Vietnam’s real GDP growth in 2016 was recorded at 6.2 per cent.  Over the next few quarters, it’s believed that Vietnam’s openness to trade, investment, tourism, and increasing demographic dividend, will continue to bode well for the manufacturing sector and broader economy. We can expect real GDP growth to accelerate to 6.4 per cent in 2017 and 2018, according to latest report from Business Monitor International (BMI) Research.

“Although Vietnam remains a regional outperformer, its growth in 2016 marked a slowdown from the 6.7 per cent registered in 2015. It was mainly a result of weaknesses in the primary sectors due to adverse weather conditions (particularly in half 1, 2016) and subdued commodity prices. This, however, was mostly offset by robust expansion in the industrial (excluding mining) and services sectors, which were supported by strong foreign direct investment inflows, a growing tourism industry and a resilient and well diversified export sector,” the report stated.

Primary Sectors To Contribute Positively To Headline Growth In 2017

Looking at the GDP in terms of production, Vietnam’s primary sectors (agriculture, forestry, fishing, and mining) shrank by a collective 0.5 per cent in 2016, as compared with an expansion of 3.8 per cent in 2015. This was led by a 4.0 per cent contraction in the mining sector, while the agriculture and forestry sectors (which account for about 14 per cent of GDP) grew by a mere 1.0 per cent.

Over the next few quarters BMI researchers expect growth in the agricultural sector to remain volatile and to underperform headline growth figures due to weak investment in productivity and erratic weather. However, the mining sector is likely to recover in 2017 when it improves commodity prices. This should see the overall primary sector contribute positively to headline GDP growth again next year, reversing the negative 0.1 percentage points (pp) contribution in 2016.

Although the natural fertility of Vietnam around the Red River Delta in the north and the Mekong River Delta in the south provides the country with a strong agricultural base, the country has suffered from the negative impact of climate change (particularly the 2015 El Niño) and hasty construction of hydropower dams in the upper stream of the Mekong River in Laos and Cambodia.

Given the lack of advanced irrigation systems and the prevalence of small-scale and low technology-based farming methods, it’s believed that Vietnam's agricultural sector will remain at the mercy of fluctuating weather.

Manufacturing And Construction Outperformance To Be Sustained

Vietnam’s remarkable economic growth in 2016 was mostly driven by the manufacturing and construction sectors which saw double digit growth rates of 11.6 per cent and 10.0 per cent respectively. Over the coming quarters, BMI researchers expect growth in the manufacturing sector to remain robust as it continues to benefit from increasing FDI inflows and market share gains from China.

Vietnam’s export-orientated manufacturing sector is also well diversified in terms of geography and product, which will allow the industry to remain resilient even as pockets of weaknesses emerge in the global economy. Despite rising global economic headwinds and a broad slowdown in global trade in 2016, Vietnamese exports have grown a remarkable 8.6 per cent, while foreign direct investment inflows reached a record high of $15.8 billion, up 9.0 per cent from 2015.

Vietnam is a popular choice for many manufacturers in the region (especially for those relocating out of China) as the country boasts a young, competitive and cheap workforce. The labor force is set to continually expand for the next 15-20 years given that approximately half of the population is under the age of 30. Furthermore, Vietnam has a wide range of free-trade agreements (FTA) in place, and its FTA network is expected to extend in the coming years with the EU-Vietnam FTA a key development, despite the TPP being dead in the water.

This is likely to entice more manufacturers to set up processing plants in the country and take advantage of the lower tariff benefits. Finally, Vietnam has continued to make notable progress improving its business environment and enhancing the ease of doing business.

According to the Ease of Doing Business 2017 report compiled by the World Bank, Vietnam's ranking has improved to 82, up from 91 in the previous year, with the components of protecting minority investors, paying taxes and trading across borders making the greatest progress. A strong manufacturing growth outlook, which often goes hand in hand with rising urbanization, will continue to have a positive knock-on effect on the construction sector.

VN Economic Times