Vietnam may be affected by the UK vote to leave the EU through financial markets, trade and investment channels, its exposure to potential first round effects is relatively limited, the World Bank
(WB) has said in a report.
Regarding financial markets, the reaction of the Vietnamese markets has been in line with global markets. The benchmark VN Index of its stock market recouped all losses it suffered on June 24 when the vote results were announced. Equally, the Vietnam dong initially depreciated by 0.13% against the U.S. dollar, but has since bounced back.
More volatile global financial conditions and a sustained surge in the U.S. dollar could reignite capital outflows and put pressure on the exchange rate and domestic interest rates.
However, compared to more financially integrated economies, these risks are relatively contained in Vietnam, given its limited reliance on portfolio inflows, including cross-border interbank lending, according to WB.
Since party of Vietnam’s public debt is denominated in the U.S. dollar and the Japanese yen, a sustained strengthening could in turn amplify pressures on the public debt stock, although associated liquidity and debt service risks are limited due to concessional and long term nature of this debt.
In terms of trade and tourism
could further weaken the already frail growth prospects of the EU economy which would in turn dampen demand for imports, including from Vietnam.
Being the second largest export destination, the EU market accounts for 19.5% of Vietnam’s exports with the UK accounting for about 3% of Vietnam’s exports.
In recent years, Vietnam’s exports to the EU have been quiet resilient and not very sensitive to changes GDP growth in the EU. This suggests the effect of a potential slowdown in the EU may be dampened, Sebastian Eckardt, lead economist for the World Bank in Vietnam, said.
Finally, visitors from the EU and the UK account for about 12% and 2% of all tourist arrivals, respectively. While a slowdown in the EU and UK could reduce travel demand, the magnitude of the impact is expected to be too small to affect the Vietnamese economy.
With respect to foreign direct investment
), the impact of Brexit on FDI is also expected to be marginal.
At the end of 2015, total cumulative FDI commitments of EU countries to Vietnam are around $25 billion, which is equivalent to about 8% of total – relatively small compared to top investors such as Korea, Japan, Singapore and Taiwan (China). FDI commitments by UK are less than 2% of the total.
The bank noted that despite the limited direct exposure, heightened global risks reinforce the focus on solidifying macroeconomic stability to strengthen Vietnam’s resilience to cope with potential external volatility.
The current policy mix of continued exchange rate flexibility, a gradual build-up of foreign exchange reserves and fiscal consolidation to stabilize debt and restore fiscal buffers is appropriate in this context.