In its third quarter Asian Economics report, HSBC pared back its forecasts for Vietnam’s GDP growth in 2016 to 6.2 per cent, while the World Bank estimated the economy would grow 6 per cent for the year as a whole.
In fact, the country posted a 6.21 per cent GDP growth, in wholly 2016, according to General Statistics Office.
The fundamental drivers of growth - resilient domestic demand and export oriented manufacturing - remain in place though manufacturing is predicted to grow at a lower rate than in previous years.
Vietnam’s economy grew in the third quarter by 6.6 per cent year-on-year, a sharp improvement over the 5.6 per cent registered in the earlier quarters.
During the first half the economy struggled, in part due to widespread drought and declining agricultural output, which in turn further constrained rural consumption.
However, these supply-side disruptions eased over the last few months, with production conditions normalizing. Third quarter growth bounced back, though it will be a challenge to meet the government’s full-year growth target of around 6.7 per cent.
Manufacturing and exports continued to be the twin bright spots for the economy. The September Purchasing Managers’ Index (PMI) report from HSBC pointed to further improvements in the manufacturing sector.
Both internal and external demand improved during the month, as did output and employment, with the latter increasing at the fastest pace for more than five years. This and the fact that local enterprises are continuing to build inventories is cause for optimism among manufacturers.
The index of industrial production (IIP) in the first eleven months rose 7.3 per cent year-on-year, slightly lower than the 7.4 per cent in the first ten months and the 9.9 per cent recorded in the same period last year.
Increases in the manufacturing and processing sector, electricity generation and distribution, and water supply, wastewater and garbage treatment helped offset a decline in the mining sector.
Index of industrial production, 2010 - 11M 2016
![Source: GSO, December 2016](http://vneconomictimes.com:8081/uploads/media/images/ISSUE/275/Chart-p22.jpg)
Index of industrial production, by sector, 11M 2016
![Source: GSO, December 2016](http://vneconomictimes.com:8081/uploads/media/images/ISSUE/275/Chart-p22b.jpg)
The manufacturing and processing industry, which accounts for 75 per cent of total industrial production, increased 11 per cent in the first eleven months.
Secondary industries improved significantly with high growth, such as the metal and textile and garment industries, which both reached 17.3 per cent, while electricity generation and distribution increased 12.3 per cent.
Some industrial items increased higher than in the same period last year, including TVs, by 68.2 per cent, rolled steel 25.9 per cent, vehicles 21 per cent, raw steel 20.2 per cent, cattle feed 18.5 per cent, and cement 14.5 per cent, according to the General Statistics Office (GSO).
The external sector also remained resilient. Vietnam earned roughly $159.5 billion from exports in the first eleven months, an increase of 7.5 per cent year-on-year and again outpacing regional peers, according to the GSO.
The foreign direct investment (FDI) sector recorded a trade surplus of $21.2 billion including crude oil and $19.1 billion excluding crude oil, from January to November, with export revenues of $114.1 billion (including crude oil), accounting for 71.5 per cent of the total, up 8.6 per cent year-on-year. Imports by the sector were $92.8 billion, up 3.6 per cent against 2015 and accounting for 59.2 per cent of total imports.
The manufacturing and processing industry attracted registered FDI capital of $8.8 billion in the first eleven months, accounting for 67.6 per cent of all newly-registered capital.
Many new projects were in the manufacturing sector, including the LG Display Hai Phong project, with capital of $1.5 billion, and the LG Innotek Hai Phong Plant, with $550 million. “With new factories commencing operations this year, we expect such FDI to drive further gains in exports,” HSBC analysts wrote.
“Vietnam remains highly competitive, especially in apparel and electronics assembly, and should gain further global market share even as world trade remains lackluster.”
Major commodities
2016 was a rather good year for the local steel industry, thanks to increasing construction demand.
Vietnam has seen a surge in both steel production and sales compared to 2015, with the production of raw steel reaching some 4.2 million tons in the first ten months, up 19 per cent year-on-year, according to figures from the Ministry of Industry and Trade (MoIT).
