Optimism about Vietnam benefiting from trade tensions but worth sifting through the "hype": Citi

Despite optimism about Vietnam reaping the benefits of supply chain migration in the wake of trade tensions between the US and China, risks from a global slowdown and capacity constraints remain. 

Indeed, there is some growing frustration of sub-optimal domestic spillovers from the foreign direct investment (FDI) /export boom pointed out Citi in a report. 

Reasons for this include the large role state-owned enterprises play in the economy (28.6 per cent of GDP); the predominance of SMEs in the private sector which lack scale to compete with foreign suppliers; lack of adequate access to funding; and lack of domestic policy support compared with what foreign firms have, either via favourable tax policies, or ability to overcome domestic regulatory hurdles. 

Another issue is capacity constraints. While this is not yet a bottleneck for growth, there is growing concern that strong FDI coupled with years of slowing public investment will mean constraints in critical areas of infrastructure in future years, notably in energy, aviation, and hinterland transport. 

Lack of skilled labour is another potential bottleneck. "Contrary to our earlier expectations, it seems that much of the manufacturing sector in Vietnam is still rather labour intensive, requiring dexterous hands for assembly. But with only an estimated 7 per cent of the labour force having post-secondary degrees including vocational education, there seems to be a significant wage kill premium, and that the government needs to invest more in skills to be able to move up the value added chain," noted the report.