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Macroeconomic update

Cambodia will experience a broad-base economic growth around 6.9% in 2018. Garment and footwear industry will maintain its growth momentum, as in the first half of 2018, exports of garment and footwear grew 11%YOY, following strong demand from major trading partners, the U.S. and EU. The development of emerging industries, such as electrical parts and automobile parts will also contribute to growth of the manufacturing and export sectors. Construction boom will continue as reflected in robust credit growth to this sector of 36%YOY in 2017. An expansion of both resident and commercial estates projects has made Cambodia the largest importer of Vietnamese steel, rising 56%YOY in the first 7 months of 2018. The Kingdom’s favorable investment climate has attracted the total USD 1.32 billion of foreign direct investment, increasing 14%YOY, in the first half of this year. Moreover, the number of tourist arrivals accelerated 13.5%YOY as of May 2018, dominated by Chinese and other Asian visitors. One-party-state Cambodia under Prime Minister Hun Sen aims to become an upper middle-income country by 2030 and become a developed country by 2050. The Cambodian People’s Party (CPP), won all 125 seats in parliament with around 80% of the vote in July national election. On September 5, the new government was formed and Hun Sen was reelected as prime minister for another 5 years. To maintain high economic growth and to achieve higher income status, the 2018 annual budget has been set with a larger allocation to public investment, amounting to 7.8% of GDP. According to the public investment program 2018-2020, there are 586 development projects in the pipeline, requiring USD 5.4 billion for public investment. The projects are spread across economic and social sectors, with around 25% of the total investment budget going to infrastructure. Downside risks are associated with a deceleration of key sectors in medium term. Garment and footwear production and exports have been slowing down from a double-digit growth in the past few years due to higher minimum wages and rising regional competition. Export prices of garment and footwear products are also heading down. Another concern is potential loss of Everything But Arms (EBA) privilege with EU, which is now being reviewed over the human rights abuses regarding Cambodia’s general election. However, according to Debt Sustainability Analysis by the IMF and the World Bank, Cambodia’s risk of external debt distress remains low as public external debt of 33% of GDP in 2017 is still

Facts and Figures Population (2017) 16.2 million Labor force (2017) 7.9 million GDP (2017) 22.3 USD billion GDP per capita (2017) 1,390 USD GDP by sector (2017) Agriculture: 25.3%, Industry: 32.8%, Services: 41.9% Top exports (2017) Textile 65%, Footwear 11%, Travel goods 3%

Economic Outlook

Things to watch in 2018

Potential loss of EBA benefit with the EU

Business opportunities in tourism sector

manageable, the current account deficit narrowed on the back of strong FDI inflows, and foreign reserves continued to grow reaching 5.5 months of imports.

The National Bank of Cambodia (NBC) gradually promotes the use of Khmer riel while maintaining exchange rate stability. NCB has continuously implemented measures to increase Khmer riel (KHR) usage in the economy through financial institutions and local people. KHR in circulation has increased through the Liquidity-Providing Collateralized Operation (LCPO), by which NBC injects additional KHR for financial institutions through auction. LCPO has increased the KHR contribution to broad money growth from 1.1% in 2016 to 3.2% in 2017. Moreover, people’s confidence in local currency and in banking system is improving as shown by growing deposits in KHR. With little pressure on exchange rate, KHR has maintained its value around 4,035 against US dollar since the beginning of 2018.

Tourism sector presents strong potential growth as other key sectors will be moderate in the medium term. While the growth of garment and footwear industries have decelerated in the past few years, the number of tourist arrivals and tourism receipts speed up with a double-digit growth. The Cambodian government has pushed forward development of untapped historical and natural sites. In 2017, Temple zone of Sambor Prei Kuk was officially announced a world heritage site by UNESCO. The government also sets a target to welcome 7 million foreign tourists by 2020 and up to 10 million visitors by 2025. Chinese are the number one group of foreign tourists, followed by Thai and Vietnamese. Though not eligible for the Council for the Development of Cambodia (CDC)’s incentives, investment opportunities arise in tourism-related businesses, such as hotel, restaurant, traveling agent, and transportation as they present high profitability.

