Economy, Finance and Trade Vietnam: Asia Pacific’s Next Manufacturing Hub

Euromonitor International’s Vietnam Economy, Finance and Trade Country Briefing, focuses on one of Southeast Asia’s most dynamic and fastest growing emerging markets. Low labour costs when compared to regional peers such as China and Thailand have supported the growth of Vietnam as a manufacturing base and a major electronics exporter in the region. Furthermore, Vietnam has a young population with a bourgeoning middle class and a populace of 93.4 million, which undoubtedly indicates an essential market for consumer goods. Vietnam has continued to maintain its position as one of the star performers in terms of economic growth boosted by strong growth in private consumption, continued rise in foreign investment and growth in exports. However, shortage of skilled labour, low productivity, corruption and rising wages are major challenges faced by businesses and the manufacturing sector, which the government needs to tackle to maintain Vietnam’s overall competitiveness and cement its position as Asia’s next manufacturing hub.

Vietnam offers a low cost manufacturing alternative to its regional peers where labour costs are rising:

• The agricultural, manufacturing and services sectors are all major contributors to the economy. With companies like Samsung and Intel investing significantly in the country, Vietnam has emerged as a key location for high-technology manufacturing in the region;
• To prevent the hoarding of foreign currency, the State Bank of Vietnam (SBV) cut rates for dollar deposits in 2015 from 0.75% to 0.0%. In the short run, this will help stabilise the foreign exchange and monetary markets. However, in the long run, if not increased, it might cause capital flight and lack of foreign currency;
• As the US dollar strengthened and the Chinese yuan devalued, the SBV in 2015 devalued the Vietnamese dong four times to increase the country’s export competitiveness. The dollar/dong trading band was also widened twice in August 2015 from 1.0% to 3.0%. Furthermore, in January 2016, in an effort to adopt a more market-based exchange rate regime by setting a daily reference rate versus the dollar, the SBV further devalued the dong. The dong exchange rate has continued to decline against the US dollar;
• The Vietnamese economy is expected to benefit the most from the Trans Pacific Partnership Agreement (TPPA) that was signed in February 2016. Vietnam’s garments and shoes industries will highly benefit from reduced import duties in the member countries, especially the USA and Japan. The ASEAN Economic Community (AEC) that became official on 31st December 2015 will generate better opportunities for Vietnam to export goods and services to the ASEAN market while the free flow of labour among the ASEAN economies should help ease skilled labour shortage in the country;
• Vietnam’s relatively low labour costs, a strategic location; and a large manufacturing sector have helped the country emerge as a major electronics exporter in the region. According to trade sources, as of 2015, 50.0% of Samsung’s mobile phones were manufactured in Vietnam. The country also exports large amounts of textiles, oil and agricultural products. According to trade sources, in 2015, Vietnam was one of the world’s largest exporters of rice and the second-largest exporter of coffee.

Government continues to enhance business environment

Despite rapidly rising wages, Vietnam’s minimum wage per month remained the third lowest among ASEAN economies in 2015, below that of Thailand and Indonesia. Hence, over the years, Vietnam has experienced an increase in foreign direct investment (FDI) inflows especially in its labour intensive industries. Businesses with manufacturing hubs in China and Thailand are relocating to Vietnam. In 2015, LG Electronics moved its television production base from Thailand to Vietnam. Furthermore, the government has been taking numerous initiatives in enhancing Vietnam’s overall competitiveness; these include a gradual cut in corporate tax rates and reforming the state-owned enterprises (SOEs). Although the government failed to reach its ambitious target of equitizing 500 SOEs by 2015, it succeeded in privatising 94 SOEs between January and September 2015. The corporation tax rate was slashed from 28.0% in 2008 to 20.0% in 2016, which now stands lower than China and on par with Thailand and Cambodia. If the government continues to thrive in enhancing Vietnam’s business environment and help boost economic activity, the country has great potential in developing into Asia’s new manufacturing hub.