The world is slowing down. The latest data, whether exports or PMI, all highlight the extent to which trade activity has slowed.
And this is not just an Asian problem – global trade data reveal that the USD19trn global export pie did not grow in 2014. Commodities subtracted 2ppt from global export growth, while manufacturing added 2ppt, netting to zero per cent expansion. This essentially means three things: a) the only way to grow exports is to take away global market share from another country; b) countries with higher exposure to manufacturing fare better than those that are commodity-based; and c) countries with comparative advantages in manufacturing will likely do better.
We believe Vietnam is poised to continue to take some global manufacturing market share due to three reasons. First, it has comparative labour cost advantages to attract labourintensive manufacturing. Coupled with this, the government has been aggressive in courting manufacturing FDI by providing tax incentives and improving infrastructure.
Second, Vietnam has a diversified export exposure, with the EU and the US as its largest partners. Export growth to China and Korea has been strong as well. Given that it has signed a FTA with Korea and has been working on a comprehensive agreement with both the US and the EU through the Trans Pacific Partnership (TPP) and the EU Free Trade Agreement (EU FTA), we expect Vietnam to continue to gain market share. In 2014, its share rose to 0.8% of total global trade from 0.7% in 2013. The July PMI continued to expand to 52.6 from 52.2 in June.
The question is what will give? Even domestic demand is on the mend (Table 4). We believe the biggest risks to Vietnam will be domestic-oriented rather than externally driven. Labour comparative advantages and limited exposure to portfolio investment limit the impact of slowing external demand and the unpredictable nature of capital flows. However, two domestic developments are worth highlighting: a) widening fiscal deficit, which the MoF has recently tried to tap into the foreign reserves of the SBV; and b) the continued crowding out of the state-owned sector investment over the more efficient private sector.
Davi Nguyen
Source: HSBC