Financial markets

EIC’s view

Cambodia’s Key Indicators Indicators Unit 2012 2013 2014 2015 2016 2017F 2018F Real GDP % YOY 7.3 7.4 7.1 7.2 7.0 6.9 6.9 Consumer price index % 2.5 4.7 1.0 2.8 3.9 2.2 3.3 Current account balance % of GDP -8.2 -13.0 -9.8 -9.3 -8.8 -8.8 -10.7 Policy rate (end of period) % 1.33 1.34 1.42 1.42 1.44 1.44 -

Sources: International Monetary Fund (IMF) and The National Bank of Cambodia

Trade deficits widened as export growth decelerated Number of tourism visitors continued to rise

Sources: International Monetary Fund (IMF) Sources: World Bank and CEIC

Improving investment climate drove FDI growth Reserves buffers were higher than a 3-month standard

Sources: World Bank

Sources: IMF

KHR has been depreciating against the USD External debt was in manageable level

Sources: Bloomberg Sources: International Monetary Fund (IMF) and CEIC

Links with Thai Economy

Exports to Cambodia Imports from Cambodia

Sources: Thailand’s Ministry of Commerce Sources: Thailand’s Ministry of Commerce

Border exports to Cambodia Border imports from Cambodia

Sources: Thailand’s Department of Foreign Trade Sources: Thailand’s Department of Foreign Trade

Thailand’s Direct Investment in Cambodia Cambodia’s tourist arrival in Thailand

Sources: Bank of Thailand Sources: Thailand’s Department of Tourism


The Lao economy expanded 6.9%YOY in 2017, according to the World Bank’s Lao PDR Economic Monitor. Growth was driven by electricity generation, manufacturing, and construction. The power sector accounted for 11% of total GDP and contributed 2.5% to overall growth. The Lao economy will continue its good momentum backed by electricity exports. During the first quarter of 2018, power exports to Thailand – its major partner – rose 110%YOY and will keep expanding as large hydropower projects begin commercial operation from 2019. For 2018, the IMF expects full-year growth of 6.8% before advancing to 7% in 2019. Nevertheless, a high current account balance and fiscal deficits remain key risks to Laos economy. In 2017, the current account deficit narrowed to -13% of GDP thanks to surging exports, but it is expected to widen in the near-term from rising construction import demand. This has raised Laos’ vulnerability to external disturbance considering its low reserves buffers – able to cover only 1.3 months of imports. Meanwhile, prolonged fiscal deficits heightened the need for funding, particularly from external sources. As of 2017, Laos’ public debt and external debt reached 61% and 114% of GDP, respectively, the highest levels among its regional peers. About two-thirds of the nation's external debt were dominated by the US Dollar, exposing Laos to currency fluctuation risk. Furthermore, share of commercial term loans is declining, as share of market base borrowing is increasing. This will intensify the sovereign debt burden as external market rate is on the rise, putting more challenges on future fiscal solvency. A dam break in July leaves Laos’ target of becoming the ‘Battery of Asia’ into question. Following the collapse of the Xe-Pian Xe-Namnoy hydropower project, the Lao government decided to halt new dam projects to review its hydropower development strategy and set up a working team to inspect dam quality nationwide. This may delay some hydropower projects and result in higher costs for hydropower investment. [Read more in box: Laos’ dam break brings ‘Battery of Asia’ target into question]

Facts and Figures Population (2017) 7.13 million Labor force (2017) 3.6 million GDP (2017) 17.15 USD billion GDP per capita (2017) 2,568 USD GDP by sector (2017) Agriculture: 20.9%, Industry: 33.2%, Services: 39.1% Top exports (2017) Electricity 24%, Copper 20%, Electrical product 12%

