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PMI signals sustained manufacturing recovery at start of fourth
quarter
Recovery buoyed by rising demand for electronics goods in
particular, with global electronics PMI indicating expansion for
first time in 10 months
Export rebound has fueled the recovery, but also poses trade
tension risks
Vietnam has been one of the most resilient economies in the
Asia-Pacific region to the shockwaves from the global COVID-19
pandemic. Vietnam is expected to be one of the few major Asian
economies that will show positive growth for the 2020 calendar
year.
Vietnam's export sector, which is a key driver of GDP growth,
has also shown moderate positive growth during the first ten months
of 2020 despite the economic shocks in key export markets, notably
the US and EU.
However, Vietnam's large and rising bilateral trade surplus with
the US has resulted in increasing trade tensions with the US. In
October 2020, the US launched an official investigation into acts,
policies, and practices by Vietnam that may contribute to the
undervaluation of its currency and the resultant harm caused to US
commerce.
Vietnam's economy moderates due to COVID-19 but avoids
recession
Vietnam has been one of the world's fastest growing emerging
markets in the past decade, boosted by strong foreign direct
investment inflows into its manufacturing sector. The pace of
economic growth slightly exceeded 7% in both 2018 and 2019. Rapid
growth of manufacturing exports and large new inflows of foreign
direct investment have been important growth drivers for Vietnam,
notably driven by rapid expansion in the textiles and electronics
sectors. Total electronic and electrical manufacturing exports
accounted for 33% of total merchandise exports in 2019, with
textiles, clothing and footwear accounting for a further 19.4%.
Total foreign direct investment inflows reached USD 20.4 billion
in 2019, up 6.7% year-on-year (y/y), driven by strong investment by
multinationals in establishing new manufacturing production
facilities in Vietnam. Samsung has been a key investor, with total
foreign direct investment into Vietnam of around USD 17 billion in
the decade to 2018. Vietnam has consequently become the biggest
foreign production hub for Samsung Electronics, which booked USD 66
billion of sales in 2018 out of its Vietnamese operations, which
was equivalent to around 28% of Vietnam's GDP. Around 50% of
Samsung's smartphones and tablets are produced in Vietnam and
exported globally. Samsung Vietnam has also built its largest
R&D centre in Southeast Asia near Hanoi.
However, economic growth momentum has moderated significantly in
the first nine months of 2020, due to the impact of the COVID-19
pandemic. For the January to September 2020 period, the Vietnamese
economy grew by 2.12% y/y, compared with a 7.1% GDP growth rate in
calendar 2019. Vietnam's GDP rose by 2.62% y/y in the
July-September quarter of 2020, improving on the 0.39% y/y pace
recorded in the April to June quarter. Despite the moderation in
growth momentum, Vietnam is expected to be one of the very few
industrial economies in the Asia-Pacific region that will record
positive GDP growth in 2020. IHS Markit estimates that the
Vietnamese economy will expand at a pace of 2.2% year-on-year in
calendar 2020.
Manufacturing sector has shown significant
recovery
The Vietnamese manufacturing sector returned to growth in
September as concerns around the latest outbreak of new COVID-19
cases in the country during July and August eased. Both output and
new orders increased in September, according to IHS Markit's PMI
data, while business confidence strengthened. The October surveys
saw a continuation of expansion in the Vietnamese manufacturing
sector, as the COVID-19 pandemic remained under control
domestically.
The IHS Markit Vietnam Manufacturing Purchasing Managers' Index™
(PMI®) posted 51.8 in October, down marginally from 52.2 in
September but still signalling expansion in the manufacturing
sector and representing a substantial recovery from April's record
low of 32.7. The latest survey showed improving operating
conditions in the consumer and intermediate goods sectors. However,
investment goods firms posted a deterioration, amid further
declines in both output and new orders.
In October 2020, industrial production rose by 5.4% y/y,
reflecting a substantial rebound in manufacturing output and export
orders as lockdowns eased in major export markets. For the first
ten months of 2020, industrial production rose by 2.7% y/y,
reflecting a very resilient performance compared with many other
Asian industrial economies which have faced sharp contraction in
industrial output due to the pandemic and related lockdowns.
Reflecting Vietnam's success in limiting the domestic spread of
COVID-19 cases during the first ten months of 2020, retail sales of
goods and services rose by 6.1% y/y in October.
According to Vietnam's General Statistics Office, exports in
October are estimated to have risen by 9.9% y/y to USD 26.7
billion, while imports likely increased 10.1% y/y to USD 24.5
billion, resulting in a trade surplus of USD 2.2 billion for the
month of October. Exports are estimated to have risen by 4.7% y/y
for the first ten months of this year, while imports rose by 0.4%,
resulting in a strong trade surplus for the first ten months of USD
18.7 billion.
The US has been Vietnam's largest export market during 2020
year-to-date, with Vietnam's exports to the US up 24% y/y.
