Vietnam is ASEAN’s shining economic star

Vietnam’s economic share of ASEAN’s total GDP has grown strongly over the years, doubling from under 6 per cent in 2000 to about 12 per cent now.

Vietnam’s economic recovery for 1H 2024 is likely to extend into 2H 2024

Vietnam witnessed a strong recovery in GDP growth in the first half of 2024, rising to 6.9 per cent year-on-year in the second quarter of 2024 from 5.8 per cent in the first quarter.

Overall economic growth is supported by strong manufacturing as well as a recovery in trade. Both the manufacturing sector and the services sector gained strength over the past two quarters. The manufacturing sector grew 10 per cent year-on-year in the second quarter, up from 7.2 per cent in the first, while the services sector grew 7.1 per cent in the second quarter, up from 6.2 per cent in the first. The recovery in both sectors is important, as collectively they account for three-quarters of Vietnam’s GDP.

In addition, external trade has maintained its strong pace of recovery in the first half of 2024, and the upswing in semiconductor sales since mid-2023 is likely to continue in the second half. Exports and imports increased 14 per cent and 16.6 per cent year-on-year, respectively, in the first half.

While downside risks are still present, including external geopolitical risks, volatility in the semiconductor cycle, and uncertainty in China’s economic recovery, we reaffirm our positive growth forecast for Vietnam at 6 per cent for FY 2024, recovering from 5 per cent in FY 2023. This will make Vietnam among the fastest-growing economies in ASEAN.

Vietnam’s long-term prospects supported by positive demographic and macro-economic trends

Over the longer run, Vietnam’s strong economic growth is supported by positive long-term demographic and macro-economic trends. This has allowed Vietnam to become the rising economic star of ASEAN. In terms of positive long-term demographic trends, it has a strongly growing middle class and the third-largest population in ASEAN, at about 100 million. This sets Vietnam up positively in the years ahead for increased consumer spending as the population continues to grow and become wealthier.

In terms of macro-economic trends, Vietnam is successfully transitioning away from lower-cost manufacturing towards higher value-added technologies, as well as developing a strong focus on the services, retail, and tourism industries. As a result of these strong long-term fundamentals, Vietnam’s economic share of ASEAN’s total GDP has grown significantly, almost doubling from under 6 per cent in 2000 to about 12 per cent now.

Vietnam to benefit from strong trade and FDI growth across ASEAN

Vietnam, as a key member of ASEAN, is well-positioned to benefit from strong growth in both trade and FDI across the region. Amid rising global trade tensions and tariffs, ASEAN stands out with its robust and expanding regional trade opportunities. ASEAN’s strong trade credentials are backed by six longstanding FTAs with China, Hong Kong (China), Japan, South Korea, India, and Australia / New Zealand.

More importantly, the ten ASEAN nations are at the core of the 15-strong Regional Comprehensive Economic Partnership (RCEP). Think of ASEAN as the beating heart of the RCEP, supporting trade in North Asia with China, Japan, and South Korea, as well as with Australia and New Zealand. Together, these 15 RCEP nations significantly boost ASEAN’s trade and economic reach. In total, RCEP nations account for almost 30 per cent of global GDP, global population, and global trade.

ASEAN nations can further enhance their strong trade credentials by working together to attract even more FDI into the region and collaborate on developing new industries in sustainability and the digital space, increasing cross-border policy coordination, and deepening integration among key industries across the region.

Specifically, ASEAN is poised to register yet another year of record FDI inflows, rising to $226 billion in 2023, rebounding strongly from the low of $120 billion during the Covid-19 year of 2020. Overall, ASEAN is the world’s second-largest FDI destination after the US (at $311 billion) and ahead of China (at $163 billion). Over the long run, ASEAN’s FDI inflows are projected to grow strongly to about $370 billion by 2030.

Three key challenges ahead for both Vietnam and ASEAN economies

Looking ahead to the second half of 2024 and into 2025, there are three key challenges for ASEAN. First is the uneven and slow economic recovery in China. Latest high-frequency activity data continue to point to weak retail sales and spending amid a manufacturing slowdown. The painful debt restructuring in the property sector will continue to take time to resolve. As a result, we expect economic growth in China to slow down from 5 per cent in the first half of 2024 to 4.8 per cent in the second half.

This economic slowdown is a double-edged sword for ASEAN. While there are risks from slowing demand in China, ASEAN also benefits from the strong push by Chinese corporates to invest in ASEAN as they seek out new growth opportunities outside of China.

The second challenge is potential policy risk amid leadership changes across key ASEAN countries, including Indonesia, Thailand, and Vietnam. These changes may affect various fiscal and economic policies that corporates and investors need to navigate.

The third challenge is, of course, the upcoming US presidential election. Depending on the outcome, the trade conflict between the US and China may intensify, potentially resulting in higher trade tariffs not just against China but potentially across the world, including ASEAN.

Investors can expect stable monetary policy from the SBV amid gradual VND recovery

In an effort to support this growth recovery, the State Bank of Vietnam (SBV) is expected to act cautiously and maintain its benchmark refinancing rate unchanged at 4.5 per cent for the foreseeable future, focusing instead on measures that will encourage more loan growth and boost credit growth for the economy.

As for the VND, supported by the economic recovery throughout 2024 and the anticipated weaker USD backdrop globally, the VND has started to strengthen back to the stronger side of 25,000 against the USD. Going forward, the VND is expected to strengthen gradually towards 24,100 against the USD by the second quarter of 2025.

In summary, the growth recovery in the first half of 2024 for Vietnam is expected to extend into the second half of 2024. Vietnam’s economy is set to benefit strongly from ASEAN’s projected trade growth and increased FDI inflows. Over the longer run, positive demographics as well as macro-economic factors will help Vietnam retain its strength as ASEAN’s rising economic star.