Economic Outlook

Government’s policy and

measure following the dam break

Enforcement of the Public Debt Management

Law


Laos’ banking sector is facing 3 financial soundness challenges according to the World Bank’s report. First, even though the overall baking sector is well-capitalized, the capital adequacy ratio in some state-owned commercial banks (SOCBs) and some private banks remained lower than the 8% minimum requirement. This reflects a weak buffer as SOCBs dominate about 42% of Laos’ banking asset. Second, the rising number of non-performing loans (NPLs) has worsened credit quality. In 2017, NPLs climbed to 3.1% of total loans but were considered understated since they excluded loans related to government projects. Last, return on assets (ROA) in the sector has been declining and stayed at 0.5% in 2017, lower than its peers. These vulnerabilities signal a fragile banking sector, prompting the Bank of Lao PDR (BOL) to improve supervision and regulation frameworks. Laos introduced a reform of intellectual property (IP) law and a further tax break for investment in Special Economic Zones (SEZs). The new IP law took effect from 9 June 2018 and aims to support SMEs as well as research and development areas. Key amendments include more trademark types and plant variety rights to meet some requirements in the International Union for the Protection of Plant Varieties (UPOV). The amended law did not bring many changes, but it underlines the government’s efforts to improve Laos’ legal system toward worldwide standards. Furthermore, Laos has promoted investment in SEZs via new tax incentives. These involve tax holiday extension in various segments and VAT exemption for SEZs developer.

Laos is moving gradually from a production-based to a service-based economy. In recent years services made up about 40% of Laos’ GDP and contributed to economic growth by 1.8% out of 6.9% in 2017. Wholesale and retail trade has been a bright spot in the service segment, with annual growth of 9.8% during 2012-2017. This offers a lucrative opportunity for Thai businesses interested in selling or exporting products to the Laotian market. Based on our research, Thai products are popular among the people of Laos and are perceived as high-quality goods with affordable prices. Expanding wholesale and retail sales in Laos will also benefit the Thai border trade. During the first half of 2018, the Thai border trade with Laos rose 6.3%YOY. Major export products with notable growth included diesel fuel, livestock products, and chicken meat. Border trade with Laos is likely to grow in line with Laos’ economic growth, which will help boost domestic demand going forward. According to the IMF, the Lao economy will maintain high growth of around 6.8-7% through the next 5 years, assuming that key risks are properly managed.

Law & Regulation

EIC’s view

Financial markets

Figure 1: Service sector in Laos has been expanding, led by wholesale and retail trade

Source: EIC analysis based on data from Lao Statistics Bureau

Laos’ Key Indicators Domestic Demand Unit 2012 2013 2014 2015 2016 2017F 2018F Real GDP % YOY 7.8 8.0 7.6 7.3 7.0 6.8 6.8 Consumer price index % 4.7 6.7 2.4 0.9 2.5 0.1 2.6 Current account balance % of GDP -26.0 -28.4 -20.0 -18.0 -12.0 -13.0 -14.9 Policy rate (end of period) % 5.0 5.0 5.0 4.5 4.25 4.0 -

Sources: International Monetary Fund (IMF) and Bank of the Lao PDR

Trade balance improved thanks to surging exports Tourism visitors dropped during the past 2 years


FDI fell but remained robust led by Chinese investment Low foreign reserves intensified external vulnerability

Sources: World Bank

Sources: IMF

LAK is depreciating as USD strengthens High external debt level is a major risk to Laos’ economy

