VietNamNet Bridge – HSBC Bank in a report recently released said that improved demand from the European Union (EU) and the U.S. will lift Vietnam’s exports in 2014.

In the coming years, Vietnam may emerge as one of the countries benefiting the most from improved Western demand. The reason is that Vietnam’s economy is export-dependent, the bank said in a report on Vietnam’s macro-economic picture.

Despite faltering global demand in 2013 and declining commodity prices, Vietnam’s exports managed a respectable expansion of 15.4%. The bank projects this year’s exports to rise faster.

From a country with persistent trade deficits, Vietnam had a US$900 million trade surplus in 2013 following a marginal surplus in 2012.

Most of this was due to the rebound of garment and textile shipments as well as new foreign investment in electronics.

“With disbursed foreign direct investment (FDI) rising 9.9% and registered investment increasing sharply, we expect exports to accelerate in 2014,” the bank said.

HSBC’s December Purchasing Managers’ Index (PMI) for Vietnam shows an acceleration of output for the manufacturing sector. It rose to 51.8, the highest level since April, 2011. What is positive about the PMI reading is the strength of the sub-indices, especially new orders and employment.

The increase of new orders, coupled with reduced inventories, means that output will likely rise in the coming months to match the demand for goods. With U.S. and EU GDP expected to expand in 2014, which will increase demand for Vietnamese goods such as apparel and electronics, the manufacturing sector is expected to continue its upward trend.

The most positive news from the PMI is the sharp rise of the employment sub-index. This reflects the country’s competitiveness in labor-intensive manufacturing, which attracted high inflows of foreign investment in 2013.

With global conditions improving and trade negotiations in the works, export-oriented firms will enjoy another year of robust growth. With high exposure to the U.S. (18% of total exports) and the EU (14% of total exports), Vietnam is poised to benefit from improving Western demand.

“We expect exports to rise 20% in 2014 from 15.4% in 2013. This will help GDP expand 5.6% in 2014, up from 5.4% in 2013,” HSBC said in the report.

While this helped improve the country’s macro stability, it also exposes the weakness of Vietnam’s domestic demand. Domestic demand will likely stay lackluster due to the overhang of bad debts over the economy.

The State Bank of Vietnam (SBV) established the asset management company but the bulk of financial sector reforms remain largely unaddressed. While a positive step, further reforms are necessary to address non-performing loans and reduce the stress in the financial system.

HSBC’s economist Trinh Nguyen said that without reforms to address its bottlenecks, Vietnam will continue to perform below potential, with domestic firms affected by a frozen financial system in an increasingly competitive market. Banking sector reforms, infrastructure investment, and supply chain restructuring and human resource development are some of the reforms needed to kick the economy into high gear.

“We expect inflation to accelerate slightly in 2014 due to higher energy and food prices. While inflation will accelerate in 2014 to 7.9% (average), SBV has scope to keep rates on hold in the first quarter of 2014,” the lender added.

Source: SGT