Rolled steel and steel bars were 4.29 million tons, up 25.7 per cent year-on-year, and 3.9 million tons, up 11.7 per cent, respectively.
Higher building demand also contributed to increasing production. During the first ten months, rolled steel production rose 30 per cent year-on-year against the same period last year, to 487,800 tons, while that of steel bars was estimated at 397,000 tons, up 1.5 per cent year-on-year, according to industry data.
The surge in both steel production and sales over the last ten months show that the local steel sector can indeed meet local construction demand.
The November report from the Vietnam Steel Association (VSA) also revealed that its members’ production reached more than 1.51 million tons since the start of the year, posting a year-on-year increase of 13.03 per cent.
Steel sales also reached over 1.47 million tons, or 36.6 per cent higher than in the corresponding period last year.
In terms of trade, raw steel imports were up 23.7 per cent in volume and 4.9 per cent in value, according to MoIT’s figures.
With the price of imported steel products continuing to fall, by 27.7 per cent last year, experts believe efforts at preventing a flood of cheap steel from China remains problematic for local producers, especially in the context of integration.
The VSA believes steel imports from China reached over 7.29 million tons in the first ten months of 2016, accounting for 60 per cent of the total. Together with the stability of steel prices in the ten-month period, large domestic suppliers are even happier with the additional anti-dumping tariffs.
In mid-July the MoIT released a decision applying additional tariffs on imported steel products as an official safeguard measure against cheap imports that threaten domestic steel producers.
In the first eleven months of 2016, mobile phones and components, textiles and garments, footwear, and machinery, equipment, tools and instruments continued to be major exports, contributing to growth in total export revenue.
Exports of mobile phones and components earned $31.3 billion, up 10.2 per cent, while textile and garment exports stood at $21.5 billion, up 4.5 per cent, computers, electronic products and parts $16.8 billion, up 17.1 per cent, footwear $11.6 billion, up 7.5 per cent, and machinery, equipment, tools and instruments $9.3 billion, up 26 per cent.
Contribution to growth
![Source: CEIC, HSBC, December 2016](http://vneconomictimes.com:8081/uploads/media/images/ISSUE/275/Chart-p23.jpg)
Contribution of net exports
![Source: CEIC, HSBC, December 2016](http://vneconomictimes.com:8081/uploads/media/images/ISSUE/275/Chart-p23b.jpg)
In the first ten months the consumption index grew 8.3 per cent over the same period of 2015 (when it increased 12.8 per cent year-on-year).
Inventories in the manufacturing sector as a whole as at November 1 were up by 8.8 per cent year-on-year (compared to 9.7 per cent in the same period of 2015).
The average inventory in manufacturing in the first ten months of 2016 was 66.9 per cent, a rise of 72.9 per cent against the same period last year.
The Nikkei Vietnam Manufacturing Purchasing Managers’ Index (PMI) rose to 54 in November from 51.7 in October, signaling a solid monthly improvement in the health of the sector.
New order growth supported a rebound in production following a dip in October. Output rose solidly and at its fastest pace in 16 months.
“The strongest growth in new business for a year and a half gave a boost to the manufacturing sector in the month, helping to lead to a rebound in production and faster rises in employment and purchasing activity,” Mr. Andrew Harker from IHS Markit said.
“The sector therefore looks set for a strong end to 2016, while IHS Markit forecasts an increase in GDP of 6.3 per cent in 2017.”
The growth in the manufacturing and processing sector in the closing months of 2016 has, however, slowed compared to the same period last year.
According to the GSO, the reason for this was a decline in consumption demand and tough competition between manufacturers in regional countries such as Cambodia, Laos and Myanmar. Some economic experts said that Vietnam’s exports still mainly depend on processing and assembling and material exports.
Meanwhile, the development of support industries remains modest, the volume of raw material imports is a disadvantage as global material prices increase, and production costs in the country are on the rise, leading to lower competitiveness.
The oil and gas industry, a key contributor to growth in total industrial production, is estimated to see low volume growth, bringing down total industrial production with it.
