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12 July 2023

Vietnam Market Review

Vietnam, located in Southeast Asia, is a captivating country with a rich history, diverse culture, and breath-taking natural landscapes. In recent years, the country has emerged as one of the world’s fastest-growing market economies and has attracted significant foreign investment. With favourable population demographics and a strategic geographical position, Vietnam offers an interesting market for both domestic and international business.

Economic performance in recent decades has been steady and impressive, averaging 5.5% GDP growth annually since 1990, showing resilience in the face of global challenges. This has resulted in robust GDP growth in recent years, with 8% year-on-year GDP growth in 2022, among the highest in the world for the period. This growth has been driven by multiple factors including a booming manufacturing sector, rising domestic consumption, and increasing foreign investment. The country also possesses a stable macroeconomic environment, with current inflation levels of 3.2% significantly lower than many other countries.
Now the 15th most populous country globally with a population size of over one hundred million, its demographics are attractive. It has a median age of 32.5 years, which is among the youngest in the continent, a 98% literacy rate, the second highest among investible frontier market countries, and high internet use, all of which are complimentary to future economic growth. The growth in population has seen the country witness rapid urbanisation in recent years, with the current 38% urbanisation rate expected to increase as people move from rural to urban areas in search of improved economic opportunities. The country also boasts the fastest growing middle class population in the region, driving growth in domestic consumption levels. With these factors leading to increased spending, expectations are for continued growth in areas such as retail, automotive, real estate, and hospitality.

Vietnam has a large number of workers aged between 16 and 54, allowing it to benefit from relatively lower manufacturing costs when compared to areas such as Chinese coastal provinces, where manufacturing wages have been rising rapidly over the past decade due to the decrease in the size of the working demographic. Despite this, Vietnam is also experiencing growth in the number of over-65s with improvements in healthcare resulting in a continued rising life expectancy to the current 75 years, the second highest life expectancy in Southeast Asia, which is expected to be a dragon per capita growth between 2020 and 2050.

A key component of the strong performance of the Vietnamese economy in recent years is the growing manufacturing sector. Vietnam has become a key manufacturing hub, particularly for electronics, clothing, and footwear. The Vietnamese Government’s initiatives to attract foreign investment, coupled with favourable labour costs, make the manufacturing sector highly attractive for businesses seeking cost-effective production. Vietnam has also benefited from its strategic location, which allows it to serve as a gateway to the rest of Southeast Asia and major global markets. The country is also a key beneficiary of the diversification in global manufacturing supply chains that are moving away from China towards competitive Southeast Asian countries. In 2022, Vietnam’s goods exports rose by 10.6%, however, the economic slowdown in the US and EU, which together account for 42% of Vietnam’s total goods exports, has resulted in predictions of significant weakening in exports in the upcoming period.

In addition to its strong economic performance, Vietnam has also made significant progress in improving its political and regulatory environment. The country has worked to reduce corruption and improve the rule of law, alongside implementing reforms aimed at improving the business environment through simplification of administrative procedures that reduce the friction on foreign companies investing and conducting business in Vietnam. These efforts have helped to attract foreign investment, particularly from countries like Japan, South Korea, and China. The Vietnamese Government has also offered tax incentives, developed industrial zones, and promoted public-private partnerships in order to enhance its attractiveness to its investors. Foreign direct investment in the country has actually created 27% of the country’s GDP in the previous 30 years, accounted for 70%of the export turnover and contributed 17% to the Government state budget.

Vietnam is also set to benefit from its growing network of free trade agreements. Since 2015, it has been a member of The Association of Southeast Asian Nations (ASEAN), which aims to move toward greater economic and community integration on a number of fronts. Vietnam already has benefited considerably from the ASEAN Free Trade Agreement (AFTA), which has substantially removed tariffs on trade between ASEAN member countries since 2010.

Another important trade deal that took place in 2020 was the EU-Vietnam Free Trade Agreement (EVFTA). The EVFTA is an important boost to Vietnam’s export sector, with 99% of bilateral tariffs scheduled to be eliminated over the next seven years, as well as significant reduction of non-tariff trade barriers. These trade agreements will look to strengthen Vietnam’s competitiveness as an exporting hub, while attracting further foreign direct investment.

However, as with many emerging markets, Vietnam does not come without its challenges and risks. This includes an infrastructure gap within the country and, despite significant investments in recent years, Vietnam still lags behind other countries in the region, particularly in areas such as transport and energy. The Government estimated that by 2030, US$133bn of new power infrastructure spending is required, including US$96bn for power plants and US$37bn to expand the power grid, in order to facilitate further growth within the economy.

Another challenge for the country is, despite its large and young labour force, employers often express concerns about the growing skills gap, indicating that there is a mismatch between the skills possessed by the workforce and the skills required by businesses. Improving the skills of Vietnam’s labour force is essential for the country’s economic competitiveness, industry upgrading, technological advancements and attractiveness to foreign businesses.

By investing in skills development, Vietnam can enhance productivity, foster innovation, and ensure sustainable economic growth for decades to come. Vietnam is also vulnerable to environmental risks, such as climate change regulation and natural disaster incidents that can negatively impact economic development over the long term. The country’s Government recently started to place increased emphasis on sustainability and green initiatives which will drive investment in renewable energy and environmentally friendly practices and will aim to mitigate this risk. The country has immense potential for renewable energy, particularly solar and wind power and the Government aims to increase the share of renewable energy in the country’s total energy consumption in coming years.

In conclusion, Vietnam’s economic performance in recent years has been remarkable, characterised by strong growth, foreign direct investment inflows, export expansion, and development in key sectors. Over the medium-term economic outlook, a large number of positive growth drivers are creating favourable tailwinds and will continue to underpin the rapid growth of Vietnam’s economy. While challenges remain, the Government’s policies, openness to change and ongoing efforts to address them suggest a positive outlook for Vietnam’s economic future.

This article was taken from the May 2023 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested
Vietnam Market Review

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