Sources: Bloomberg

Sources: International Monetary Fund (IMF) and CEIC


Exports to Laos Imports from Laos


Border exports to Laos Border imports from Laos


Thailand’s Direct Investment in Laos Laos’ tourist arrival in Thailand


The dam break tragedy in July provoked a concern over Laos’ hydropower ambition. On 23 July a collapse of the Xe-Pian Xe-Namnoy hydropower project unleashed severe flooding in the southern part of Laos. The damage also expanded to some parts of Cambodia and farm fields in Vietnam’s Mekong Delta. The Xe-Pian Xe-Namnoy dam is located along the lower Mekong basin in Attapeu province. The dam was about 90% completed and set to start operation in early 2019, with a 410 MW total capacity. Delay of Xe-Pian Xe-Namnoy dam is expected to incur a loss of 2,023 GWh in electricity generation annually. In response to the dam disaster, the Lao government called for a suspension of new hydropower projects and set up a working team for dam quality inspection. The announcement came on August 7, requiring construction quality inspection for hydropower projects countrywide, both completed and under construction. The government also decided to reexamine its hydropower development strategy. This may lead to rising costs for hydropower investment to ensure construction safety, and future projects may take longer time for approval. A dam sustainability review may affect Laos’ position as the ‘Battery of Asia’ if the current and future hydropower projects continue to get blocked. Under the ‘Battery of Asia’ strategy, Laos plans 90 hydropower plants across the country by 2020, with about 12,110 MW installed capacity and up to 61,092 GWh power generation capacity per year (Figure 2). This plan is a part of Laos’ ambition to graduate to middle-income country status within the next two years. However, dam inspections could result in project delays and keep the country from achieving such targets within the timeframe.

BOX Laos’ dam break brings ‘Battery of Asia’ target into question

Figure 2: Hydropower projects in Laos

Remark: COD stands for commercial operation date Source: Laos Hydropower Development Report by the Ministry of Energy and Mines (2016)

EIC’s view The project delays may result in a fall of expected country revenue, as electricity is a key element in Laos’ export and industrial sectors. Over the past 5 years, the power sector has been a major driver behind Laos’ surging exports (Figure 3). According to the BOL, electricity exports accounted for 26% of total Laos’ export value, while the power sector covered 11% of real GDP (Figure 4). These figures highlight the vital role of the power sector in the Lao economy. For that reason, a big loss of electricity revenue will surely affect the country’s economic outlook in the medium term given its currently high current account and fiscal deficits. But in the near term major dams which are going as planned will help reduce the effects. These projects include the Xayabury and Nam Ngiep 1 dams, which will begin distributing electricity in 2019 and add about 1,575 MW in generation capacity. Most of electricity generated from both dams will be exported to Thailand. For investors, the dam sustainability review implies higher costs for hydropower project investment, in order to ensure construction safety and dam resilience. Future projects may also take longer to approve if the government imposes stricter frameworks for project consideration. Environmental effects are another potential factor which may take a key part in approval decision, after the dam break in July provoked massive criticism over hydropower impacts on local communities, wildlife and fishery. In the meantime, the government may shift its development focus towards other renewable energy sources such as solar power and wind power, opening new business opportunities. Laos has already agreed to build several solar and wind power projects across the country. These include a MOU-signed solar power plant in Xekong province with an installed capacity of 300 MW-350 MW and wind power development projects in Savannakhet, Khammuan, and Xekong provinces with a total capacity of 600 MW. Similar to dam-generated electricity, most of the solar and wind power will be exported to Laos’ neighbors. Nevertheless, there are concerns whether Laos will be able to secure its electricity buyers and keep selling prices at a profitable level. Figure 3: Electricity has been a key component in Laos’ exports during the past 5 years

Figure 4: Electricity contribution to Laos’ GDP has increased from 6% in 2012 to 11% in 2017

