Though not often recited, Vietnam has been a stunning economic success story, even in the East Asian context. Vietnam’s growth story began in 1986 after it launched Doi Moi reforms, loosely modeled on the reforms enacted by China’s Deng Xiaoping in 1978, embracing market forces and allowing private entrepreneurship. Since 1990, Vietnam grew by a respectable 6.8% per annum (against China’s 9.2%). According to the World Bank, poverty declined from 52.3% in 1992 to 1.8% in 2018. IMF estimates that income per capita increased 30-fold since 1990 to USD 3,743 per year today; still low, but once exchanged into dong it buys you a lot of Big Macs (about 1,239). The growth model is typical for Asian economies, i.e. highly focused on manufacturing and exports. The country has done a good job in signing trade agreements (it joined the WTO in 2007 and has signed trade agreements with Japan, Korea and the EU, amongst others; in 2020, Vietnam joined RCEP, an Asia trade pact comprising 16 countries) and attracting FDI (about USD 16 billion in 2021). Agricultural technology freed up a significant part of a young and growing workforce, accelerating urbanization from 20% in 1986 to 37% now and allowing workers to do more productive jobs. Agriculture also became more resilient with the switch towards higher-margin products, like cashew nuts, peppers and aquaculture.

Racing full speed towards middle-income status in 2035

Vietnam weathered the covid-19 pandemic well. Real GDP growth in 2020 was nearly 3%, among the highest in the world, thanks to swift containment of the virus by quickly identifying and isolating infected people (a communist specialty, it turns out). But the expected recovery in 2021 did not materialize (growth was a disappointing 2.6%) as first the delta variant and then the omicron variant took hold of the country, forcing the government to implement harsh lockdown measures and later, unlike China, making the sensible decision to abandon the zero-infections policy when omicron became dominant. Initially, the vaccination rate was very low (7.5% of adults received at least one dose by August 2021), but the government realized that this low rate jeopardized economic growth as well as human health and undertook a massive vaccination drive. According to GAVI, now 90% of adults are fully vaccinated. The economy is rebounding: this year’s expected real GDP growth is in excess of 6.5%, despite headwinds following the Russia-Ukraine conflict (Vietnam is a net energy importer). Fiscal and monetary policies have been accommodating during the pandemic but sensibly focused on temporary support to firms and households and on providing sufficient liquidity to the banking system, whilst the economy generally benefits from high remittances. Public debt as percentage of GDP has risen to 41%, comparable to Indonesia, with the fiscal deficit running at a somewhat elevated level of -4%. Inflation is rising due to higher fuel prices and animal feed costs but is expected to stay below 4%. Actually, the country’s government seems quite competent. It has responded swiftly, decidedly and pragmatically to the challenges caused by covid-19 and slowdown in global trade.

Vietnam’s economy is an important link in supply chains with an openness to trade (defined as exports plus imports as a percentage of GDP) in excess of 200%. This is coupled with high levels of foreign investment. We expect that Vietnam will be a beneficiary of the lost love between China and the U.S., with many multinationals setting up shop or expanding in the country. Initially, most of the manufacturing was in low-tech sectors, like apparel and footwear (including my Nike trainers), but nowadays Vietnam is part of the global technology supply chain, making electronic components (Foxconn), chips (Intel), smart phones (Samsung) and cars (Toyota), amongst others. However, a large part of business still is focused on assembly and intermediate goods as opposed to finished products, which means that a significant part of export growth is captured by foreign firms (from China and Korea) instead of domestic firms. For Vietnamese firms to capture more of this value add (by becoming suppliers instead of assemblers), they will need to become more productive and innovative. This means that more capital should be allocated towards competitive firms instead of state-owned enterprises (SOEs). SOEs still consume a large part of banks’ balance sheets as they enjoy preferential terms (i.e. cheap borrowing) that is not available to private firms, specifically SMEs. But they are utterly inefficient compared to private firms. The government knows this and has announced plans to further privatize SOEs over the next 5 years. It also has embarked on an industrial policy focused on developing diversified national champions (like Korea’s chaebol), albeit by stimulating the private sector (using tax incentives, amongst others). We doubt whether this is the best way to achieve the goal of becoming a middle-income country by 2035. We rather would like to see that the government increases its investments in (higher) education to increase labour skills (especially digital skills) and in infrastructure (logistics, broadband) to efficiently connect to the global value chain. The banking sector should be restructured to foster better capital allocation. Apart from pursuing growth in (high-tech) manufacturing, Vietnam also needs to further develop its services sector in order to make its economy more resilient. The country already has a flourishing tourism sector (yes, it has an Aman resort!), which offers plenty of growth opportunities.

Having copied China’s reform agenda, it is only logical that Vietnam also shows some of its less desirable traits, like rapidly rising property prices and debts (although this is ubiquitous across the globe), corruption, red tape, weak institutions and scrappy rule of law. However, we are hopeful that, within the constraints of a communist one-party state, the government will act to address some of these weaknesses. Vietnamese capital markets are not yet well developed but investors certainly should keep an eye on this tiger economy.