FDI Uptrend Persists despite Global Headwinds
After reaching a record in 2016, foreign investment in Vietnam will likely to continue to increase in the 2017-2018 period even without the Trans-Pacific Partnership (TPP), which Vietnam was expected to be a major beneficiary, said ADB
Country Economist Aaron Batten in Hanoi on April 10.
New foreign direct investment (FDI) commitments that were made to Vietnam last year suggest that disbursements will continue over the forecast period, Batten said at the launch of the “Asian Development Outlook 2017.”
Vietnam has signed a number of free trade agreements with a number of countries and it will continue to benefit from that liberalization agenda in the coming years. In particular, the implementation of the EU-Vietnam FTA in 2018 will open up many trade opportunities, he said.
The economist noted that the construction sector was attracting considerable FDI. Following a 10% growth in 2016, FDI coupled with rising domestic investment into new building and housing will lead to a continued strong construction performance in 2017-2018.
Vietnam has benefited from a wide ranging liberalization agenda, which helps it avoid dependence on one particular market. Besides China, foreign investment also comes from Japan, South Korea, North America, European economies and ASEAN.
“Vietnam is in a good position to withstand this type of shocks [the Fed’s interest rate hikes and Brexit] in the global economy, because of the diversity of players that are interested and participating in Vietnam’s economic growth
. So we don’t see either of these events is having a having a major impact on Vietnam’s FDI flows over the forecast period,” he stressed.
GDP Growth to Pick up in 2018
The bank forecasts Vietnam’s economy to grow by 6.5% in 2017 and 6.7% in 2018, as a result of rising activity in the manufacturing, construction, wholesale and retail trade, banking and tourism sectors.
The report notes that continued record levels of foreign direct investment will boost domestic manufacturing while at the same time helping to lift Vietnam’s export earnings even though global and regional trade flows will remain depressed.
Vietnam’s rapidly expanding middle-class, which is expected to double in size by 2030 to 33 million, will also help to push up consumer spending and boost retail activity.
Wholesale and retail trade is now the second biggest contributor to Vietnam’s GDP growth, averaging 0.8% per year since 2011. This is second only to manufacturing which contributed an average 1.4% to total growth.
Agriculture Remains a Major Drag on Economic Growth
Agricultural output is expected to pick up modestly in 2017 given the outlook for higher global food prices and a return to more normal weather. However the report highlights that the sector continues to underperform relative to the rest of the Vietnamese economy, dragging down overall growth.
“Agriculture has been a significant driver of growth, poverty reduction, food security, and exports since government began reforming the sector in the late 1980s”, said Eric Sidgwick, ADB country director for Vietnam.
“However, in recent years, in the face of growing international competition and low domestic labor productivity, the sector’s growth has slowed to an average of just 2% per annum since 2011.”
The report highlights that agriculture output per worker in Vietnam is one-third of Indonesia’s and less than half of Thailand’s and the Philippines’.
The report also emphasizes that as Vietnam recovers from its most severe drought in a decade, boosting growth in the agriculture sector will be vital for Vietnam to achieve its aspirations of becoming an upper-middle income country.
“While Vietnam continues to address the worsening impacts of climate change on agriculture, deeper reforms and higher investment in the sector will be critical to boost agricultural productivity and long-run growth that is inclusive and environmentally sustainable,” Mr. Sidgwick added.
The report stresses that to transform agriculture a number of major policy challenges will need to be addressed, including introducing greater competition into agricultural supply-chains and post-harvest processing, developing rural infrastructure to support higher-value adding cash crops, adopting more sustainable natural resource management practices, and better integrating climate change considerations into policy making processes.