Source: EIC analysis based on data from Bank of the Lao PDR


Myanmar’s economic outlook is still favorable, with expected growth around 7% in FY2018/192, but risks have built up. Rapid economic expansion will be driven by a recovery in agricultural production, improving exports, and higher public spending. Rice and garment exports will continue growing from last year despite global trade uncertainties. Trade between Thailand and Myanmar is likely to expand under bilateral agreement to double trade value by 2022 from the current level of USD 6 billion. However, foreign direct investment (FDI) and tourism are expected to grow moderately as, in FY2017/18, FDI declined 14%YOY to USD 5.7 billion while the number of tourist arrivals from the U.S. and EU, high-spending groups, dropped 15%YOY. The survey conducted by the Union of Myanmar Federation of Chambers of Commerce and Industry in the second quarter of 2018 also reported weakening business sentiment in Myanmar. Unclear economic policy and persistent Rohingya human rights issue in Rakhine state are the two main investors’ concerns, followed by MMK depreciation against USD, limited access to banking services, and relatively high taxes and tariffs. The government announced a seven-year high budget deficit for FY2018/19 and implemented a number of measures to support economic activity. Public spending reached MMK 24.9 trillion while expected revenue was MMK 20 trillion, resulting in deficit of MMK 4.9 trillion or 5% of GDP. Government spending in FY2018/19 will focus on infrastructure development, particularly in electricity, energy, and transportation, as well as improving social welfare in education and healthcare. To regain investors’ confidence and further promote business activity in the country, the government have continued its efforts to liberalize more sectors for foreign investors. Two months after the liberalization of wholesale and retail business, the list of 24 products permitted for foreign traders was released. The products range from food, consumer goods, home appliance, to industrial intermediate goods and vehicles. Moreover, since 1 August 2018, the government granted visa allowances for the Chinese, South Korean, and Japanese to promote eco-tourism and business traveling, which is also complied with the new Myanmar Companies Law.

2 Myanmar new fiscal year starts from October 2018 to September 2019

Facts and Figures Population (2017) 55.12 million Labor force (2017) 22.3 million GDP (2017) 66.96 USD billion GDP per capita (2017) 1,272 USD GDP by sector (2017) Agriculture: 24.8%, Industry: 35.4%, Services: 39.9% Top exports (2017) Oil & Gas 27%, Textile 14%, Cereal 10%

Economic Outlook

Things to watch in 2018 CBM’s measures to stabilize MMK and steps toward flexible exchange rate system

Continued depreciation of MMK will increase Myanmar’s economic vulnerability. Since early June 2018, Myanmar Kyat has depreciated sharply 13%YTD against US Dollar. The main causes of MMK depreciation stemmed from a shortage of USD in local market as trade deficit widened and FDI inflows was stagnant as well as strengthen USD due to the U.S.’s economic recovery. The continued depreciation of Kyat is expected to worsen trade deficit as demand for imported consumer goods, raw materials and capital goods remains strong. Rising prices of imported goods will put more pressure on already high inflation at 5.5% in FY2017/18. In addition, falling value of MMK will affect the country’s external debt repayment, which accounted for 3.6% of total budgeted expenditure in FY2018/19.

Central Bank of Myanmar (CBM) has actively implemented measures to stabilize MMK by introducing new measures that move toward banking and financial sectors development. (Figure 5) Since 27 July 2018, CBM has injected more than USD 7 million into the economy through private banks’ auctions but MMK continues its depreciation trend. Later in August, CBM announced removal of +/-0.8% trading brand of the CBM’s reference rate. The free float of MMK is a significant step toward flexible exchange rate regime, which will allow the exchange rate to be determined by the market. CBM also launched the first swap facility with private banks and plans to develop a foreign exchange market to further stabilize MMK. However, Myanmar’s banking and financial markets are relatively small and in the early stage of development, comparing to regional peers. [Read more in Box: Introduction to Myanmar banking sector]

Financial markets

Figure 5: Despite CBM’s attempts to stabilize the exchange rate, MMK has kept depreciating substantially since early June 2018.

