Following a meteoric 20 year rise as one of Southeast Asia’s fastest developing nations, recent economic turbulence in Vietnam has cast doubt over whether this nation’s sharp growth trajectory of previous decades will resume going forward.
Challenges continued to mount as Vietnam’s economic growth rates declined to 13 year lows of 5.2% in 2012, a far cry from the annual 10%+ rates which Goldman Sachs and PriceWaterhouseCoopers predicted not long ago would likely last until 2025. The government struggles to curb inflation which has accelerated to 7% in recent months following a series of five central bank interest rate cuts last year. Toxic debts are swelling following a decade of bank liberalization efforts which has resulted in a fragile financial system mired with a bad debt ratio of 10 percent among commercial banks.
Symptomatic of these weaknesses, foreign direct investment for 2012 dipped 4.9% y/y, however early indications of a strong 2013 rebound are emerging with FDI up 74% in January, 2013 from the same time last year. Moreover, Vietnam continues to serve as a favorable low cost manufacturing alternative to China, with government incentives such as preferential tax rates and foreigner-friendly investment policies attracting new productions of exported goods, agricultural farming and processing projects, and investments involving advanced technology.
Nevertheless, the recent economic turbulence has deterred many investors who are now opting to pursue projects in neighboring countries, with Cambodia and Thailand proving themselves as serious contenders for the spot of the Indochina Peninsula’s most attractive manufacturing hub.
What does the future hold?