Since December 2013, HSBC manufacturing Purchasing Managers Index (PMI) has been above 50, showing the upward trend of the sector. Output and quantity of purchases have been strong, responding to price discounting and better external demand.
In June 2014, export growth was double digits, albeit with some deceleration. But with export performance primarily driven by foreign invested enterprises, the concern is that recent geo-political tensions with China will dampen its prospect.
GDP accelerated to 5.5% year-on-year in the second quarter of this year from 4.8% in the first quarter on higher manufacturing and resilient service growth.
The short-term economic impact from geo-political tensions will likely be limited, with sectors such as tourism bearing most of the brunt.
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Tourist arrivals from China will likely slow, but it will be normalised in the coming months. Statistics show that tourist arrivals grew 26.1% in the first half of 2014.
Core investors in Vietnam will stay put, as FDI tend to be sticky. The major foreign investors in Vietnam are Japan, the Republic of Korea (RoK), the US and Taiwan.
The long-term impact will likely be how Vietnam organises its supply chain. Currently, Vietnam still relies on imported inputs for its major export items, including textiles, footwear and electronics.
Vietnam is negotiating for the Trans-Pacific Partnership (TPP). It is expected to be the largest gainer of TPP once it is passes. However, one of the non-tariff sticking points for Vietnam is the Rule of Origin, which requires inputs to be sourced from TPP countries.
According to HSBC, TPP considerations and recent tensions with China will accelerate the pace of reforms.
Inflation is expected to stay stable, with some seasonal acceleration in early third quarter and State Bank of Vietnam will keep rate steady at 5%.
In addition to waiting for the conclusion of the EU-Vietnam FTA and good news from the TPP negotiations, observers will also watch out for the progress of State businesses and banking sector reform.
