Our Opinion: 2025
VietNam’s spectacular growth
It is 50 years since Vietnam was reunited after a 25-year war that devastated the country.For the next 15 years, the Communist regime made a bad situation worse by encouraging their opponents – the skilled, the educated and the ethnically Chinese – to flee, mostly in small boats. Between 200,000 and 400,000 refugees are thought to have died at sea.
However, in the late 1980s, the government performed a sharp U-turn and turned Vietnam into a very capitalist country under autocratic rule. Since then, GDP per capita has risen from $270 a year to $4,300 in an economy that has grown from $6.3bn to $430bn.
Wider signs of social progress are equally impressive: the population has increased from 44 million to 100 million, male life expectancy at birth has risen from 61 to 75, literacy has risen from 57% to 96% and the poverty rate has fallen from 78% to around 3%. This transformation is largely down to the resilience, grit and determination of the nation – making it, for many, the number one destination in Asia for investment over at least the next ten years.
With the economy growing at 6% per annum, Vietnam is likely to become a high-income nation like Taiwan and South Korea, with a GDP per capita of $12,500 within 20 years. Vietnam is culturally more like these countries than the very different countries of Southeast Asia, like Thailand, Malaysia or Indonesia.
Sceptics will worry about the prospect for capitalist growth in a communist country, but prosperity for everybody provides the legitimacy for one party government, as in Singapore. There is some correlation between democracy and prosperity, but which comes first? South Korea and Taiwan became democracies as the result of development.
Vietnam has key advantages; a diaspora of around five million Vietnamese around the world, a high participation rate for women in the workforce, agricultural and mineral wealth and a very pragmatic mindset. The country’s 2,000-km coastline is a significant asset. The wealth of China and the US is concentrated on the coast. Surveys also assess it as the third least-corrupt country in Asia, after Singapore and Malaysia.
The threat of tariffs was the biggest worry. Yet, it looks like his may still translate into corporate earnings growth of 20%, for a stock market valued at just 10.4 times expected earnings.
Vietnam is classified as a frontier market rather than an emerging one, so any exposure in an emerging-market fund is off-benchmark and typically small, making specialist funds look more compelling. It is normally wise to be sceptical about single-country funds: investors can easily get sucked in at the high only to see the country fall out of favour. Being cautious about investing based on a country’s economic record is also wise (China has proved a miserable place to invest over the last 15 years). However, Viet Nam may be a stand out exception to that rule.
Stocks rallied to a three-year high recently after the country became the first in Asia to secure a trade deal with the USA, following the announcement of ‘Liberation Day” tariffs in April. US president Donald Trump says that Washington will impose 20% taxes on imports from Vietnam, a significant decrease. from the threatened 46% level that shocked markets in the spring. In return, Vietnam will charge no tariffs on US goods.
The devil is in the detail. The US will impose a much more punitive 40% tariff on Vietnamese ‘transshipments’, a measure designed to clamp down on Chinese exports that pass through the country. With details of the agreement yet to be finalised, there is a danger that US officials could take a broad view of what constitutes transshipment. Vietnam is a manufacturing hub – and as a hub you take inputs from other countries and make value-added stuff in Vietnam. Few goods can be made entirely in Vietnam because of the nature of modern manufacturing supply chains. Estimates put the level of indirect Chinese content in Vietnamese exports to the US at 28%. The deal seems in large part to be about China. The key lesson for other countries from this deal, and that agreed previously by the UK, is that they will be expected to curtail some trade with China.
The trade deal will cheer local investors, but it may not have much of an impact on the economy in the short term. If Vietnam’s tariff rate is less than 10% higher than regional competitors”, it should continue to attract significant foreign direct investment (FDI) thanks to its other strengths – the quality of the workforce, costs, demographics and location. Indeed, despite the uncertainty about trade, registered FDI is up nearly 50% this year, representing more than 7% of GDP.
Vietnam’s FDI-driven manufacturing prowess has made it the envy of the region, with annual growth rates averaging 6% for 15 years. Yet the resurgence of protectionism means that this economic model is reaching its limits. The pool of cheap workers is dwindling as the process of migration from countryside to city is largely completed. Vietnam risks becoming trapped as a low-killed assembly hub, with workers simply fitting together more sophisticated components that have been made in other countries.
Encouragingly, the country’s leaders have recognised the challenge and are rapidly moving to cut bureaucracy and foster a more competitive private sector. This market is attractive to all investors looking for growth.
