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FDI to remain a strong economic force

Released at: 09:55, 06/07/2016

FDI to remain a strong economic force

Photo: Khanh Hung

Mr. Chidu Narayanan, Economist for Asia at Standard Chartered Bank, spoke with VET about Vietnam's economic situation and the expectations for 2016.

by Khanh Hung

■ How do you see Vietnam’s current economic situation?

We expect steady growth in Vietnam in 2016, picking up in the second half despite a slow start to the year because of the worst drought in 30 years. I forecast that manufacturing and construction are likely to remain key growth drivers for the economy, growing at close to double digits annually. I retain my view that foreign direct investment (FDI) will remain strong this year, particularly in manufacturing. Inflation is likely to rise in the second half on a low base, with higher yet benign energy prices.

■ What contribution has FDI made to Vietnam’s economic growth?

FDI will remain strong this year, particularly in manufacturing. In the first half manufacturing accounted for 67 per cent of all FDI in the country. Total FDI in the first half was almost double the amount during the same period last year. We retain our forecast from the first quarter that FDI in 2016 will be higher than in 2015.

■ To what extent is the VND under pressure at the moment?

The VND has been highly resilient in early 2016. The State Bank of Vietnam (SBV) has been inclined towards stability or even a USD-VND downside in its new daily reference rate regime. SBV fixings this year have stayed within a narrow range and are likely to remain so. FDI inflows and healthy trade have supported the currency, helping it to shake off broader market volatility. A steadying of Chinese Yuan (CNY) expectations has also contained volatility. We expect more of the same from the VND in the second half of this year. A slippage of the trade balance back into a deficit could weigh on the currency, though inflows are likely to contain VND movements. We see a mild upside for USD-VND and expect it to rise towards VND22,500 by the end of the third quarter on a higher USD before ending the year at VND22,400.

■ What are the direct and indirect impacts of Brexit on Vietnam’s economy and financial market?

We believe that Asia’s fundamentals should prove resilient, particularly when compared to the initial sell-off in financial markets. The direct growth impact of Brexit, while negative, should not be significant for Asia. The UK’s direct trade links with Asia generally falls below 2 per cent of total trade for each country. The bigger direct growth worry will come from the Euro area. Accompanying uncertainty and increased geopolitical concerns and the negative repercussions may result in weaker growth in the Euro area.

For Vietnam, the UK is a relatively small trade partner, accounting for 3.6 per cent of exports and only 0.3 per cent of imports. Demand from the US and the Euro area is a bigger concern - around 18 per cent of Vietnam’s exports go to the EU and 5 per cent of imports come from there.

However, we continue to believe that Vietnam will be the beneficiary of significant investments via FDI, particularly from Taiwan and South Korea. Investment from South Korea and Taiwan already account for almost 50 per cent of all FDI into Vietnam and we believe that this will continue as more manufacturers move operations to the country. Vietnam is particularly attractive, not just as a low-cost base with an abundance of good quality workers but also as a large and growing domestic market due to its increasingly affluent, and growing, population.

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