HONG KONG, March 13 (Reuters Breakingviews) – Vietnam’s economy grew 8% last year as manufacturers such as Samsung Electronics ( 005930.KS ), LG and Hon Hai Precision Industry ( 2317.TW ) drove exports. Now, overseas demand is falling amid a local credit crunch and a corruption crackdown. Weak domestic demand leaves the country without much of a safeguard.
Vietnam has long served as a low-cost alternative to China for companies that outsource manufacturing. A trade deal and warmer relations with Washington spared its manufacturers from tariffs and sanctions imposed by its northern neighbor. A combination of low labor costs and proximity to more sophisticated Chinese supply chains is also alluring. Foreign investment rose 13.5% to $22 billion last year as companies slapped “Made in Vietnam” on electronics, clothing and sneakers.
At $372 billion, gross export earnings now account for as much as 90% of output last year, government data show; of its neighbors, only oil producer Malaysia has ever approached such a level. Now the demand originates from abroad. The country lacks China’s huge consumer market; gross national income per per capita was about $3,600 in 2021, compared to $12,000 in the People’s Republic. While Vietnamese workers are more youthful than China’s, they are older than peers in Indonesia and India, so the country’s labor cost competitiveness may not hold.
In that context, signs of stress in the home are worrying. A long-running corruption crackdown that toppled former president Nguyen Xuan Phuc in January should yield long-term benefits. However, it is disruptive now: crippling the bureaucracy, trickling into the real estate sector and rattling the benchmark stock index. The campaigns have targeted business leaders and thrown a wrench into supply chains, including pharmaceuticals.
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The producers have lost some enthusiasm. The world’s biggest maker of branded sports shoes, Pou Chen ( 9904.TW ), said last month it would cut about 6,000 jobs in Ho Chi Minh City, just two years after complaining it could not find enough workers. Political turbulence can also discourage new money. Registered foreign direct investment capital fell 38% in the first seven weeks of the year.
Most of Vietnam’s neighbors, including China, reduced their dependence on exports by developing dynamic private enterprises that moved up the value chain and raised wages: a virtuous cycle. However, the party’s penchant for concentrating investment in inefficient state entities will serve it poorly, especially if foreign direct investment continues to cool. If Hanoi really wants to compete with Beijing, it may have to change its ways.
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Vietnam’s economy grew 8.02% in 2022, the fastest annual pace since 1997, according to data released by the country’s General Statistics Office on Dec. 29.
Vietnamese exports were flat in February and fell 23.4% in January from a year earlier, according to Refinitiv data released on March 9.
Editing by Pete Sweeney and Thomas Shum
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