VIETNAM FOCUS. The Next Growth Story In Asia?

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1 The Next Growth Story In Asia? Vietnam s economic policy has dramatically transformed the nation since 9, spurring fast economic and social development. Consequently, Vietnam s economy took off booming at an average annual rate of 9.% during 9-99 and continuing steadily at an average of.% to. Five factors, namely high-quality human capital, competitive wages, business-friendly economic environment, rising middle class and export diversification, have helped position Vietnam as a rising star of Asia. As such, businesses are likely to be attracted to expand their exports to, and/or invest directly in, Vietnam, considering growing demand and purchasing power along with opportunities in supply chain investment. Vietnam s Prospects Look Bright Vietnam s track record of policy-making concentrated on strong macroeconomic performance has been improving. Economic expansion accelerated to.% in from.% in the previous year supported by investment, export-oriented manufacturing sector and continued growth in services. We expect headline real GDP growth of.% in in line with the growth target set by the National Assembly, mainly supported by strong foreign direct investment (FDI) inflows and continued expansion in manufacturing. Exports and tourism will continue to benefit from a broad-based global recovery. Retail trade is expected to remain strong as an increase in private credit will stimulate private consumption spending. As such, Vietnam would remain among the fastgrowing economies in the region. Exhibit : Exports Remain A Significant Engine Of Growth This Year Source: Bloomberg, UOB Global Economics & Markets Research Economic Growth (%) Exports Growth (%) Quarterly Global Outlook Q UOB Global Economics & Markets Research

2 Vietnam s fast-growing economy however faces risks including quickening inflation. Inflation could accelerate on increases in global oil prices and consumer goods prices. In addition, the government is also planning to raise wages, which will create pressure for prices to rise in the second half of this year. For, headline inflation is expected to remain high at.%. In terms of monetary policy, the State Bank of Vietnam (SBV) would maintain the policy rate at.% until at least the end of in order to help achieve annual growth target of.% under the socio-economic development plan. Going forward, we see the US Federal Reserve continuing its rate hike process, with another two more rate hikes for the rest of. Overall, we see ongoing mild VND weakness in line with rising US rates. The domestic positive drivers will limit excessive VND depreciation. Vietnam s Success Is No Miracle Vietnam has emerged as a rising star among emerging market countries, both in terms of foreign direct investment (FDI) and exports. Its rapid development and continued economic growth at.% on average per annum have helped Vietnam remain among the fastest-growing economies in ASEAN. The factors which make Vietnam a development success story are much the same economic and social advantages that Thailand enjoyed over years ago, along with some other features specific to Vietnam. In general, foreign investors have been attracted to Vietnam to set up production or service bases to capitalize on significant factors. These are () a large supply of high-quality human resources, () competitive wages and high productivity, () a business-friendly economic environment, () growing domestic demand along with an expanding middle class, and () diversity of export markets and tax incentives.. Integrating Human Capital With Human Development While some countries in Asia are becoming an aging society, Vietnam offers a more attractive choice for foreign investors given its pool of large and young population. The Vietnamese population has grown rapidly since the end of the Cold War. As of, there are 9 million people in Vietnam, million of whom, or %, are working age. The average age is only years old, a major demographic advantage. Exhibit : Stable Currency Helped Support Economic Expansion Source: Bloomberg, UOB Global Economics & Markets Research Economic Growth (%) USD-VND Exchange Rate Nevertheless, because its population growth has slowed to approximately % in, Vietnam is expected to fully transition into an aging society in about years. As such, the Vietnamese government has prioritized human resource development to enhance efficiency and production capacity. In 9, education reforms started with the goal to adapt the system to new economic and social standards under the Doi Moi policy. The reform placed an emphasis on mathematics, science and technology. The reform s achievement is reflected in the Program for International Student Assessment (PISA) rankings. Vietnamese students ranked rd in reading comprehension, nd in mathematics and th in science, well in line with developed countries like,,,,,9,,,, Japan and South Korea, and ahead of neighboring countries such as Thailand, Malaysia and Indonesia. In the business sector, foreign investors are drawn by Vietnamese workers capabilities in science, technology, engineering and mathematics, all crucial for technological operations. The quality of human resources boosts Vietnam s appeal as an investment destination. Indeed, Google Inc. has already expressed interest in working with the Vietnamese government to develop human resources in technology and the sciences, recognizing that Vietnam will soon become one of its major markets. Constant development of the skills needed in technologies for modern production lines is another success factor in Vietnam s human resource. As seen in its production of tablets Exhibit : Vietnamese High School Students Rival Those In Many Developed Countries Source: OECD, UOB Global Economics & Markets Research Programme For International Student Assessment (PISA Score) OECD Singapore Japan Vietnam China Korea US Thailand Indonesia Reading Mathematics Science Quarterly Global Outlook Q UOB Global Economics & Markets Research

