FDI, friendshoring major drivers of Vietnam's economic growth: VinaCapital

FDI, friendshoring, and a rapidly growing middle class are factors to drive Vietnam’s economy, says Michael Kokalari, chief economist at fund manager VinaCapital.

Kokalari made the statement at a corporate governance forum in Ho Chi Minh City on Thursday. The event was hosted by the Vietnam Institute of Directors (VIOD) with support from the International Finance Corporation (IFC) and the Swiss State Secretariat for Economic Affairs (SECO).

Friendshoring is a growing trade practice where supply chain networks are focused on countries regarded as political and economic allies.

“Vietnam’s long-term growth story essentially hinges on these three factors driving the economy,” Kokalari stated.

He noted that manufacturing accounts for roughly 25% of Vietnam’s economy, compared to the nearly 35% recorded in other Asian economies like Taiwan and South Korea.

Firstly, Vietnam’s middle class is expanding. The manufacturing sector’s contribution to the country’s GDP will continue to rise. As manufacturing expands, more high-income jobs will be created, helping many people transition into the middle class.

Urbanization is another driver of this shift. Although Vietnam’s urbanization rate is around 40%, it remains significantly lower than that of China and other countries, offering room for growth.

Foreign direct investment (FDI) is another critical factor. According to the Foreign Investment Agency, as of November 30, 2024, the total registered FDI capital in Vietnam reached nearly $31.4 billion, up 1% over the same period in 2023.

However, the economist foresees a potential dip in FDI inflows in 2025, citing uncertainty surrounding Donald Trump’s potential tariff policies.

He also anticipates increased U.S. scrutiny of Chinese factories relocating to Vietnam, though they believe Trump’s initial focus will remain on imports from China and Chinese-manufactured goods in Mexico.

Kokalari noted that Vietnam’s trade surplus with the U.S., about $100 billion, is the third largest, trailing only Mexico and Canada.

To mitigate trade tensions, he suggested Vietnam consider measures to reduce its surplus by increasing imports of U.S. products, such as aircraft engines and liquefied natural gas (LNG).

Kokalari highlighted that Vietnam was the only country visited by both Chinese President Xi Jinping and U.S. President Joe Biden last year, reflecting its good relations with the two countries.