It was only up until recently that Vietnam has attracted global investor interest as a possible beneficiary of the ongoing trade war between the U.S. and China, but investors have also taken notice of the country’s attractive long-term fundamental characteristics.
Since the government seeks to boost foreign investment by relaxing foreign ownership limits on local companies, Vietnam’s status as a frontier market may change in the future. Moreover, in order to maximise the benefits of an export-driven local economy, Vietnam is leveraging its international trade relationships against the setting of a changing global economic landscape.
Firstly, for the last 10 years, Vietnam’s annual GDP growth rate has exceeded 6 per cent, compared to an average of 5 per cent for emerging market countries. In 2018, Vietnam’s GDP growth is estimated to have exceeded China’s by around 50 basis points.
Vietnam’s economic growth may be linked to the country’s abundant natural resources and a strong manufacturing base, which has led to a healthy export-based economy that is also supported by robust domestic demand.
Secondly, in 2008, inflationary pressures led to a significant decrease in foreign direct investment. Since then, the government has been relatively successful in managing inflation despite a fast-growing economy and heavy foreign investment. In fact, in 2018, Vietnam’s annual inflation rate was estimated to be 3.5 per cent, compared to an average 4.8 per cent for emerging market countries.
Thirdly, demographics are also helping to fuel long-term, sustained growth.
Vietnam’s population is growing, has a median age of 31 years and is more educated than its neighbour countries. This young, educated population is contributing to a rising middle class, which ultimately could drive higher rates of domestic consumption.
While Vietnam is not currently in a complete transition to a consumption-driven economy like China, the same types of structural changes are taking place and are drivers in the Vietnamese economy.
Frontier Market to Emerging Market?
By definition, Vietnam is a frontier market, characterized by a young population, high economic growth rates and a relatively undeveloped capital markets structure.
Global index providers currently classify Vietnam as a frontier market. That said, the Vietnamese government seems keen on attracting foreign capital to further sustain long-term growth, and the reduction or removal of foreign ownership limits for locally listed companies may result in global index providers adding Vietnam to emerging markets indices in coming years.
Vietnam is taking gradual steps to liberalise its markets, while seeking to avoid the negative impacts of capital flight. The flow of funds from one country to another for short-term profit on interest rate differences is a real issue for frontier and emerging market economies. The negative repercussions, including volatility, may have long lasting effects on the local economy.
As a traditional frontier market, Vietnam’s economy revolves around exporting, primarily of natural resources and manufacturing goods. Escalating trade tensions between the U.S. and China has led to speculation that Vietnam could benefit, as companies may look to shift manufacturing operations from China to Vietnam to avoid tariffs and take advantage of the country’s lower costs. There is already some evidence that this is occurring.
Primary Export Relationships
Vietnam has also been actively strengthening its trade relations with other global counterparties. While the U.S. backed out of the Trans-Pacific Partnership, Vietnam signed onto the revised agreement in 2018.
More recently, the European Union signed a landmark free-trade deal with Vietnam, eliminating 99 per cent of tariffs over the next 10 years. Even though the deal still needs to be approved by the European Parliament, it is another instance of Vietnam aggressively displaying its economic strengths to the global marketplace.
Due to Vietnam being an export-led economy, these types of trade deals are crucial to maintaining a competitive edge for local Vietnamese firms that export their goods.
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