Vietnam’s strong start to 2013

Regular readers will know that I’ve long been optimistic about Vietnam. For most of that time, the market has resolutely declined to play along, so 2013 has been a pleasant surprise so far – the VN Index is up almost 20% since the start of the year.

However, it remains to be seen if those gains will stick. There’s still plenty for policymakers to do in terms of sorting out the economy’s many problems (FT Beyond Brics has a quick primer), although they seem to be making some progress and deals like Mitsubishi UFJ’s recent agreement to buy a 20% stake in VietinBank can be see as a long-term vote of confidence.

And despite the slowdown in growth, there is the odd spot of good news – exports were up almost 20% year-on-year in 2012, reflecting the country’s improving position in manufacturing, as Capital Economics notes:

Vietnam’s strong export performance reflects the emergence of a competitive export-orientated manufacturing sector. Increasingly, this is not only in low-end goods such as textiles, where it is benefiting from China’s shift away from low-end manufacturing, but also in higher value-added sectors, such as in the assembly of electronic consumer items. Exports of computers and other electronics (which now account for around 7% of total exports), grew by over 90% last year.

While the ongoing travails of the property sector get much more attention in the short term, trends in exports concern me more in the long term. Every one of Asia’s recent success stories has followed an export-driven approach to development and there’s little reason to expect Vietnam to do anything different.

So long as the government continue to encourage competitive manufacturing while making gradual moves towards curbing the inefficient state-owned enterprises, Vietnam’s potential remains very promising. There’s nothing unusual about countries suffering crises like these in the earlier stages of development and arguably they’re an important step in forcing change.

Still, it will unquestionably be a volatile ride. For now, whether this turns out to be the beginning of a market recovery or just another false start will probably depend on whether policymakers announce credible plans for dealing with the banks’ non-performing loans – something that is impossible to predict given the apparent infighting between different factions in the ruling party.

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