Source: EIC analysis based on data from Bloomberg

EIC’s view

Investment in consumer goods and industrial raw materials has high growth potential in Myanmar as the government focuses on promoting exports and import-substitution. Import demand in Myanmar remains strong amid rising prices of imported products due to recent MMK depreciation. Government’s investment promotion together with liberalization of wholesale and retail business will increase opportunity for Thai businesses to expand their productions and sales in Myanmar domestic market. therefore, business opportunities arise in products, ranging from food & beverage, raw materials such as metal and plastic, to machineries & parts and vehicle & parts, which are currently Thai top export products to Myanmar for the past 10 years. Moreover, Thai investors could consider establishing export-related businesses in Myanmar as it still enjoys preferential trade treatments under GSP programs with US and EU.

Myanmar’s Key Indicators Domestic Demand Unit 2012 2013 2014 2015 2016 2017F 2018F Real GDP % YOY 7.3 8.4 8.0 7.0 5.9 6.7 6.9 Consumer price index % 4.7 6.4 6.1 8.4 7.0 5.5 5.8 Current account balance % of GDP -4.0 -4.9 -2.2 -5.1 -3.9 -5.3 -5.4 Policy rate (end of period) % 10 10 10 10 10 10 -

Sources: International Monetary Fund (IMF) and The Central Bank of Myanmar

Trade deficits deepened as imports continued to rise Tourism visitors fell especially from the western regions


FDI growth weakened from unclear economic policies Foreign reserves provided sufficient economic buffers

Sources: World Bank

Sources: IMF

Sharp decline of MMK intensified economic vulnerability External debt remained low

Sources: Bloomberg



Exports to Myanmar Imports from Myanmar


Border exports to Myanmar Border imports from Myanmar


Thailand’s Direct Investment in Myanmar Thai tourist arrivals in Myanmar


Myanmar banking sector has grown significantly but remains the smallest in ASEAN. Myanmar banking assets accounted for only 49% of GDP in 2015, the lowest among ASEAN peers. However, Myanmar banking sector has been one of the fastest growing in the region, with an annual average asset growth of 29% from 2012-2017 (Figure 6). The expansion of total bank assets has been driven by increasing demand for credit in domestic market. A 40% credit-to-GDP as of September 2017 was, again, relatively small as it improved from a very low base. Domestic banks play major roles in the system, covering around 95% of total bank assets1, while foreign banks are mostly restricted.

Domestic banks, which dominate the banking system, are main drivers of growth. Currently, there are 28 domestic banks in Myanmar, of which 4 state-owned banks (SOBs) and 29 private banks sharing half of the market. Despite a decrease in share of banking assets, SOBs remain important to the economy as they provide subsidized lending to the state and agricultural sector. For private banks, the “Big Three” banks take more than 60% share of private bank market and are the major creditors to private sector, focusing in construction, manufacturing, trade, and services sectors. Thus, total loans provided by domestic banks have increased 29% per year from MMK 7 trillion in 2013 to MMK 15 trillion in 2017, led by the Big Three (Figure 7).

1 Thomas Foerch et al., Myanmar’ Financial Sector: A Challenging Environment for Banks, Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ), October 2016

BOX Introduction to Myanmar banking sector

Figure 6: Myanmar total bank assets have been substantially increased but from a very low base.

Source: EIC Analysis based on data from Central Bank of Myanmar, and Myanmar Banking Sector 2025: The Way Forward (September 2016)

Myanmar banking sector have several structural challenges despite a rapid expansion. According to the World Bank’s Global Findex 2017, Myanmar’s access to finance remains low as only 26% of adults have bank accounts and 19% of adults can borrow from financial institutions, reflecting a limited pool of borrowers. The banking sector is heavily collateralized that requires lending to be backed by real estate or other immovable assets, increasing bank exposure to property value. Moreover, the interest rates cap at 13% maximum lending rate and 8% maximum deposit rate make banks unable to price risk properly and limit profitability. Last but not least, most banks in Myanmar lack of capital, with 6 of them do not even meet the new capital requirement of MMK 20 billion under the Financial Institutions Law 2016. Central Bank of Myanmar (CBM) has taken serious steps to develop banking sector and improve supervision. The much progress in Myanmar banking sector was seen after the implementation of Financial Institutions Law 2016, resulting in approval of foreign bank branch licenses and the first company listed on Yangon Stock Exchange (YSX). CBM plans to further issue more licenses for foreign banks in the near future. In terms of financial services, CBM also announced regulations on Mobile Financial Services to open the market for non-bank financial services providers and allow development of mobile banking/payment. By the end of 2018, 13 existing foreign banks will be permitted to provide both export and import financing services for their clients and there the first National Credit Bureau will start its operation. In addition, CBM plans to draft a movable asset finance law to allow banks to accept other assets rather than real estate as collateral. At the same time, CBM has moved forward to reform state-owned banks and enhance the financial sector regulation and supervision, with assistance from the World Bank.

