Vietnam’s trade deficit with China could widen further in the upcoming years as the country imports large quantities of materials, machinery and spare parts from the northern country, Minister Vinh said in a report submitted to the National Assembly.
“Given the depreciated yuan, imports of these goods will likely surge, causing the trade deficit to widen,” Mr. Vinh noted.
In the light of the yuan devaluation, the State Bank of Vietnam has devalued the Vietnamese dong by a combined 3% this year and increased the trading band of the currency to 3%. With the dong being weakened by 5% against the U.S. dollar since the end of 2014, the negative impact of a softer yuan on Vietnam’s external trade has been minimized, the minister said.
Vietnam’s trade gap with China jumped 10-fold to nearly $29 billion in 2014 from $2.8 billion in 2005, and is projected to widen to $35 billion this year.
On the other hand, Vietnam will have more difficulties in exporting goods to China due to that country’s weaker demand for imports. In addition, China may boost exporting cheap consumer goods to Vietnam, especially those of underutilized industries. “This will challenge the competitiveness of Vietnamese manufacturers and may result in a wider trade deficit,”
The minister went on analyzing that China’s economic slowdown would hurt Vietnam’s oil industry.
China’s slowing economy will pull down its oil demand and global trade, thus exerting downward pressure on crude oil prices. “For Vietnam, the plunge in oil price will help cut down production costs and stimulate consumer demand, but it will negatively affect the state budget revenue sourced from crude oil,” the minister noted.
Vietnam’s state budget, to which crude oil has contributed some 10%, has felt the pinch of the oil crash.
The country fetched 55.5 trillion dong ($2.47 billion) from crude oil in the ten months through October, falling 37.7% from the comparable period of 2014, according to data of the Ministry of Finance.
According to preliminary calculations, Vietnam’s central state budget will fall short of 63 trillion dong ($2.8 billion) this year in comparison with the initial estimation, due to the plunge in oil prices.
State-run Vietnam Oil and Gas Group or PetroVietnam has estimated its revenues to reach 555 trillion dong ($24.7 billion) this year, or 77.3% of the whole-year plan, because selling prices of crude oil will likely average $50 per barrel in 2015, half of the initial projection.
With the country’s fiscal deficit widening to 141.4 trillion dong ($6.3 billion) in the ten months through October, the government has mulled over a number of unprecedented measures to offset the budget shortfall.
The Ministry of Finance has taken out a 30-trillion-dong loan from the State Bank of Vietnam and has proposed issuing $3 billion worth of long-term sovereign bonds abroad. In addition, it has asked for permission to use proceeds gained from sales of state stakes in profitable companies to mend the “hole in the state budget.”
Minister Vinh also pointed out positive effects of the Chinese slowdown.
Lower commodity prices in the global market, caused by weaker demand from China, will help reduce input costs for manufacturers in Vietnam, thus elevating their competitiveness.
In addition, foreign direct investment in China could be shifted to Vietnam to capitalize on high growth potential, cheaper labor costs and the opening up of opportunities when Vietnam signs the Trans-Pacific Partnership agreement.
The recent turbulence in the Chinese stock market will also prompt foreign indirect investment to flow to other markets including Vietnam in search for higher returns and safety for their investments.
Last but not least, the minister analyzed that as the China government seeks for a sustainable economic growth path, its inflation will stay low and stable. “This will have a positive impact on inflation control in countries which heavily depend on Chinese imports like Vietnam,” he added.
Mr. Vinh concluded that a slower pace of China’s economic growth would not leave significant effects on Vietnam in the short term. Vietnam still takes reins of the macroeconomy and the forex market while the USD/VND rate and external trade will go according to the plan set for 2015.
However, in the long run, the Chinese economic slowdown will dampen Vietnam’s external trade and state budget collections.
Vietnam’s economy is forecast to grow 6.5% this year and is projected to advance 6.5%-6.7% next year.