Vietnam could fall well short of its ambitious growth target

vietnam rice farmingVietnam is a major exporter of rice, as well as the world’s largest producer of robusta coffee.International Rice Research Institute

Earlier this year, Vietnam’s government set an ambitious GDP growth rate of 6.7%— that was subsequently upped by Prime Minister Nguyen Tan Dung to 7% — as its target for 2016.

But judging by the numbers released on Wednesday, growth is unlikely to reach that goal.

Vietnam’s GDP grew by 5.6% in the second quarter, bringing the total growth so far this year to 5.5%. This time last year, though, GDP growth was 6.3%, and the total GDP for 2015 was 6.7%.

It doesn’t look promising. Credit Suisse recently lowered their growth forecast for the country to just 6.0% for 2016, down from the 6.3% they estimated earlier. Additionally, BMI also downgraded its growth forecast for 2016. It now sees growth of 5.9%, down from its previous estimate of 6.3%.

The main drag on GDP growth continues to be Vietnam’s agriculture. According to Bloomberg, Vietnam’s worst drought in three decadesis crippling its farming economy. As the world’s biggest producer of robusta coffee and a major exporter of rice, a hit to agriculture greatly impacts overall GDP. A new research report from BMI, suggests the harsh weather conditions are estimated to have cost the country a total of $681 million.

graph 1CEIC, Credit Suisse

Alternatively, manufacturing and tourism remain bright spots for Vietnam’s economy.

Bloomberg says the manufacturing industry has “grown in importance over the years after companies such as Samsung Electronics Co. set up plants there to export smartphones.”Manufacturing growth jumped to 12% this past quarter, compared to 8% in 1Q, and the head of the General Statistics Office told Bloomberg that he expects higher manufacturing output to buoy growth in the second half of the year.

Additionally, tourism should be another engine for growth. In its report, BMI says it expects growth to accelerate significantly in the next two quarters, due in part to agriculture recovering once the weather improves and in part to rising tourism revenues. According to the report, international tourist arrivals increased by 21.3% this year to a record 4.7 million visitors, and tourism revenue surpassed $9 billion.

Vietnam recently extended its visa waiver program for certain European countries, which should sustain the country’s positive tourism momentum as well as provide tailwinds for the retail sector and the hotel and restaurants industry.

So while Vietnam will most likely fall well short its goal of 6.7% for 2016, the rest of year — and future years — look promising, as conditions improve to facilitate more growth.

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