Figure 7: The Big Three are the major creditors to private sector.

Source: Data from Myanmar Banking Sector 2025: The Way Forward (September 2016) and World Bank’s Myanmar Economic Monitor (May 2018)

Domestic banking loansUnit: MMK trillion

Composition of loans to private sector% of GDP

3 3

24

2

8

0

5

10

15

State-owned banks

The Big Three

Other private banks

Q3/2016 Q4 2016 Q1/2017 Q2/2017

Others Transportation

Construction

Services Trade

Manufacturing

Agriculture

EIC’s view

Businesses will have better access to credit once Myanmar Credit Bureau and the movable asset finance law are in place in the future. Under the upcoming immovable asset finance law, banks will be permitted to accept immovable assets as collateral, including stock, equipment, and receivables. Myanmar Credit Bureau, which is expected to begin within this year, will also help reduce financial institutions’ reliance on collateral-base lending with database of financial information and credit history. Businesses and small and medium enterprises (SMEs), which lack immovable assets, particularly real estate, as collateral, will increase access to proper financial institutions under the new lending practices. Credit to private sector will be further boosted, especially in Myanmar’s key sectors, namely manufacturing, trade, and services. CBM’s ongoing development, with technical assistants from the World Bank, will make Myanmar banking sector become more sophisticated with better supervision.



Vietnam’s economy posed a robust growth of 7.1%YOY in the first half of 2018. The growth was backed by service and industry sectors which rose 6.9%YOY and 9.1%YOY, respectively. Major service contributors were wholesale and retail trade, followed by finance, insurance and banking. Meanwhile, FDI in the first 6 months of 2018 surged 5.7%YOY, mainly from Japan, South Korea and Singapore. The IMF expected Vietnam’s economy to continue its growth momentum and expand 6.6% in 2018. For 2019, the 2 trade agreements – CPTPP and EU-Vietnam FTA (EVFTA) -- will help boost Vietnam’s growth to 6.5%YOY. The CPTPP is likely to take effect by March 2019 while EVFTA should be signed in late 2018 before taking effect next year. Exports growth stayed strong but trade war risks are looming. In the first 6 months of 2018, exports rose 16%YOY led by mobile phones and spare parts. Exports of FDI sectors covered 71% of total exports, affirming Vietnam’s position as a regional manufacturing factory. Vietnam’s export outlook remained firm but risks emerged from a looming U.S.-China trade war. The U.S.’s tariff on Chinese imports will indirectly affect Vietnam’s shipment to China, particularly machinery parts and phone components. These are intermediate goods which will be assembled in China before exported to the U.S. as final goods. In other words, as trade war escalates, Vietnam’s exports of such intermediate goods are set to decline following the U.S.’s cutback on Chinese imports.

Moody’s raised Vietnam’s rating, citing a bright growth potential and improving banking soundness. In August 2018, Moody’s Investor Service upgraded Vietnam’s long-term issuer and senior unsecured ratings from B1 to Ba3 – from high credit risk to substantial credit risk. Lower dependence on external debt was another upside factor while heavy reliance on credit growth weighed on the country’s growth potential. Outstanding credit in Vietnam surged 14.1%YOY as of May 2018. About 64% of outstanding credit was expended on production, construction, trade and business while other 36% mainly flowed into consumer lending, particularly on real estate. This fueled concerns on capital leakage from production sector to non-value adding activities, as well as property speculation.