3 and smartphones circuits, continuous technological adoption and capacity enhancement among the Vietnamese labor force in both the manufacturing and service sectors during the past years have resulted in growing recognition of Vietnamese products in the global market. Vietnam has been able to attract FDI which brings in modern technology. This in turn helps spur further improvement and lead to a spillover of knowledge throughout the production value chain.. Competitive Production Costs Today, Vietnam has the advantages of a large labor force and low wages, similar to China - years ago. Back then in China, massive foreign investment flowed in to develop a production base for Asia. As wages and costs in China rose, foreign investors began adopting a China plus one strategy, which is to seek and establish a new, secondary market and production base elsewhere in Asia as an alternative to China. This strategy helped reduce production costs and prevent the risk of overreliance on China. Investors adopting this approach made Vietnam one of their top choices for a plus one country. Companies were attracted by Vietnam s lower wages and higher productivity compared to other countries in the region. Vietnam s labor productivity has been rising since, unlike in China and Thailand, where it has been in decline. According to published reports, one of the first top-tier companies to adopt the China-plus-one strategy was Intel Corporation, which chose Vietnam as a location for its largest integrated circuit (IC) production base, worth approximately USD billion. Since Intel came in, many other large firms have followed, including Samsung Electronics and LG Corporation, which have both moved their production bases from Thailand to Vietnam. Likewise, Canon Inc. has relocated its production base there, according to media reports. Exhibit : Wages Are Cheaper In Vietnam Than In China, Indonesia, Malaysia And Thailand Source: World Bank, IMF, UOB Global Economics & Markets Research 9 Myanmar Cambodia Vietnam Indonesia Malaysia China Thailand. Business-Friendly Economic Environment Vietnam s present system of government allows for political stability which ensures continuity of development policies. A great deal of policy effort has been put into fostering an investor- and business-friendly economic environment, with goals to become a logistics hub, factory of Asia and Silicon Valley of Asia. In doing so, the Vietnamese government has provided support for infrastructure development, established economic zoning, and offered investment incentives. Vietnam s shared borders with China, Laos and Cambodia, and its long coastline from north to south, make its geography an ideal location for factories and logistics hubs. Vietnam border trade can be transported on land directly to China and ASEAN, while exports to global market from Vietnam can be transported by sea, more conveniently than from Philippines or Indonesia. Moreover, Vietnam is currently planning further infrastructure and deep seaport development to enhance its logistics capacity. The government allowed for foreign partnerships in some construction projects such as roads, bridges and railways, power plants in Ho Chi Minh City and Hanoi, industrial estates and ports. Daily Minimum Wage (USD) To become the Factory of Asia, Vietnam has established economic zones throughout the country to host large foreign manufacturers in a wide range of industries. The economic zones are divided into industrial zones (IZs), export-processing zones (EPZs) and high-tech zones (HTZs). The three existing HTZs in Hanoi, Danang and Ho Chi Minh and new HTZs planned elsewhere aim to form a new Silicon Valley of Asia. These developments reflect Vietnam s readiness to improve its capability to attract both manufacturing and technology investment going forward. The government also offers investment incentives that vary according to target industry and location. Key promoted industries are manufacturing, technology, infrastructure and agribusiness. In terms of locations, the economic zones and under-developed areas are getting special treatment. Quarterly Global Outlook Q UOB Global Economics & Markets Research

