Moody’s: Diversified economy offers Vietnam greater resilience than Cambodia


While both Cambodia and Vietnam share strong growth prospects and risks related to their financial systems, Vietnam’s more diverse economy, stronger institutions, and higher incomes underpin greater shock absorption capacity, Moody’s wrote in an August 15 report.

Robust foreign investment flows into manufacturing and steady growth in global demand have driven export-led expansion in both Cambodia and Vietnam. As the countries have become increasingly integrated into global supply chains, their economies have grown rapidly and income levels have risen markedly.

Cambodia’s real GDP increased around 7 per cent per year on average over the five years to 2016 while Vietnam’s expanded about 6 per cent per year. Growth is likely to remain robust ahead.

Vietnamese exports are spread across a variety of products and markets while garments and textiles and a few other low-value-added manufacturing products dominate Cambodia’s exports. These are largely destined for the US and the EU, exposing the economy to sector- and market-specific shocks. Vietnam’s reach into higher value-added products is reflected in greater income levels that bolster households’ capacity to absorb economic shocks.

Meanwhile, Cambodia’s ongoing reforms to reduce corruption and enhance the rule of law are positive, although they have yet to materially strengthen its institutions. The central bank has a track record of delivering economic and exchange rate stability, which supports foreign direct investment (FDI) inflows, but high dollarization continues to limit monetary policy effectiveness.

In contrast, Vietnam’s relatively stronger institutions and greater policy effectiveness have contributed to a more conducive business environment, which supports the broader sovereign credit profile.

Overall fiscal strength is similar between Vietnam and Cambodia, Moody’s report noted. Cambodia’s smaller fiscal deficits, lower government debt, and higher debt affordability – reflecting its larger concessional funding base – are credit strengths relative to Vietnam. However, its increasing shift to domestic funding sources, while more costly, reduces government liquidity risk and lowers the sovereign’s vulnerability to currency depreciation.

Banking risks constrain credit, especially in Vietnam. Vietnamese banks’ sizeable legacy bad debts and very low capital buffers drive high banking sector risk. Such risks are lower in Cambodia, although persistently strong credit growth – which has outpaced gains in nominal GDP and increasingly flowed into correction-prone sectors – poses risks to economic and financial stability. Political risk is moderate in Cambodia, reflecting the potential for domestic tensions to reduce the attractiveness of doing business.

Vietnam’s export products and markets are more wide-ranging

Cambodia and Vietnam’s relatively low wages, ample labor supply, and established infrastructure networks make them attractive destinations for manufacturing goods such as textiles and footwear. However, Vietnam’s export product mix and the markets it sells to are more diverse than Cambodia’s and continue to broaden, supported by FDI. In particular, Vietnam’s role in the global electronics supply chain has developed very fast, and the country has become a very important, interconnected production base.

FDI inflows into Vietnam equate to around 5 per cent of GDP, compared with 9 per cent in Cambodia, both much larger than in many Asian countries, and are spread across a range of sectors. Foreign investment has increasingly focused on electronics and machinery manufacturing, drawn by Vietnam’s free trade agreements (FTAs) that have spurred the liberalization of the economy, and the country’s low-cost yet higher skilled labor relative to others in the Asia-Pacific region. According to the World Economic Forum, Vietnam ranked 68th in the 2016 Human Capital Index, ahead of China (71st), Indonesia (72nd), and Cambodia (100th).

Another important driver in Vietnam’s ability to attract FDI has been progress in infrastructure development, including road and air transport, mass transit, and port facilities. The FTAs and improvement in infrastructure have bolstered the country’s competitiveness. Vietnam’s ranking in the 2016-2017 World Economic Forum Global Competitiveness Index rose to 60th out of 138 countries, up from 70th in 2013-2014, while its showing in the World Bank’s Doing Business Indicators climbed to 82nd out of 190 countries in 2017, from 99th in 2014.

Moody’s expects the EU-Vietnam Free Trade Agreement will further encourage the implementation of reforms in a number of areas, including foreign investment, energy, business administration and human resource development. It will also bring technical benefits and help to move local industries up the value chain. Compliance with rules of origin under these trade deals will additionally reduce dependence on imported products from other countries and create greater value added.

As a result, Vietnam’s economy is increasingly diversified, with notable strengths in a range of sectors including soft commodities, traditional labor-intensive manufacturing such as shoes and textiles, and more recently, moderately high-value-added manufacturing including mobile phones and other electronics. Vietnam ranked 67th out of 116 countries in the 2015 Economic Complexity Index published by Harvard’s Center for International Development, whereas Cambodia ranked 89th.

Source: / Moody’s

Photo: Moody’s