Growing Deficit and Weak Reserve Challenge Vietnam’s Economy

Vietnam has achieved quite impressive economic growth in recent years, yet the country still faces difficulties amid challenges posted by the global economic slowdown. Both IMF and the World Bank noted in their reports at the annual meeting in Washington D.C that the global economy is at its weakest stage since the financial crisis.

Report of the HSBC listed Vietnam as the country with the most pressing need to stabilize its economy in Southeast Asia, as Vietnam‘s debt is likely to hit the country’s debt ceiling - 65% of GDP - by the end of 2019.

Latest data shows Vietnam‘s PMI of 51.4 in August was apparently down from July’s reading, indicating a weak recovery of the overall business environment, such as slow public investment spending, struggling agriculture and weak transportation infrastructure.

Once dubbed the Asian Economic Miracle, Vietnam now struggles in heavy debt that threatens to reset the country‘s economic gains. IMF estimates that Vietnam’s growth rate in 2019 will drop from its peak of 7.1% last year to 6.5%. The countrys public debt reached 61% of the GDP, an equivalent of US$94 billion, in 2015, and the figure soared to over US$125 billion by the end of 2016.

To make things worse, Vietnam has only US$63.5 billion of foreign reserves. The country has always needed capital to make up its budget deficit, and thus has limited borrowing ability.

Earlier this year the US Treasury decided to add Vietnam to the currency manipulator watch-list, closely monitoring the exchange of Vietnam Dong to US dollars. Apparently, Vietnam lacks enough currency reserve to tackle the series of challenges, and at this crucial time when US capital is leaving the country, Vietnam is trying to find a solution in Chinas RMB.

Back in October, 2018, the State Bank of Vietnam issued a new rule which allows authorized banks and financial institutions, trans-boarder business dealers and citizens to use Chinese yuan in certain areas. Currently there are 7 provinces in Vietnam that accept settlement of goods and services in Chinese yuan.

Moreover, China-Vietnam trade volume in 2018 totaled US$150 billion and registered a 14% growth year-on-year. Vietnam has been China‘s largest ASEAN trade partner for 3 years in a row, while China also became the first among Vietnam’s trade partners to see a bilateral trade of over US$100 billion-41 billion imports and 65 billion exports-with the country. This further proves that Vietnam‘s economy is becoming more reliant on Chinese market and the yuan. For instance, Vietnam seafood has quite a large share on the global market, owing to its advantageous coastlines; yet Vietnam’s seafood exports dropped by 2% year-on-year in the first half of 2019, due to global economic slowdown and increasing trade barriers. In comparison, the exports to Chinese market has grown impressively against the overall declining trend. Data shows Vietnams seafood export to China has been increasing with strong momentum year to date, while the exports to EU and South Korea continues to fall.

All these signs suggest that if Vietnam loses the current advantages offered by its trade ties with China, the countrys economy can sink back into recession, while dollar capital may speed up the pace of withdrawing from Vietnam after reaping the profits.

In fact, today's Vietnam remains a low-income country characterized by high debt and great dependence on foreign investment. Its economy, dominated by low-end manufacturing and struggling with low added value, low productivity and limited education in labor force, is slow in making institutional transition. Moreover, general labor costs in Vietnam is growing fast to rival that of third-and-fourth-tire cities in China, while investing to start a factory can take many years to pay off. Such a growing method, in a time of intelligent informatization and rising uncertainties in the worlds economy, is very unsustainable. For instance, 98% of the businesses in Vietnam are small and medium size enterprises, who have limited size and lack sufficient capital to support their development.

During a time of bullish US Dollar Index, US may easily shift deficit risks worth of trillions of dollars to developing countries like Vietnam. This is partly because of the growing method of high input, high consumption and high pollution typically found in developing countries, and partly because a strong USDX will constantly drive dollars back to the US. In that case, any small ripples on the global market may eventually turn into a huge wave as flowing international capital abandons currencies of emerging economies for a stronger dollar; If foreign capital influx continues to decline and financing gets more difficult and costly, it could lead to a vicious cycle which ultimately deals a heavy blow on Vietnams economy.