Multiple reasons support the belief that Vietnam is approaching economic liftoff and a sustained period of rapid growth. One is that the country has been growing steadily and attractively for two decades—annual real GDP increases have ranged from 4.8% to 9.3% during that time—as the country has moved from a largely agrarian economy to one powered by manufacturing. (All GDP figures cited are based on World Bank GDP purchasing power parity data, in constant 2011 international dollars.) Moreover, while other economies have faltered in recent years, Vietnam has continued to grow: it has achieved real rates of 5.2% to 6.0% per year since 2012. Yet another reason is that per capita GDP in Vietnam has exceeded $5,000—the level at which growth began to accelerate rapidly in China in 2005, in Indonesia in 1992, and in Thailand in 1988. A fourth reason is that the leadership of the ruling Communist Party has just come through a major change, which points the country toward continued political stability and economic liberalization.
Three other factors underscore the attractiveness of Vietnam right now: the consumer economy, foreign investment and export growth, and room for improvement in productivity.
The Consumer Economy. With a population of about 90 million, Vietnam is the third-largest country in the ASEAN trade block. Vietnam’s wealth is increasing quickly: we expect the number of middle-income and affluent consumers to rise at an annual rate of 13%, increasing from 12 million in 2012 to about 33 million in 2020—a figure that represents about one-third of the population. More significant, Vietnam is among the top performers globally when it comes to converting wealth into well-being: it has achieved a level of well-being that would be expected of a country, such as Indonesia, whose GDP per capita is twice as high. This is a clear indicator that Vietnam has successfully harnessed limited resources for the good of its citizens. The country matches up competitively with other top ASEAN economies in health, education, and economic stability. Internet use is high and rising quickly: some 43% of middle and affluent class (MAC) consumers use the internet, more than in either Thailand (41%) or Indonesia (29%), and e-commerce is gaining a foothold. More than 15% of MAC consumers in Vietnam have made online purchases.
Foreign Investment and Export Growth. Overall economic growth in Vietnam has been fueled by rapidly rising foreign investment and exports, both of which are growing significantly faster there than in other ASEAN nations. (See Exhibit 1.) Top export segments resulting from foreign direct investment (FDI) include telecommunications devices and parts, textiles, computers and electronic equipment, and footwear. Together these four categories made up almost 45% of all exports in 2014. Total exports in 2014 were approximately $150 billion, of which $94 billion, or almost two-thirds, resulted from the FDI sector.
We believe that the manufacturing economy is set to undergo a major expansion. Vietnam’s labor force is well educated. The country’s most recent scores on the Programme for International Student Assessment—which tests proficiency in math, science, and reading—equaled or surpassed those of Germany. Vietnam also enjoys a significant cost advantage over other emerging markets. In 2015, the average annual salary for a Vietnamese manufacturing worker was $3,900; for a manager, it was $12,900. These salaries compare, respectively, with $4,300 and $14,800 in Indonesia; $5,300 and $22,500 in Malaysia; and $8,700 and $24,400 in China.
These factors have been attracting increasing levels of foreign investment to Vietnam in recent years, with Japan leading the pack until 2014, when it was overtaken by South Korea. Major companies such as Bridgestone, Panasonic, Sapporo, Samsung, and LG are investing. Samsung alone has pledged more than $12 billion. Two projects in Bac Ninh Province have attracted more than 40 South Korean subcontractors and spare-parts suppliers. LG launched a $1.5 billion appliance manufacturing facility in the Trang Due Industrial Park in Hai Phong; it is the company’s largest manufacturing base in Southeast Asia.
A recent survey by the Korea International Trade Association involving 540 South Korean companies found that Vietnam was the top destination for South Korean investors. The implementation of the Vietnam-Korea Free Trade Agreement in late 2015 is likely to promote further investments.
One big question is whether foreign investment in Vietnam will continue to be driven primarily by its Asian neighbors. A development that may change the game is the Trans-Pacific Partnership (TPP), signed in February 2016, which would facilitate more US investment. Many large and diverse US companies are operating in Vietnam, including Intel, Microsoft, American International Group, Coca-Cola, Procter & Gamble, and ConocoPhillips. During a recent visit to Vietnam, President Obama attended a signing ceremony for new US-Vietnam commercial agreements valued at more than $16 billion. But the aggregate amount of US investment in Vietnam remains small compared with that of US companies’ first destination in the region: Singapore.
Room for Improvement in Productivity. There is ample room in Vietnam for productivity growth, which could have an enormous overall impact. Simply raising productivity to the level of the top ASEAN performers (Indonesia, Malaysia, the Philippines, and Thailand) in three major sectors of the economy—manufacturing, wholesale and retail, and agriculture, which together employ some 39 million people—would add almost $424 billion to Vietnam’s 2015 GDP. (See Exhibit 2.)
To be sure, Vietnam also has its challenges. In addition to low productivity, the economy is still substantially agrarian, and infrastructure development lags that of other Asian nations.
Outlook. It’s hard to see how the country will not at least sustain the levels of growth that it has produced in recent years; indeed it is much more likely that growth will accelerate as Vietnam addresses its challenges and as foreign capital seeks to take advantage of one of the world’s highly attractive opportunities. Implementation of the TPP trade pact should provide an additional boost. We expect Vietnam to attract even higher FDI given its position as the lowest-cost manufacturing country among current TPP members, and it will benefit from the opening of major markets, such as the US and Japan, for its exports.