Vietnam's trade surplus with the US during the first ten months of
2020 reached USD 50.7 billion, compared with a trade surplus of USD
55.8 billion for the full 2019 calendar year. Exports to China have
also shown strong growth of 14% y/y during the same period.
However, exports to the EU were down 3% y/y during the first ten
months of 2020.
Although Vietnam's merchandise exports have been very resilient
in the first ten months of 2020, exports of tourism services have
collapsed due to the impact of international travel bans, including
Vietnam's own ban on international travel. The tourism economy had
been growing strongly in recent years, with international tourist
visits to Vietnam in 2019 having reached 18 million trips, up 16%
y/y. The protracted disruption of international tourism will hit
Vietnam's service sector exports badly, but the impact on the
overall tourism economy is mitigated by the significant
contribution of domestic tourism to the overall industry.
Electronics sector hit by global demand
slump
A key factor that has driven the sustained strong growth of
Vietnam since 2010 has been the rapid growth of electronics
manufacturing. The importance of Vietnam's electronics industry has
risen dramatically over the past decade, with the electronic
industry's share of total GDP rising from around 5% in 2010 to
around one- quarter of GDP by 2019, a key factor helping to drive
rapid growth of both exports and GDP.
With electronics now being Vietnam's most important export
sector, the impact of global lockdowns due to the pandemic on the
global electronics industry had been a major shock to the sector
during the first half of 2020. Amid widespread global lockdown
measures aimed at containing the spread of the pandemic, world
demand for electronic goods slumped sharply in April and May.
However, since the low points in April and May, the IHS Markit
Global Electronics PMI has showed significant improvement, with the
headline index rising to 51.1 in September 2020, the first
expansion for ten months.
The Global Electronics PMI's output index (which measures
changes in production) returned to positive territory, reaching
50.7 in September, indicating slight expansion. This is in
comparison with severe contraction in April, as reflected in the
index reading of 33.9 for that month.
According to the PMI data, global electronics new orders rose
from a calendar year-to-date low of 34.7 in May to a level of 50.3
in September, marking a return to expansionary conditions and
reflecting a significant rebound in global demand for electronics
goods. The strongest recovery has been in new orders for
communications electronics, helped by improving demand for mobile
phones. However, both industrial electronics and consumer
electronics also showed expansion in September.
Vietnam's exports from phones and components reached USD 36.7
billion in the first nine months of this year, posting a
year-on-year decline of 5.5% and accounting for 18.1% of Vietnam's
total export revenue. While the overall year-on-year decline
reflects the impact of global lockdowns during H1 2020, the rebound
in retail sales in key markets such as the US and EU since mid-2020
is expected to result in improving exports of phones and components
for the second half of 2020 and during 2021. However some near-term
volatility in exports is expected due to the impact of new
lockdowns in some key markets due to renewed waves of COVID-19
cases.
Meanwhile exports of personal computers and related products
rose strongly in Q3 2020, up by an estimated 20% y/y, as the global
shift to remote working boosted demand for personal computers.
Vietnam has significantly increased its share of global exports of
computers in the past five years and is now competing with China in
terms of the total export value of computer products.
Medium term growth drivers
In the near term, Vietnam's exports are expected to strengthen
in 2021, as key export markets, notably the US and EU, roll out
COVID-19 vaccines, allowing a gradual recovery in economic growth
momentum. This is expected to support a recovery in new orders for
key Vietnamese exports such as garments and electronics.
Over the medium-term outlook for the next five years, a number
of key drivers are expected to make Vietnam one of the fastest
growing emerging markets in the Asian region.
First, Vietnam will continue to benefit from its relatively
lower manufacturing wage costs relative to coastal Chinese
provinces, where manufacturing wages have been rising rapidly over
the past decade.
Second, Vietnam has a relatively large, well-educated labour
force compared to many other regional competitors in Southeast
Asia, making it an attractive hub for manufacturing production by
multinationals.
Third, rapid growth in capital expenditure is expected,
reflecting continued strong foreign direct investment by foreign
multinationals as well as domestic infrastructure spending. For
example, the Vietnamese government has estimated that USD 133
billion of new power infrastructure spending is required by 2030,
including USD 96 billion for power plants and USD 37 billion to
expand the power grid.
Fourth, Vietnam is benefiting from the fallout of the US-China
trade war, as higher US tariffs on a wide range of Chinese exports
have driven manufacturers to switch production of manufacturing
exports away from China towards alternative manufacturing hubs in
Asia.
Fifth, many multinationals have been diversifying their
manufacturing supply chains during the past decade to reduce
vulnerability to supply disruptions and geopolitical events. This
trend has been further reinforced by the COVID-19 pandemic, as
protracted supply disruptions from China during February and March
created turmoil in global supply chains for many industries,
including autos and electronics.
