Having a relatively small capital market is perhaps one reason and deriving limited benefit from the so-called quantitative easing in the developed world is likely another, according to its February Vietnam at a Glance report.
While some emerging markets are grappling with a hangover from their over-reliance on cheap money for growth, the country was forced to come down from its own high credit growth rates in 2011.
The Government took measures to tighten monetary and fiscal policy to cool an overheating economy, improve management of the financial system starting with classification of banks and purchasing bad debts, and reassess growth bottlenecks.
Domestic demand decelerated significantly, bringing down import costs and lifting the trade balance into surplus. Inflation has stayed in single digits since May 2012. The exchange rate, once a laggard, has steadied.
While hope is running high about its potential, especially in the international investment community, the report said the economy is still fragile, with major bottlenecks largely unaddressed.
The 5.4 percent growth in 2013 was primarily driven by the services sector and steady inflows of foreign investment into the manufacturing sector.
The impressive registered and disbursed FDI growth rates in 2013, 81.7 and 9.9 per cent respectively, reflect the country’s labour and geographical competitiveness.
But domestic firms, especially small and medium-sized enterprises, are suffering from tough credit conditions, lacklustre domestic demand, and declining competitiveness.
This means policymakers will have to address issues hindering domestic firms’ performance to sustain growth in the medium and long terms.
In the short term, the economy should continue to be supported by gradual improvement in institutional capacity building and a focus on inflows of investment into manufacturing.
With the January HSBC manufacturing PMI rising to the highest level since April 2011 and output likely to expand in the coming months, Viet Nam welcomes the Year of the Horse very hopefully.
With the worst likely over, policymakers can now work out a concrete strategy to increase economic efficiency and realize its potential.
Manufacturing activity is heating up, with the sharp rise in the output index to 53.5 from 52.6 reflecting rising demand for Vietnamese goods.
External demand too is improving, with growth in the eurozone and the US expected to be stronger this year than last.
The country’s high exposure to these markets should buoy its exports. The new export orders sub-index mirrors this trend, increasing to 52.2 from 49.1 in December.
Employment continues a six-month expansion trend, with the January figure indicating a solid increase in headcount.
The most positive jump came in the quantity of purchases, with HSBC’s purchasing managers’ index rising to 55.2 from 53.8 in December, reflecting stronger demand for goods for production. Output is expected to accelerate in the coming months as production is not keeping up with demand.
Inventories, after having been reduced to record low due to de-stocking measures, continue to fall. New orders are however rising on foreign demand and stabler domestic conditions.
The manufacturing sector is expected to support the slight acceleration in GDP growth to 5.6 per cent this year from 5.4 per cent.
But the acceleration of manufacturing is sector-specific and reflects increased foreign investment rather than a healthier domestic economy.
The sluggish credit growth rate in 2013 reflects the low risk appetite in the country as well as a large burden of bad debts that still haunt the financial system.
The rise in manufacturing is certainly positive, especially with strong inflows of foreign capital and the introduction of international production standards to the country. This should help the economy pass through a difficult period of slowing investment and consumption.
Nevertheless, during this period a strategy to improve the competitiveness of domestic firms is imperative. Whether it is increasing their linkages to the supply chain, improving value addition beyond labour and raw material inputs, co-ordinating logistics to improve efficiency and competitiveness, or supplying more skilled labour, a policy agenda is required to ensure domestic firms do not fall behind.
Failing this, there would be a risk that economic instability could result in future when labour costs start to rise more sharply.
Domestic firms’ exports have declined since 2009, partly reflecting a sharp global slowdown in demand but also the tough domestic condition in Viet Nam, which hinders productivity and competitiveness.
Core inflation is expected to hover around 6-7 per cent this year though higher food and electricity prices could stoke inflationary pressure.