Mr. Chua Hak Bin, Senior Economist at Maybank Kim Eng, tells how Vietnam is the biggest beneficiary in investment shifts from China as trade war with US continues.
The US-China trade war continues to evolve and will greatly affect the growth of the global economy, including Vietnam. What are your thoughts on this?
We think that most multinational companies (MNCs) will continue to reconfigure their supply chain, adopt a more flexible supply network, and reduce their dependence on China. ASEAN will stand to benefit as MNCs adopt a “China + 1” strategy and diversify their supply chain.
Vietnam is emerging as a major beneficiary of the break-up of the current China-centered supply chain. Some of the recent macro data confirms that it is benefiting from this major shift. Vietnam’s growth slowdown is being cushioned by trade and investment diversion due to the US-China trade war.
Vietnam’s export growth (7.5 per cent in April and 5.1 per cent in the first quarter) is in sharp contrast to contractions seen across the rest of Asia, including Singapore (down 8.9 per cent in the first quarter in USD terms), Thailand (down 1.6 per cent), South Korea (down 8.5 per cent), and Taiwan (China) (down 4.5 per cent).
Vietnam’s exports to the US that are covered by US tariffs on China have been especially strong. These include textiles and garments, wooden products, computer and electronic items, and telephones. This suggests that Vietnam may be benefiting from the diversion of demand and exports due to the US-China trade war.
We expect FDI to Vietnam to remain strong and support GDP growth in 2019. Total registered FDI was up 65 per cent in April, while total disbursed FDI also rose 11.3 per cent in the month year-on-year. Finally, consumer spending continued to remain strong in early 2019. Retail sales in April rose at their strongest pace since 2015, at 13.1 per cent, for 11.9 per cent year-on-year in the first four months.
In Vietnam, we see that FDI in the manufacturing sector, especially electronics, has risen. Is this because of the US-China trade war? Will this continue when a US-China trade deal is signed?
I think the trend will continue. The trade war is going to be a regular instrument to extract concessions from other countries. Therefore, any multinational would think twice about putting up more money or setting up more factories in China. More and more MNC are adopting a China + 1 strategy as an insurance policy. They want to diversify. So, the question now is which country to consider? I think Vietnam is one, not just for the electronics sector but for the furniture sector and others also. Thailand is on their list too, as well as Malaysia.
Of course, nobody can close up shop in China right now. It is a huge domestic market.
In your opinion, what are the key concerns for Vietnam’s economy?
There are two key downside risks this year. First, Vietnam’s exports may weaken by more than expected, especially if the US and China fail to reach a trade deal or if China’s economy slows much more sharply.
Second, infrastructure investment may slow due to uncertainties from the recent crackdown on corruption and limited fiscal funding space. Progress in the divestment of State-owned enterprises (SOEs) and land sales may have also been impacted by the crackdown.
In the context of its economy facing many challenges, what can Vietnam do to develop its market?
Vietnam can continue to invest in and build-up its infrastructure. Opening up to greater FDI and foreign participation would help increase available funds, especially given the tight fiscal space.
The government should continue to divest non-strategic assets and gradually increase foreign equity limits in listed SOEs.
In monetary policy, the central bank could gradually shift towards a more market and price-based policy framework, and gradually move away from quantitative credit growth targets. Such a shift would help ensure the more efficient allocation of capital and create a more dynamic private sector.
The fluctuations in US short-term bond interest rates is higher than long-term. How does this affect capital flows into the global financial market in general and Vietnam in particular?
An inverted US yield curve, where the long-term ten-year bond rate is lower than the short-term (for e.g. one year) bond rate, has been a reliable predictor of US recessions historically.
The recession may, however, occur three to 18 months later. The inverted yield curve has predicted nine of the ten US recessions since the 1950s. The yield curve inverted briefly a few months ago but has reverted to a positive of late.
We highlight that the US yield curve may, however, produce more false signals, as global interest rates have been falling over the past few decades. Failure to reach a US-China trade deal in the coming months will increase the probability of a US recession and global pullback in investment and trade.
Vietnam’s growth, particularly exports and investment, will be hard hit if the US-China trade talks collapse.
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