Incentivizing tourism may be driving pillar to growth instead of falling oil production

In a recent report on the potential of Vietnam economics of the Hongkong and Shanghai Banking Corporation Limited (HSBC), the government of Vietnam is aiming to incentivize more visitors to the country amidst falling oil production, providing support for the current account, partly offsetting the decline in oil exports and Vietnam's import-intensive electronics production.

Out with the oil

The mining output of fossil fuels has fallen over the past two years due to the country's limited and less productive oil fields, leading to the sector's negative contribution to GDP growth during that period. This year is looking not to be different. Vietnam's crude oil output as of September is estimated at 1.06 million tonnes, which is down 9.9 per cent year-on-year and 11 per cent on a year to date basis. 

Output of key commodities in Vietnam as of September 2017 (Source: HSBC)

Moreover, crude oil's impact on exports growth has been minimal, if not negative, for over two years. In fact, over the past five years, Vietnam's exports have been primarily driven by a rapid growth in electronics and mobile phone shipments. According to the report, electronics exports remain robust, although the Vietnam Manufacturing Purchasing Managers' Index (PMI) dipped as respondents pointed to signs of softer demand.

This is drastically different from the previous decade, when crude oil exports were a significant driver of exports growth, in addition to textiles and other goods, such as agriculture.

In August, Vietnam turned to a net importer of crude oil for the first time on record, amidst rising demand and dwindling output. The Reuters Eikon said that perhaps the oil sector's most significant contribution to the economy in recent years is through PetroVietnam's dividend transfers and tax payments to the central government, which we estimate to range between 10-20 per cent of total fiscal revenues.

In with tourism

In contrast to the mining sector, tourism has provided a sizeable lift to the Vietnamese economy this year as well as its future output. According to the Vietnam National Administration of Tourism, the country earned around US$16.5 billion in tourism revenue in the first nine months of the year, which marked a 26.5 per cent increase from 2016.

The country's services sector has also seen a boon, growing at its fastest rate since at least 2013. Tourism, in particular, has provided a lift to the transportation and accommodation sectors, with transportation growing at its fastest rate in at least four years.

HSBC’s report shows that Vietnam's tourism sector is likely to continue to grow, given the government's recent liberalization measures.

In 2016, the government introduced a visa-waiver scheme to five European countries including France, Germany, Italy, Spain, and the UK, driving tourist arrivals from Europe up 21 per cent y-o-y YTD. The scheme has also now been extended to 2018, which bodes well for future arrivals.

Moreover, nearly 70 per cent of tourist arrivals to Vietnam come from the rest of Asia, led by China and South Korea, which have also grown significantly over the past few years. Since the beginning of the year, Vietnam implemented a simplified visa process for Chinese citizens, which includes e-visas for short-term Chinese visitors and a three-day visa-free entry for Chinese visitors entering the northern province of Quang Ninh. As a result, Vietnam welcomed a record of over 10 million tourists in 2016 and is tracking to easily exceed that number this year.

Around 70 per cent of tourists to Vietnam come from Asia, led by China and South Korea (Source: HSBC)

According to HSBC, Investment interests have partly promoted the tourism in Vietnam with South Korea being the largest source of FDI to Vietnam. There has also been growing Chinese interest in Vietnam’s real estate sector after the country relaxed foreign home ownership laws in 2015.

HSBC said that Vietnam still has a lot of potentials to grow over the next few years, provided continued visa liberalization, infrastructure improvements, and a benign external economic and political environment.