year with the current figure of   about 303 thousand households below the poverty line.

Vietnam government has continued with its efforts to further introduce economic and administrative reforms with an eye on attracting foreign investment and improving the state and structure of the economy. According to one US assessment Vietnam is the second most popular destination for U.S. business expansion among the member states of the Association of Southeast Asian Nations (ASEAN), stating that Vietnam’s participation into negotiations to become RCEP and TPP membership will have a positive impact on investment activities by U.S enterprises in Vietnam. Moody’s Investors Service has also raised the bond ratings of Vietnam by one level, to B1 from B2, with a stable outlook.

 It is quite evident that the shift from centralized planned economy to market oriented economy created more opportunities for the foreign investors to reap benefits by investing in Vietnam. Even though agriculture provides 20 percent of the GDP yet it provides main source of employment; industrial and services sectors contribute 40 percent each to the GDP. A large portion of the industrial output i.e. 45 percent is provided by foreign owned enterprises, 35 percent by domestic companies and only about 20 percent by State Owned Enterprises.

The continued growth of Vietnam’s economy along with many other supporting factors makes Vietnam an attractive destination for investment. According to one study Vietnam is among few of the ASEAN countries with positive working population growth rates and declining dependency ratios, conditions that are favorable to growth. A large population of working age, comparative advantages in labour costs (much less than China) and growing consumer demand, limited inflation, control of fiscal deficit and gradual disinvestment in SOEs and booming stock markets have added to the strength of Vietnamese economy. With trade balance on the positive side, a stable currency, rationalizing of tax rates and some other stimuli to promote investment and growth has given rise to a positive environment for foreign investment in Vietnam.    

To continue to maintain its growth momentum and enabling it to continue attracting foreign investors there is a need to improve its infrastructure, remove some of the tariff and non-tariff barriers as also improve skill levels of its fast growing labour force through education and skill development. The pace of privatizing the SOES also needs to be speeded up. The fact that according to World Economic Forum’s rankings in ease of doing business where Vietnam stands at 78 out of 189 countries is indicative of the distance to be travelled to improve the regulatory environment in the country.

So far as potential for economic cooperation with India is concerned it is still very large and has not been fully tapped. Prime Minister Nguyen Tan Dung’s recent visit to India with a large business delegation focussed majorly on economic engagement besides the other facets of strategic cooperation.

   India and Vietnam have been cooperating extensively in the economic field. India has offered Vietnam 18 Lines of Credit as on date.   In the Joint statement issued by both the Prime Ministers, it was agreed that economic cooperation between both countries should be pursued as a strategic objective.  It was also noted that there has been strong growth in bilateral trade in recent years particularly after the India- ASEAN trade in Goods Agreement. Recently, FTA between India and ASEAN in services has also been signed which when operationalised would further impart momentum to Indo-Vietnam economic engagement. RCEP is another multilateral agreement that would add to enhancing the economic engagement between the two nations in the future.

 Priority areas for economic cooperation include   included hydrocarbons, power generation, infrastructure, tourism, textiles, footwear, medical and pharmaceuticals, Information & Communications Technology (ICT), electronics, agriculture, agro-products, chemicals, machine tools and other supporting industries.  Target for mutual trade has been set at 15 billion US dollars by 2015 which is closer to almost doubling the trade from the present figure of 7 billion US dollars. The strong political leadership in both the countries can be expected to do their bit to meet these targets but a lot will depend upon the business community also.

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Author: Brig (rtd) Vinod Anand