BizLIVE - Vietnam’s robust services are another crucial economic pillar. The sector expanded 8.1% y-o-y in 4Q, the fastest pace in 8 years. Key subsectors, including retail sales, transportation, and financial services, have seen steady expansion, growing above 8% y-o-y.
Vietnam’s Three Economic Pillars: FDI, Manufacturing and Services
According to HSBC in the latest report, sustained foreign direct investment (FDI) inflows have also played a role in its success. Despite total new registered FDI moderating by 7% y-o-y in 2019, manufacturing FDI rose 33% y-o-y, accounting for 70% of total FDI inflows. Looking at the origins of investors, South Korea surpassed Japan to be the no.1 foreign investor. 
Korea’s sizeable investment traces back to as early as 2014, when Samsung started relocating some of its production to Vietnam. Likely due to the trade tensions that have accelerated multinational corporations ’ relocation decisions, many tech giants , including Apple, Google, Nintendo and Kyocera, have now followed in Samsung’s foots teps and plan to move parts of their production to Vietnam. 
Anecdotes indicate that even mainland Chinese investors, who used to concentrate on the real estate sector, are moving their manufacturing factories across the border. This can be observed in some of the data - Chinese FDI rose 95% y-o-y, making mainland China Vietnam’s third largest foreign investor in 2019.
Apart from a resilient manufacturing sector, Vietnam’s robust services are another crucial economic pillar. The sector expanded 8.1% y-o-y in 4Q, the fastest pace in 8 years. Key subsectors, including retail sales, transportation, and financial services, have seen steady expansion, growing above 8% y-o-y.
As Vietnam is an increasingly popular tourist destination, the sustained high growth of its services sector has been partly explained by its flourishing tourism. After being named one of the world’s leading heritage destinations for the first time in 2019, Vietnam has set a new record of welcoming 18 million tourists in 2019, the fourth straight year of tourist arrivals reaching above 10 million.
Looking at the breakdowns, 80% tourists came from Asia, with mainland China (32%) and South Korea (24%) dominating. Given the positive development, Vietnam reached its goal of hosting 17-20 million tourists by 2020 one year earlier than scheduled, aiming now for an even higher target of 20.5 million in 2020. 
Despite data on tourist receipts in 2019 being as yet unavailable, we believe it’s fair to forecast that tourist receipts could go beyond $30 billion, helping provide more FX inflows and thus reducing the current account services deficit.
Meanwhile, strong domestic demand has also fuelled robust services development. Retail sales maintained strong momentum in 2019, growing at 13% y-o-y. Thanks to an improving labour market, a structural shift to more productive industries that have reinforced urbanization and a booming middle-class, Vietnam’s private consumption likely stayed firm in 2019, contributing the most to headline GDP growth. 
Looking at the breakdown of services, it’s not too surprising to find out that consumer-oriented sectors, such as retail, accommodation, food and beverages (F&B), have captured the benefits of this positive consumer trend.
In addition to a positive economic performance, some of Vietnam’s domestic risks have been relatively contained. For one, elevated public debt has fallen consistently over the years. Thanks to receding government guarantees , continued fiscal consolidation and rapid economic growth, the public debt-to-GDP ratio declined from its peak of 63.7% of GDP in 2016 to 58.4% in 2018, falling further below its self-imposed debt ceiling of 65%. 
Meanwhile, external public debt risk is arguably lower than what the headline figure suggests, as a large share is in the form of overseas development assistance (ODA) with favourable loan conditions (low interest rates and long repayment periods). If the government continues its fiscal consolidation, the public debt-to-GDP ratio would be further reduced, likely reaching below 57% by 2021.

DIEP NGUYEN