Potential Risks for the Vietnamese Economy

While Vietnam’s economy has displayed relatively robust economic growth over the past few decades, various short-term and long-term risks threaten to reverse this trend. After years of reform, the country began integrating with the international economic system, notably joining ASEAN in 1995 and the WTO in 2007. Partially as a result of such developments, the Vietnamese economy expanded rapidly. For instance, the economy has grown at a rate of over 5% each year since 2010 and is projected to reach 6.8% for the year 2019. Trade has to a large extent driven this growth: in 2017, trade equaled 190% of GDP. Much of Vietnam’s exports revolve around labor-intensive industries, such as manufacturing. Such reliance on labor-intensive industries may face challenges in the years ahead if potential investors choose to implement more capital-intensive and labor-saving production technologies in factories placed in countries with higher levels of development. Besides this risk, Vietnam currently faces interrelated and significant risks related to geopolitics, energy, and the environment.

Changes in regional geopolitical relations pose both opportunities and risks for Vietnam. Owing to the US-China trade war, many companies have begun to shift operations out of China and into other countries in Southeast Asia in order to increase supply chain resilience. For instance, Samsung, Kyocera, and Nike have each begun shifting operations to Vietnam since the beginning of the trade conflict. Such movements may, in turn, lead to political risks stemming from Washington. Since the trade war started, Vietnam’s trade surplus with the US has increased dramatically. The trade surplus with the US equaled roughly $40 billion in 2018 and reached $25 billion for the first half of 2019. President Trump has expressed dissatisfaction with the current trade imbalance and may push for tariffs in the future. Such a shift would, in turn, slow down Vietnam’s rapidly growing economy.

Vietnam faces various risks related to energy provision in the years ahead. The country faces rapidly increasing energy demand, for instance with electricity demand growing at roughly 9% a year. Projections by the Ministry of Industry and Trade show that Vietnam may face serious power shortages in two years if the government does not respond quickly and effectively. The country is currently locked in arguments with China over offshore drilling operations, which could exacerbate the impending energy shortage.  Investments in the energy sector face significant regulatory hurdles that have hampered the development of the sector. In order to compensate for the impending shortage, the country will need to increase energy imports, such as coal and LNG, in the years ahead. LNG imports, in turn, may not provide immediate succor, as the country lacks sufficient facilities to utilize the resource.

Lastly, Vietnam faces significant environmental risks that may, in turn, hinder economic development in the years ahead. Two primary risks stem from the destruction of coastal mangrove ecosystems and the procurement of sand from riverbeds in the Mekong river delta. The mangrove forests along the coast serve many functions: they act as a storm buffer and prevent saltwater from moving inland. Construction and developments along the coast destroy these mangrove ecosystems, leading to increased risk for erosion and the salination of coastal soil and waterways. Secondly, the country faces serious risks related to sand mining. Demand for sand, an input for construction, has increased drastically within Vietnam and abroad. Mining of sand along in the Mekong riverbed and in the Mekong Delta leads to a number of risks. The mining activities can kill fish and other river-based wildlife. Secondly, as the riverbed is cleared, the Mekong’s water current strength has increased, leading to an increased rate of erosion in the Delta. This will, in turn, pose significant risks for the robust agriculture industries housed in the Mekong Delta.

A number of domestic and international forces pose risks for the Vietnamese economy in the years ahead. The country will need to adapt swiftly in order to mitigate these risks. While the probability and impact of each specific risk may not be large in the next few years, the cumulative effects of these risks suggest less than rosy prospects for the Vietnamese economy in the years ahead.

About the Author

Dwight Lindquist

Dwight Lindquist earned his MA in International Studies from the Johns Hopkins University and has studied extensively at the Hopkins-Nanjing Center in China. Dwight is fluent in English and Mandarin, previously earning a Certificate from the East China Normal University in Shanghai.

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