Trade Balance and Foreign Exchange Reserves
When talking about Vietnam’s economic landscape, the overall trade balance is a critical indicator. Recent data reveals that the trade balance is rather close to equilibrium, with the notable trade surplus of 2019 amounting to only 4% of imports. In most other years this decade, the trade balances have been either smaller or even displayed a deficit. Moreover, foreign exchange reserves are currently within a healthy range, standing at about 3–4 months of imports. This is well within the norm, suggesting no immediate red flags for economic stability.
Evolution of the Exchange Rate
Examining the exchange rate provides further insights into the Vietnamese economy. In 2010, the country faced a trade deficit, with the exchange rate averaging approximately 18,613 dong to one U.S. dollar. Fast forward to 2019, amidst a modest trade surplus, and the exchange rate shifted to around 23,050 dong. Interestingly, this figure remained relatively stable for much of 2020.
The disparity in inflation rates between Vietnam and the U.S. largely explains the dong’s value movement. From 2010 to 2019, Vietnam’s GDP deflator surged by 62%, compared to just 17% in the U.S. Had the currency depreciated in line with this differential, one could argue that the dong ought to have depreciated by 38%, possibly reaching over 25,000 dong per dollar. This aligns with the theory of purchasing power parity, which posits that exchange rates are influenced by differing inflation rates.
Currency Manipulation Concerns
If Vietnam were indeed manipulating its currency, it would likely do so to keep it undervalued, thereby promoting exports. Contrary to this assumption, evidence suggests that the dong is, if anything, overvalued, making exports more challenging. This raises the question: what are the underlying factors at play?
Shifts in Production Strategies
The last decade has witnessed a significant shift in production strategies, particularly in light of rising tensions with China and its soaring labor costs. Many companies have adopted a ‘China+1’ strategy, establishing assembly factories in Vietnam for garments, electronics, and footwear. More recently, the trade war initiated during Donald Trump’s administration prompted companies to adopt an ‘ABC’ (Anywhere But China) strategy, further accelerating the transfer of export production to Vietnam.
This influx has resulted in an impressive rise in exports, with goods growing from $150 billion in 2014 to $264 billion in 2019. Interestingly, even in 2020, exports continued to rise by 2% through September. However, imports also witnessed significant growth, increasing from $148 billion in 2014 to $253 billion in 2019, although they experienced a slight decline in 2020.
Foreign Investment and Current Account Surplus
Foreign Direct Investment (FDI) has experienced a noticeable uptick, with the International Monetary Fund (IMF) reporting a current account surplus of 4.9% of GDP in 2014, dropping to 2.2% in 2019. Despite a current account balance of $8 billion by 2020, the evidence suggests that neither trade surpluses nor foreign reserves indicate significant currency manipulation.
The interplay between other currencies, such as the euro and renminbi, is also crucial for Vietnam’s economic standing. The strength of the U.S. dollar, bolstered by Federal Reserve interest rate increases amid lower rates in the EU and Japan, significantly impacts trade dynamics. As the U.S. trade deficit expanded due to strong domestic demand, it underscored the factors influencing global trading relations.
The Value of Foreign Direct Investment
Data from the World Bank illustrates a net inflow of FDI rising from $9.2 billion in 2014 to $16.1 billion in 2019. While much of this investment is geared towards export production, the value added is notably low. Estimates suggest that the labor value added for smartphone exports is a mere 2% of sales value, signaling that a substantial part of Vietnam’s trade surplus with the U.S. might arise from imported components.
Future Competitiveness and Labor Supply Challenges
Vietnam’s current account is almost balanced, reflecting a cycle where imports surpass valuable domestic production, leading to seemingly large exports that primarily stem from foreign assembly. Despite the potential for future currency manipulation, Vietnam seems keen on maintaining good relations with OECD countries and the U.S., opting for transparent negotiations in economic management practices.
However, the growing demand for labor in manufacturing has its limits. Vietnam faces a tight labor market, with a dwindling agricultural workforce that is aging, and younger, educated workers are increasingly disinterested in factory jobs. This suggests that labor supply may stagnate or even decline in the coming years, posing challenges for economic expansion.
Infrastructure Investments and Economic Outlook
Looking ahead, Vietnam is likely to invest more in infrastructure, particularly in transportation, electricity, and water systems, which are essential for sustained growth. However, such investments require time to materialize and may initially lead to greater imports than exports due to low, falling tariffs.
The enhancements in automation, including smarter robots and 3D printing, could also reshape Vietnam’s export landscape. The United Nations estimates that such technologies may displace 75-85% of labor in key manufacturing sectors, potentially threatening the viability of traditional exports.
In the grand scheme, Vietnam finds itself uniquely positioned to capitalize on global shifts, even if it lacks direct control over these developments.