For example, the Japanese government has introduced a subsidy
program in 2020 for Japanese companies to help reduce supply chain
vulnerability by relocating production out of China either back to
Japan or to certain other designated nations. The Japanese
government has allocated an estimated 220 billion yen for the
supply chain reshoring program in Japan's supplementary budget for
the 2020 fiscal year, equivalent to around USD 2.1 billion. An
additional 23.5 billion yen were allocated for supply chain
diversification to other selected countries, which includes ASEAN,
India and Bangladesh. Vietnam has been one of the preferred
destinations for Japanese firms choosing to shift their production
to the ASEAN region in the first round of subsidy allocations
announced by the Japanese government.
Free trade agreements
Vietnam is also set to benefit from its growing network of free
trade agreements. As a member of the ASEAN grouping of nations,
Vietnam already has benefited considerably from the ASEAN Free
Trade Agreement (AFTA), which has substantially removed tariffs on
trade between ASEAN member countries since 2010. ASEAN also has a
network of free trade agreements with other major Asia-Pacific
economies, most notably the China-ASEAN Free Trade Area which
entered into force in 2010. This network of free trade agreements
has helped to strengthen Vietnam's competitiveness as a low-cost
manufacturing export hub.
The EVFTA is a key new free trade agreement that will boost
Vietnam's exports and foreign direct investment inflows. The EVFTA
is an important boost to Vietnam's export sector, with 99% of
bilateral tariffs scheduled to be eliminated over the next seven
years, as well as significant reduction of non-tariff trade
barriers. For Vietnam, 71% of duties were removed when the EVFTA
took effect on 1st August 2020. The scope of the EVFTA is
wide-ranging, including trade in services, government procurement
and investment flows. An EU-Vietnam Investment Protection Agreement
has also been signed which will help to strengthen EU foreign
direct investment into Vietnam when it is implemented.
Vietnam will also benefit from the Regional Comprehensive
Economic Partnership (RCEP) free trade agreement that is expected
to be signed by 15 RCEP member countries by the end of 2020. The
fifteen RCEP countries that are expected to sign the agreement are
the ASEAN ten nations, plus China, Japan, South Korea, Australia
and New Zealand. The RCEP agreement covers a wide range of areas,
including trade in goods and services, investment, e-commerce,
intellectual property and government procurement.
US bilateral trade frictions
The US deficit for trade in goods with Vietnam reached USD 55.8
billion in 2019, with the deficit widening by 41.2% compared to
2018. This was slightly mitigated by the USD 1.2 billion surplus in
favour of the US for trade in services, but still left the overall
bilateral trade deficit at USD 54.5 billion in 2019. In the first
nine months of 2020, the US deficit with Vietnam for trade in goods
has remained at similar high levels, reaching USD 49.5 billion.
Reflecting the persistent large bilateral trade surplus that
Vietnam has with the US, the Office of the US Trade Representative
(USTR) announced on 2nd October that the US government has launched
an official investigation into acts, policies, and practices by
Vietnam that may contribute to the undervaluation of its currency
and the resultant harm caused to US commerce, under section 301 of
the 1974 Trade Act.
As part of its investigation on currency undervaluation, USTR
will consult with the US Department of the Treasury as to issues of
currency valuation and exchange rate policy. The US Treasury has
informed the US Department of Commerce that Vietnam's currency was
undervalued by 4.7% in 2019, partly due to intervention by the
Vietnamese government.
USTR has also launched an investigation into Vietnam's acts,
policies, and practices related to the import and use of timber
that is assessed to be illegally harvested or traded.
Economic outlook
The Vietnamese economy is expected to rebound in 2021, with GDP
growth expected to strengthen to a pace of 6.1% y/y. Over the
medium-term economic outlook, a large number of positive growth
drivers are creating favourable tailwinds, continuing to underpin
the rapid growth of Vietnam's economy. This is expected to drive
strong growth in Vietnam's total GDP as well as per capita GDP.
Vietnam's total GDP is forecast to increase from USD 270 billion
in 2020 to USD 450 billion by 2025, rising to USD 720 billion by
2030. This translates to very rapid growth in Vietnam's per capita
GDP, from USD 2,800 per year in 2020 to USD 4,500 per year by 2025
and USD 6,900 by 2030, resulting in substantial expansion in the
size of Vietnam's domestic consumer market.
Vietnam's role as a low-cost manufacturing hub is also expected
to continue to grow strongly, helped by the further expansion of
existing major industry sectors, notably textiles and electronics,
as well as the development of new industry sectors such as autos
and petrochemicals.
For many multinationals worldwide, significant supply chain
vulnerabilities have been exposed by the protracted disruption of
industrial production in China as well as some other major global
manufacturing hubs during the COVID-19 lockdowns. This will drive
the reshaping of manufacturing supply chains over the medium term,
as firms try to reduce their vulnerability to such extreme supply
chain disruptions. With US-China trade and technology tensions
still remaining high, this is likely to be a further driver for
reconfiguring of supply chains. A key beneficiary of the shift in
global manufacturing supply chains will be the ASEAN region, with
Vietnam expected to be one of the main winners.
Rajiv Biswas, Asia Pacific Chief Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