Facts and Figures Population (2017) 96.16 million Labor force (2017) 56.46 million GDP (2017) 215.93 USD billion GDP per capita (2017) 2,306 USD GDP by sector (2017) Agriculture: 16%, Industry: 33%, Services: 41% Top exports (2017) Electronic products 39%, Garments and footwears 19%

Economic Outlook

Financial markets

Progress of EU-Vietnam Free

Trade Agreement (EVFTA)

U.S.-China trade war effects on

Vietnam’s exports

Vietnam planned a 5.3% minimum wage hike starting from 1 January 2019. The proposal was approved by the National Wage Council (NWC) and is currently under government consideration. The hike is about USD 7-9 increase per month. This year, minimum wage in Vietnam ranges from VND 2.76-3.98 million (USD 119-171) per month depending on regions. On average, a monthly minimum wage is around VND 3.34 million (USD 143). The rate is the second-highest among CLMV peers but remains far lower than other ASEAN countries; such as USD 201 in the Philippines and USD 211 in Thailand.

EVFTA may dampen Thailand’s exports to the European countries, especially machinery and electrical appliances which are major export products from Thailand (Figure 8). Once entering into force – which is expected in 2019, the agreement will eliminate import tariffs on 99% of trading products between Vietnam and EU within 10 years. EU’s key exports to Vietnam include aircrafts and pharmaceutical products while Vietnam’s major exports to EU are electronics and footwear. Thai exporters is at risk of losing EU customers as our trade agreement negotiation with the EU was halted since 2014. Thailand’s automatic data-processing machines and telephone parts are the 2 exported products expected to suffer from EVFTA. In 2017, Thai exports of both products accounted for 8% and 2% of total Thai exports to EU, respectively.

Meanwhile, the planned wage hike signals a rising cost of business in Vietnam. Similar to other CLMV countries, Vietnam continues to raise minimum wage in response to an uplifting economic condition. The increased wage is still within competitive level since it remains lower than most ASEAN countries’ (Figure 9), but lack of high-skilled workforce is another lingering business concern. On the other hand, rising wage implies higher income and purchasing power in Vietnamese market. This will later boost demand for Thai exports to Vietnam particularly higher-sophisticated products such as premium fruits and home appliances.

Law & Regulation

EIC’s view

Figure 8: Thai machinery and electrical appliances will lose competitiveness to Vietnam after the EVFTA is enforced

Source: EIC analysis based on data from Trademap

Figure 9: Vietnam’s new minimum wage remains lower than most ASEAN countries

Remark: Exchange rate as of 31 July 2018 Source: EIC analysis based on data from press search

Vietnam’s Key Indicators Domestic Demand Unit 2012 2013 2014 2015 2016 2017F 2018F Real GDP % YOY 5.2 5.4 6.0 6.7 6.2 6.8 6.6 Consumer price index % 6.8 6.0 1.8 0.6 4.7 2.6 4.0 Current account balance % of GDP 6.0 4.5 4.9 -0.1 3.1 4.1 3.0 Policy rate (end of period) % 9.0 7.0 6.5 6.5 6.5 6.25 -

Sources: International Monetary Fund (IMF) and The State Bank of Vietnam

Trade deficits continued with a rising import demand Tourism helped lifting service balance


FDI is on the rise, concentrated in manufacturing sector Reserves buffers are lower than a 3-month standard

Sources: World Bank

Sources: IMF

VND is currently in a depreciation trend against USD Country debt are relatively high, comparing to peers

Sources: Bloomberg



Exports to Vietnam Imports from Vietnam


Cross Border Exports to Vietnam Cross Border Imports from Vietnam


Thailand’s Direct Investment in Vietnam Thai tourist arrivals in Vietnam


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