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Vietnam's economy on sound
footing
By Jephraim P Gundzik
Falling export growth in Vietnam this year
is unlikely to weaken economic growth or slow the
pace of foreign exchange reserve accumulation.
Rising private consumption expenditure will lead
economic growth higher while increasing foreign
capital inflows will bolster the balance of
payments in 2005. Vietnam's exports should rebound
in 2006, helping economic growth to continue
accelerating.
Vietnam's exports surged
higher by 32% in 2004. Exports growth was led by
shipments of crude oil, clothing and textiles, and
footwear, which advanced by 48%, 17% and 15%
respectively. Together, these goods accounted for
48% of total exports in 2004. In the first five
months of 2005, export growth slowed to 20%,
compared to the same period in 2004. Rising
international oil prices pushed the value of crude
oil exports higher by 38% despite a nearly 10%
decline in crude oil production. Meanwhile,
exports of clothing contracted by 3% while exports
of footwear increased by only 4%.
Efforts
to prolong the life of the Bach Ho and Su Tu Den
oilfields have reduced oil production. The Vietnam
government expects total oil production to decline
by about 12% in 2005 from its record high level in
2004. In terms of income, however, reduced oil
production will be mostly offset by the continued
upward march of international oil prices this
year.
Unlike the value of crude oil
exports, the value of Vietnam's clothing and
footwear exports are likely to stagnate in 2005.
The scrapping of the Multi Fiber Agreement (MFA)
in January has rapidly reallocated global textile,
clothing and footwear production and exports away
from Vietnam towards other countries, mainly
China. China's exports of textiles and clothing to
both the US and the EU increased by several
hundred percent in many categories in the first
several months of 2005. This has led both the US
and the EU to renew quota limits on some textile
and clothing imports from China. These new quotas,
although they will limit the growth of Chinese
textile exports, are not expected to significantly
increase Vietnam's exports of textiles and
clothing. Importers in the US and EU are more
likely to fill demand gaps resulting from quotas
on China's textiles, clothing and footwear exports
with products from other WTO (World Trade
Organization) member countries. Because Vietnam
remains outside of the WTO, its exports of
textiles and garments to the US, its top market
for these products, are still subject to import
quotas. Vietnam's exports of textiles, clothing
and footwear will remain weak until the country
joins the WTO, which is very probable in late
2005.
Consumers to the
rescue
Unlike China's economy, which is
investment-driven, Vietnam's economy, like most
Western economies, is driven by private
consumption. In 2004, private consumption
accounted for 67% of expenditure-based GDP (gross
domestic product). By comparison, private
consumption accounted for only 43% of
expenditure-based GDP in China in 2004.
Real private consumption growth in Vietnam
jumped by 13% in 2004 after growing by 7% in 2003.
Accelerating private consumption growth has been
supported by rising employment, growing real
incomes and, more recently, a rising tide of
foreign worker remittances. Vietnam's unemployment
rate has steadily declined from 6.4% in 2000 to
5.6% in 2004. The decline in the unemployment rate
is partially explained by the limited nature of
state-owned enterprise restructuring. This
restructuring has been limited because most of
Vietnam's state-owned enterprises are profitable.
According to government officials, as much
as 80% of Vietnam's state-owned enterprises are
profitable. This is supported by data that shows
state-owned enterprises account for around 70% of
total government tax revenue. Vietnam's
unemployment rate will continue to decline in 2005
and 2006 as rapid private consumption growth fuels
investment in the service sector. Rising wages and
pensions have helped to boost real income. In
2003, the government increased the minimum wage by
28% and pensions by over 37% in real terms. This
helped boost private consumption growth in 2004.
As part of its effort to reduce the scope for
corruption, the government increased public sector
wages by about 20% in real terms at the end of
2004.
Increased public sector wages have
fueled higher private sector wages. Rising public
and private sector wages will boost private
consumption expenditure in 2005 and 2006, pushing
overall economic growth higher. Another factor
boosting incomes in Vietnam is rising foreign
worker remittances. In 2004 these remittances are
estimated to have reached a record $3.8 billion,
equivalent to 8% of GDP. Remittances are expected
to keep climbing in 2005 and 2006, attracted by
growing investment opportunities in equities, real
estate and family businesses. The continued growth
of employment, real wages and foreign remittances
will support strong private consumption growth in
2005 and 2006.
Investors like
consumers
Rapidly rising wages have raised
concerns that Vietnam is losing its competitive
edge vis-a-vis other low-wage manufacturing
countries. Surging foreign investment suggests
that wage costs remain low in Vietnam. In 2004,
realized net foreign investment approached $2
billion. Net foreign direct investment in Vietnam
accelerated in the first quarter of 2005 and will
very likely reach at least $2.5 billion by
year-end.
Net foreign direct investment
inflows will continue to increase in 2006. In
addition to Vietnam's WTO accession and related
liberalization of foreign investment rules, the
strong growth of private consumption is attracting
foreign investors. These investors are
increasingly targeting the services sector in
order to capitalize on Vietnam's consumption boom.
Vietnam has the second largest population in
Southeast Asia, further raising the attraction of
service sector investments.
Rising
foreign exchange reserves
The strength of
private consumption growth will allow economic
growth to accelerate modestly in 2005 despite the
negative effects of slowing export growth and
related weakening of industrial production.
However, slowing export growth is expected to push
the trade deficit up from $5.5 billion in 2004 to
$7 billion in 2005. The growth of the trade
deficit may stoke fears of balance of payments
problems in Vietnam. These fears will be
misplaced.
Increasing foreign worker
remittances will contain the growth of the current
account deficit, which is expected to reach about
$2.5 billion in 2005, equivalent to 5% of GDP. The
current account deficit will be easily financed by
net foreign direct investment inflows. In
addition, Vietnam will continue to attract
substantial Official Development Assistance (ODA),
composed of grants and soft loans from bilateral
and multilateral creditors. Net foreign lending to
Vietnam, about 80% of which is ODA-based, will
increase from $1.4 billion in 2004 to about $2
billion by 2006. The growth of net foreign lending
will help boost Vietnam's foreign exchange
reserves by about $1 billion in 2005 to around
$7.5 billion.
Intensive oil exploration
and development efforts in 2003 and 2004 are
expected to help oil production bounce back in
2006. Vietnam's 2005 WTO accession will promote
the recovery of textile, clothing and footwear
exports. Rebounding exports and industrial
production will help to accelerate private
consumption growth, pushing GDP growth toward 8.5%
in 2006 following GDP growth of about 8% in 2005.
Vietnam will remain one of Asia's fastest growing
economies over at least the next two years.
Jephraim P Gundzik is president
of Condor Advisers Inc,
which provides emerging markets investment risk
analysis to individuals and institutions
worldwide.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
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