4 . Growing Domestic Demand & Middle Class Continual expansion of Vietnam s economy has raised per capita income and living standards. By the number of middle-income earners in Vietnam will double to million people, while average income per capita will increase from $, to $,. Due to their rising purchasing power and diverse demand for consumer products, high-tech and luxury goods, the Vietnamese middle class is a target for leading global brands. Multinational companies such as CP Group, Unilever, Samsung Electronics and Google Inc. have already set up investments in Vietnam to serve a booming local demand.. A Wide Variety Of Exports & Preferential Trade Treatment Since, Vietnam s major export products have increased in variety and become more sophisticated, especially electronics. Foreign firms like Samsung Electronics and other Korean companies are investing in Vietnam. The manufacturing of goods like clothing and shoes continues to play a significant role in the economy because a large share of the labor force still works in these industries. And indeed, manufactured goods constitute up to % of Vietnam s total exports. In addition, Vietnamese exports are in high demand, and various trade privileges have been important success factors. Because global demand for Vietnam s main exports, such as smart phones and tablets, is on the rise, its overall export growth is expected to continue. Vietnamese exports also benefit from joining the World Trade Organization (WTO), signing free trade agreements with various countries and preferential treatment from developed nations under the Generalized System of Preferences (GSP). As a result, Vietnam is diversifying its export markets beyond its past partners among other socialist countries. Today, Vietnam s key export destinations are the US, EU, ASEAN, Japan, China, South Korea and the Middle East. Exhibit : Doing Business In Vietnam Is Easier Than Those In Cambodia, Laos And Myanmar Source: World Bank, UOB Global Economics & Markets Research Ease of Doing Business : CLMVT Countries Thailand Vietnam Cambodia Laos Myanmar Exhibit : The Rapid Economic Growth Improves Welfare Of Vietnamese Citizens Source: World Bank, UOB Global Economics & Markets Research Table : Vietnam Is On A Par With Other ASEAN Countries In Terms Of Investment Incentives Country Corporate Income Tax (CIT) Thailand % GDP Growth Corporate Income Tax Exemption years (Strategic), 9- years (Technology-based), < years (Sector-based) Personal Income Tax (PIT) % (% for experts) Growth of GDP Per Capita Land Lease (Years) +9 Singapore % - years % + Indonesia % - years % + Malaysia -% years % Philippines % - years % Vietnam % Source: BOI, UOB Global Economics & Markets Research years plus or 9 years of % CIT % Quarterly Global Outlook Q UOB Global Economics & Markets Research

5 From now through the coming ten years, Vietnam s economic and industrial growth will make it an important trade partner and market for countries in the region. With rising household income and low household debt, Vietnam s consumption growth is set to continue. Also, demand for consumer goods and high-tech products is rising with expansion of the middle class. Businesses are expanding their exports or invest directly in Vietnam, considering growing demand and purchasing power along with opportunities in supply chain investment. Products with high growth prospects in Vietnam are those which are offered in only limited variety in the domestic market including food and beverages, particularly processed food, instant food and healthy food and beverages, and electrical appliances such as refrigerators, washing machines and air conditioners. As Vietnam is one of ASEAN s main bases for electronics production such as for mobile phones, electronic parts makers can benefit by investing to connect the value chain in the country. Exhibit : In Recent Years, Vietnam Has Exported Mostly Computers, Mobile Phones And Shoes. In, Its Exports Were Mostly Garments And Oil. Source: CEIC, UOB Global Economics & Markets Research % % Computer & Electronic Parts % % Phone & Spare Parts % Share Of Exports By Product In And % Plastic Products % 9% % % % % % % Textile Footwear Crude Oil Aqua Products % % Others Quarterly Global Outlook Q UOB Global Economics & Markets Research