By focusing on productivity, Vietnam’s economy can converge with South Korea’s in a decade or so
DURING President Joe Biden’s short visit to Hanoi, the United States upgraded its partnership with Vietnam and offered support for semiconductor chip manufacturing. These closer links reflect the US’s recognition of Vietnam’s growing importance in supply chains and Indo-Pacific geopolitics -and comes just two weeks after Singapore unveiled a deal expanding its own scope of cooperation with Vietnam.
This rush of diplomatic activity is a consequence of Vietnam’s extraordinary economic development over the last decade, which has made the country of just under 100 million people globally competitive as an exporter.
Today, Vietnam’s per capita income growth trend is similar to that of post-conflict South Korea’s in 1961, in current US dollar terms. The country’s growing young population and its people’s hunger to build a better life has powered its transformation from agrarian to industrial -and helped bring Biden to Hanoi
Within a decade or so, Vietnam’s economy has the potential to reach a similar stage of development as South Korea. But this will require a clear policy focus on increasing productivity, and policymakers will need to avoid the mistakes of the previous generation of so-called Asian Tigers, which allowed family-and state-owned companies to dominate strategic sectors.
Vietnam’s success so far has been driven by a confluence of factors: a highly committed workforce, excellent industrial parks and a wide range of trade and investment partners. Its proximity to China has helped it reap benefits as a “plus one supply chain hub adjacent to the world’s manufacturing powerhouse.
An export-to-GDP (gross domestic product) ratio of more than 100 per cent puts Vietnam ahead of every country in Asean except Singapore, demonstrating its global competitiveness.
It has maintained a high degree of macro stability in terms of inflation, currency movements and foreign direct investment (FDI) inflows, even while going through a cyclical downturn in its real estate sector. Vietnam’s external debt is less than 25 per cent of GDP, compared with an Asean average of 89 per cent.
On top of all this, Vietnam’s annual economic expansion has averaged 6.2 per cent since 2000. It even maintained positive growth and stability throughout the pandemic from 2020 to 2022, in contrast to the sharp contraction in other countries.
We believe the country’s potential real GDP growth trend is around 6 per cent, which is higher than that of its Asean peers.
Productivity as the priority
As Vietnam looks towards the next stage of its multi-decade economic miracle, though, focusing on productivity gains will become increasingly critical.
That means obtaining more and higher quality output from firms, infrastructure, workers and natural resources. Growth should be based on a balanced accumulation and efficient allocation of different types of capital: private, public, human and natural.
Vietnam’s economy is already marked by private entrepreneurialism. The Vingroup conglomerate has achieved a global profile since the early 2000s and operates across sectors including automobiles, real estate and retail.
The number of startups has more than dowbled from 1,600 at the start of the Covid pandemic in early 2020, to over 3,500. Startups such as MoMo, a mobile wallet, and Sky Mavis, a games developer, have been among the standard bearers for the country’s vibrant technology sector.
However, state-owned enterprises dominate a number of key sectors, as they do in China. It would make sense for policymakers to evaluate their role in future. Vietnam has a chance to avoid the mistakes of Hong Kong, the Philippines, Thailand and -yes
-South Korea.
These former Asian Tigers allowed a few players-family-owned firms in their cases
-to dominate sectors such as retail, property development, and telecommunications.
Their economies suffered from a lack of competition and innovation as a result.
A highly competitive domestic economy should drive greater investment, more innovation and lower prices for Vietnamese citizens.
Vietnam is already very popular with multinational investors that manufacture everything from smartphones to shoes in a network of export-oriented industrial parks. The latest data, from July, showed that FDI grew by around 30 per cent year on year in the first half of 2023, with new manufacturing FDI inflows picking up strongly despite global economic headwinds.
To boost offshore investors’ confidence further, policymakers should focus on easing infrastructure bottlenecks, increasing regulatory transparency and investing in education to meet demand for highly skilled workers as Vietnam’s economy rises up the value chain.
Expediting critical infrastructure projects is a natural priority, such as expanding its airports, enhancing roads and ports that connect industrial parks, improving public transport in Hanoi and Ho Chi Minh City and enhancing the national electricity grid.Continued investment in these public goods will provide a strong foundation for productivity gains.
Recent moves to reform real estate rules and strengthen measures against corruption show the government’s willingness to address complex problems -and should be encouraging to global investors.
The continued development of Vietnam’s domestic capital markets will also help to attract international capital. Liquidity has improved and returns are attractive, though Vietnamese equities remain undervalued compared with regional peers.
The trend return on equity for Vietnam’s entire listed market is above 15 per cent per annum on average. That’s higher than the Asean peer group, yet Vietnam trades at a comparable valuation to the region.
With a clear focus on productivity and policy measures to encourage domestic competition, there should be no stopping Vietnam from achieving its phenomenal potential -and catching up with South Korea quicker than many expect.
South Korea’s post-war industrialisation during the 1960s was known as the Miracle on the Han River. We expect the Miracle on the Mekong during the 2020s and 2030s.
About the Author:
Nick Ferres is CIO of Vantage Point Asset Management. Prior to this, Nicholas was at Eastspring Investments, the Asian asset management business of Prudential plc, as Investment Director, in September 2007. Nicholas was Head of the Multi Asset Solutions team and was responsible for managing the global tactical asset allocation of funds for external institutional and retail clients. Before joining Eastspring Investments, Nicholas worked for Goldman Sachs Asset Management as Investment Strategist & Portfolio Manager. He has more than 20 years of financial industry experience. Nicholas holds a B.A. (Hons) in Economic History and Politics from Monash University, Australia, a Graduate Diploma in Economics and a Graduate Diploma in Applied Finance.