Rising foreign direct investment has been a key driving force behind Vietnam’s impressive growth rate in recent years. In the year to September, for example, the value of new FDI projects surged 22% year-on-year, likely supported by businesses pivoting production away from China to avoid punitive tariffs. The country’s cheap wages, geographical location, young and rapidly growing middle class and swathe of new trade deals are other obvious reasons why 61 of the 109 companies that announced shifting supply chains in the region in the first nine months of the year chose to shift production, source from, or increase capacity in Vietnam; for perspective, only 19 companies opted for Malaysia, with 16 companies settling upon Thailand.
This sudden popularity is putting enormous pressure on the country’s infrastructure, leading to port congestion and soaring land costs. And again more importantly, threatened sanctions—as highlighted by our quotes of the week below—could jeopardize Vietnam’s emerging status as a mini China. Adequately responding to both these issues will have a significant bearing on the country’s economic trajectory over the forecast horizon.
“Our estimates suggest Vietnam has all the prerequisites to be labelled an FX manipulator. The country has been used to reroute some Chinese exports to avoid US tariffs, so President Trump would not lack the reasons to target the country with hostile trade policy.”
Seok Gil Park, Economist at JPMorgan:
“Strong industrial activity suggests Vietnam has benefitted somewhat from the relocation of manufacturing bases out of China, into EM Asian countries. That said, the uncertainty on external demand lingers with US-China trade tensions, likely with a payback in 4Q after a robust 3Q outcome.”
U.S. Treasury Report:
“As Vietnam strengthens its monetary policy framework, and reserves reach adequate levels, Vietnam should reduce its intervention and allow for movements in the exchange rate that reflect economic fundamentals, including gradual appreciation of the real effective exchange rate, which will help reduce Vietnam’s external surpluses.”