2017 expectations
Vietnam’s industrial production growth is estimated at 8 per cent in 2017 against 2016 as expectations are lower than in previous years, according to MoIT’s 2017 plan. 2017 will be problematic for the mining sector, including petroleum, coal and light industry.
Machinery and fertilizers will be negatively affected by a decline in Chinese machinery prices and the global fertilizer price.
The oil and gas sector is expected to exploit 14.8 million tons of crude oil in 2017, down 12.9 per cent compared to the 2016 estimate.
The gas output is to reach 11.3 billion cu m, up 10.8 per cent against the 2016 estimate. MoIT has forecast the power industry will produce 99 billion kWh of electricity this year and will have to buy an additional 179.8 billion kWh, 13 per cent more than in 2016.
Output in the coal industry is expected to remain unchanged, at 38.3 million tons.
The sector, as well as the engineering industry, will be affected by low global prices.
In heavy industry, the steel sector is expected to see output of 5.6 million tons of raw steel, up 16.6 per cent, while rolled steel is forecast to rise 18 per cent to 5.84 million tons.
In 2017, the VSA believes the steel industry is likely to enjoy 10-12 per cent growth, with steel consumption greatly dependent upon the country’s GDP growth.
With expected growth of 6.2 per cent this year and ten steel projects in operation, growth is expected to expand.
“The government should identify solutions to preventing trade fraud to help local steel producers record strong growth,” said Mr. Nguyen Van Sua from the VSA.
In addition, Vietnamese producers should improve product quality and invest in technologies to reduce production costs and enhance competitiveness at home.
MoIT will continue to apply trade defense measures to ensure fair competition with imported products to promote the country’s steel sector.
Export dependence by destination
![Source: CEIC, HSBC, 2015 annual data](http://vneconomictimes.com:8081/uploads/media/images/ISSUE/275/Chart-p24.jpg)
Trade with China and the US
![Source: CEIC, HSBC, 2015 annual data](http://vneconomictimes.com:8081/uploads/media/images/ISSUE/275/Chart-p24b.jpg)
MoIT has mapped out optimistic forecasts for growth in the fertilizer industry in 2017, with there being sufficient output to meet not just domestic demand but also for exports.
The output of urea fertilizer will increase 2.2 per cent to 2.01 million tons, while NPK fertilizer will rise 2.4 per cent to 2.67 million tons. Casting an eye over the improvements in the fertilizer industry for 2017, General Secretary of the Vietnam Fertilizer Association (VFA) Mr. Nguyen Hac Thuy told VET that the government should “only authorize one ministry to manage fertilizers”, as the joint management between the Ministry of Agricultural and Rural Development (MARD) and the MoIT has exhibited shortcomings.
Moreover, with thousands of fake fertilizer products in the market, “there is a need to cut loose the group benefit system that still helps dishonest traders,” Mr. Thuy added.
Fiercer competition among foreign brands is forecast for the beer-alcohol-beverage sector this year. Output is expected to be 3.92 billion liters, up 8.2 per cent against 2016. Alcohol will grow slowly due to tightening policies in production and business activities.
Textiles and garments and footwear are also expected to see more export opportunities in 2017 with a number of new free trade agreements taking effect.
However, local small and medium-sized enterprises in the industries will face more challenges at the same time.
Textiles and garments and electronics are the industries believed to gain greater global market share this year, according to HSBC Global Research’s Vietnam at a Glance report, released in December.
With China’s fading competitiveness in lower-end manufacturing, mostly due to soaring wage costs on the mainland, Vietnam is one of the few countries still enjoying a vibrant export sector amid sluggish global demand.
The presence of free trade agreements with strategic members augments the gains for the country’s export. The failure of the TPP is certainly a setback for Vietnam, but still leaves the economy with plenty of growth potential.
The country remains highly competitive and continues to benefit from China’s rapid climb up the value chain, vacating valuable export space at the lower end that few countries have so far been able to occupy, with the notable exception of Vietnam.
Its geographical location is of strategic importance for foreign companies with operations throughout Southeast Asia. Vietnam, therefore, is an ideal export hub to reach other ASEAN markets, the report stated.
VN Economic Times