Infrastructure and human capital bottlenecks are forecast to cap growth of the Vietnamese manufacturing sector in 2020. — Photo baoquangninh.vn

The growth of the industrial sector will likely continue to slow this year after easing to 7.3 per cent in the last quarter of 2019, from 10.4 per cent in the third quarter.

“Transport and logistical infrastructure and human capital bottlenecks will continue to weigh on the sector's growth, which accounts for around 16.5 per cent of the Vietnamese economy,” Fitch said.

The US-China trade war has accelerated a structural shift in low-end electronics and textiles manufacturing out of China and into ASEAN, with Viet Nam being a major beneficiary. However, the rush to set up operations and export out of Viet Nam has put considerable stress on existing road and port infrastructure, resulting in severe congestion in and around major cities such as HCM City and Ha Noi, and also week-long delays at ports. Indeed, export growth has decelerated since September 2019 and this trend is expected to persist over the coming months.

A shortage of qualified labour, as suggested by high year-on-year wage growth of between 12 per cent and 18 per cent across the occupational skill levels, will also weigh on manufacturing growth by inhibiting the integration of better technology into work processes.

Viet Nam’s manufacturing production growth slowed sharply to 6.5 per cent year-on-year in November 2019, its lowest level since 2017, from 10.8 per cent year-on-year in October 2019.

The agriculture sector will also be under pressure in 2020 due to hydroelectric dam projects upstream of the Mekong River in Laos, as well as diseases such as African swine fever.

However, it is expected that stronger growth in construction and services will partially offset the slowdown.

The construction of the North-South Highway, which began in September 2019 and is expected to be completed by 2021, will be a key project supporting the construction sector.

Meanwhile, services growth would be underpinned by four key sub-sectors, analysts said.

Firstly, a strong increase in real wages, in part driven by skills shortages, would support a continued rise of Viet Nam’s middle class.

This, together with the ongoing trend of robust tourist arrivals, boded well for further strengthening in retail as well as hospitality services. Retail sales growth had been relatively stable above 10 per cent over the past three years, growing by an average of 11.7 per cent year-on-year.

Next, the influx of companies to Viet Nam to circumvent US tariffs on China would also support the growth of transport and warehousing services, especially with a shortage of such services likely to push up prices and profitability in this sub-sector.

Finally, despite a likely (slight) softening of economic growth in 2020, still-robust economic activity would continue to support growth of financial services. — VNS

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