Vietnam is riding a wave of economic success after taking the crown of fastest-growing economy in Asia in 2022, with a very healthy 8% growth. The country is also enjoying low rates of inflation, averaging 3.3% for the first half of 2023.
This is proving to be positive news to Khanh Vu, deputy managing director at VinaCapital Fund Management. “We saw rates rise last year, but they have subsequently come down in recent months, with four policy rate cuts within the past three months,” he notes. “This has transmitted to bank deposit rates, which are down to around 7%. Lending rates are also down to around 8% to 9%, which will help support economic growth.”
He adds that with improvements in the business cycle and as profits and earnings growth increases, he expects the market to see an average of 10% of earnings growth in 2023, and 25% in 2024. Prudence in lending activity — which has focused on sectors such as manufacturing, transport and logistics, and construction — has helped directly support economic growth.
Mr Vu believes that this growth will, in turn, fuel the country’s stock market, as it is primarily driven by domestic retail investors. As confidence and liquidity increases, this will filter through to retail investors, who make up around 90% of the country’s market participation.
The real estate sector is one area facing hardship, as liquidity has dried up. “There is a push to increase construction activity,” Mr Vu says. “There is still strong demand for housing, given the shortage of affordable units in Hanoi and Ho Chi Minh City. It helps that mortgage rates have reduced by about 2% in recent months to around 9–11%.
“While urbanisation is growing at a rate of just under 2% a year, the country’s population is still split between around 60% rural and 40% urban, which supports the idea that there is still tremendous demand for housing.”
Export demand
The employment rate is strong, with the unemployment rate standing at 2.27% for the first half of 2023. However, Mr Vu notes it has been impacted by layoffs in the factory sector, driven by weak demand. This may account for the uptick in unemployment, after the World Bank stated it stood at just 1.5% during 2022.
There are signs the manufacturing space could start to recover, as demand increases for exports. “Supply chains were overstocked coming out of the [Covid-19] pandemic, and that inventory oversupply was being worked through. Hence, we saw weak export activity for Vietnam in recent months,” Mr Vu says.
“But now we are seeing the destocking for large US retailers like Walmart and Costco bottoming out. In the late summer, we are anticipating improvements in export orders ahead of rising consumer demand for the Christmas period, and the Lunar New Year early next year. Therefore, we should expect to see stronger export numbers in the second half of the year and into 2024.”
we should expect to see stronger export numbers in the second half of the year and into 2024
Vietnam’s economy has benefited in recent years from companies looking to expand their production bases in Asia beyond China. Mr Vu says this trend extends to both domestic and international companies in China.
With this in mind, Vietnam has been looking to extend to new markets. “Vietnam currently has 16 free trade agreements in place with several countries or trading blocs, with an additional three under negotiation,” Mr Vu says. “We are still seeing positive growth in foreign direct investment (FDI) disbursements, year to date, and we expect there will be an increase in investment in the second half of 2023.”
Vietnam signed a trade agreement with Israel in July 2023, which will remove duties on at least 86% of Vietnamese products and 93% of Israeli products, according to Vietnam’s Ministry of Industry and Trade. Bilateral trade is forecast to increase to $3bn, after recording $2.2bn in 2022.
FDI
With the growth of Vietnam’s economy, FDI has become more important. This has been illustrated in the global brands that have, in recent years, decided to set up operations in Vietnam.
“Lego has said it expects to commence producing its first bricks out of its first carbon-neutral factory here in Vietnam in 2024,” Mr Vu says. “The company will have an important role in supporting the local community, offering employment to more than 1400 people. Other companies have begun or committed to move manufacturing to Vietnam, including Foxconn, Apple and Pandora.”
While these are positive moves, the country cannot rely on low-skilled manufacturing or services. “Longer term, Vietnam will need to ensure that it moves up the value chain in manufacturing,” Mr Vu says. “You can see this already happening as high-tech companies move to Vietnam given the skilled workforce, improving infrastructure and logistics, and favourable business environment.”
The banking sector could also benefit from increased international interest. Since 2022, most banks have been Basel II compliant, with the next priority being to grow their capital bases. “They will be looking for greater international investment, whether through selling equity stakes or providing additional capital via international bond issuances,” Mr Vu says.
Vietnam will need to ensure that it moves up the value chain in manufacturing
Among the areas that are in most need of support, Mr Vu points to the healthcare sector. VinaCapital has been involved in this, with the development of private healthcare networks, including hospitals and clinics. Geographically, the cities of Hanoi and Ho Chi Minh offer potential, as do rural areas like the Mekong Delta.
Vietnam’s main exports consist of electronics including mobile phones, but the agricultural sector is still an important part of the economy, accounting for 11% of gross domestic product in 2022, according to the World Bank. The country is also in the top three global exporters for rice, pepper, coffee and seafood.
While the government has been supportive of attracting FDI, Mr Vu has a note of caution in prioritising international enterprises: “Vietnam needs to develop domestic brands and technologies, and grow an ecosystem where local business champions can compete with regional and global companies.”
There is innovation domestically, which has attracted the attention of VinaCapital. “Deep data analysis and artificial intelligence are not being utilised extensively yet, but companies here are moving towards using this in productive ways,” Mr Vu says.
“For example, we have recently invested in the leading digital advertising platform in Vietnam that utilises advanced advertising screens that will use smart data to tailor and push out customised advertising programs depending on the time of the day.”
