Vietnam’s economy could grow bigger than Singapore’s in 10 years

A rising star

According to an economics and strategy research by Singapore-based DBS Bank on Vietnam, the nation has emerged as a new rising star in recent years, evident in its remarkable GDP growth of 7.1 per cent last year. 

The Southeast Assian nation thus only stood second to India (7.2 per cent) among the fastest Asian economies, outperforming China and Singapore.

DBS noted that local policymakers are now focusing on longer-term economic stability and sustainability, rather than the pace of growth by itself. The long-term prospects of Vietnam economy are positive, and the country could expect to join the ranks of some of the relatively more developed economies in the region in the coming decade.

To build the capacity for longer-term growth, the local government has focused on encouraging investment and improve infrastructure. Vietnam is now one of the top recipients of FDI in the region. It received about $14.1 billion worth of FDI in 2017 (6.3 per cent of nominal GDP), the third highest in ASEAN.

Key advantages offered by Vietnam would include its highly integrated and dedicated industrial or economic zones, its strategic location in the middle of regional supply chain, close proximity to China, attractive tax concessions and low corporate tax rate, as well as a competitive workforce.

Among the sectors, manufacturing is the main draw for investors, particularly in electronics.

“The rise of Vietnam’s electronics cluster is due in part to the structural shift in regional electronics supply chain. Vietnam has captured market share from many of its regional peers,” wrote the report led by DBS senior economist Irvin Seah, adding that earlier players saw incomes and wages rise, opening the door for lower cost producers.

“Vietnam is the latest new kid on the block,” he noted.

Investment into electronics is growing rapidly, and high-tech electronics players have established presence in Vietnam in recent years. Samsung, Intel, LG, Panasonic and Microsoft are among the global tech giants that have expanded in the country, marking a shift away from China. This trend is likely to persist, and the effect thus far has been apparent.

In less than a decade, Vietnam has leapfrogged ahead of some of the more established electronics manufacturing hubs to become the second largest electronics exporter within ASEAN, just marginally behind Malaysia. Indeed, at the current pace of growth, it will not come as a surprise if Vietnam becomes the top electronics manufacturer in ASEAN in the coming years.

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Judging from the potentially strong investment flows, DBS reckons that productivity growth in Vietnam could average about 5.5 per cent in the coming years.

Juxtaposed with a working age population growth rate of about 1 per cent in the near term and gradually tapering off to 0.5 per cent against the backdrop of the gradual aging of the post-war baby boomers, Vietnam has the potential to achieve a growth pace of about 6.0-6.5 per cent over the next 10 years.

If Vietnam is able to sustain a growth pace of about 6-6.5 per cent in the near term, and that economies in the region continue to grow at their medium term potential growth rate (e.g., Singapore at 2.5 per cent, Thailand at 4 per cent, Indonesia at 5 per cent), the pecking order in the region in terms of the size of the economy (real GDP) will change.

At present, the size of the Vietnam economy is about $224 billion, or about 69 per cent of the Singapore economy ($324 billion), which is also the third largest in the region behind Indonesia and Thailand. If Vietnam is able to maintain the growth pace of about 6-6.5 per in the coming years, and that Singapore continues to grow at a matured pace of about 2.5 per cent, then the real GDP of these two economies will intersect by 2029.

“Simply put, the Vietnam economy will be bigger than the size of the Singapore economy in 10 years’ time. And this implies tremendous growth opportunities for companies and investors looking to get a slice of the action.”

It could be a perfect picture for Vietnam in theory, in practice, before realising such picture, the country must first resolve a slew of domestic issues. For example, SOE reform has been tepid while financial sector liberalisation has been slower than expected, often dampened by concerns regarding non-performing loans. Ambiguous domestic regulations and poor corporate governance are some of the pain-points confronting foreign investors.

“What is certain is that Vietnam’s policy direction is heading the right way, and underlying fundamentals within the economy are conducive. Amid the uncertainties in the global economy, companies and investors would have to start focusing more on this “rising star” to leverage on its growth prospects. Indeed, long term prospects of the economy, relative to the region, are exceptionally positive,” the report concluded.