Vietnam has shown remarkable economic progress. Over the past few decades the country has established itself as a regional hub in export-led manufacturing. Myanmar looks set to follow suit. Little more than a year since its first democratically elected civilian government took office the country’s potential for trade-led growth is considerable.
Strong commercial links with China have buttressed both countries’ success. Yet both Vietnam and Myanmar would do well to ensure that Chinese trade is not the only guarantor of their economic security. Diversifying their export markets – to the West, to countries across the Pacific and to the other members of the Asean – could be a wise move.
“Made in Vietnam”
The Vietnam story seems a textbook example of trade’s ability to spur a nation’s development. A country in which as late as the early 1990s most of the population lived below the poverty line now enjoys “lower-middle income” status. The annual GDP growth rate has averaged at a strong 6.5% since 2000. Last year, the Vietnamese economy expanded by 6.2% – a figure set to rise to 6.5% in 2017 and 6.7% next year.
How did this happen? Sustained industrialization, liberalization and modernization, that’s how – helped in no small part by political reform, a low-wage base that increasingly competes with China for jobs, and a labour force growing by about a million people a year. All these factors have drawn foreign direct investment (FDI) to the country’s flourishing export-oriented textile and manufacturing sectors.
Significantly, Vietnam has been diversifying its export profile. It is rising up the value chain, producing higher-value goods such as telecommunication components, machinery and computer electronics. As Figure 1 shows, together these now represent over 40% of its total exports.
In only half a decade, in fact, the volume of Vietnam’s exports has doubled. Supporting local banks to deal in short-term tenors, hedging export risk, and also providing longer-term financing and re-financing for intra-Asian trade, we’ve seen this is thanks in no small part to the trade finance sophistication of the country’s local banks.
Can Myanmar emulate Vietnam?
Given the above, if Vietnam is not the model for Myanmar, it should be. According to the International Monetary Fund (IMF), Myanmar’s economy expanded by as much as 6.3% last year – with 7.5% a likely figure for 2017. As Figure 2 shows, rates of GDP growth are likely to hover at over the 7% mark over the next several years.
Again, trade will be vital. Myanmar would do well to build up its export profile beyond primary resources, such as oil products and natural gas, as well as fish, fruits, precious stones, rubber, vegetables and wood. While such resources support government revenues, Myanmar cannot rise up the value chain without diversification, which will, of course, help attract the FDI needed to help build new industrial sectors.
Figures from Myanmar’s Directorate of Investment and Company Administration, a government agency in the Ministry of National Planning & Economic Development, suggest that Myanmar attracted a record US$9.5 billion in 2015. Some US$3.3 billion of FDI was sourced last year. Capital flows have, to date, mainly been Chinese and Singaporean. But with the growth of democracy – and, more specifically, the easing of EU and US sanctions by 2016 – interest from Europe and America has been rising, which brings the promise of the US dollars vital for trade.
Through our relationships with local correspondent banks, at Commerzbank we have seen Myanmar’s potential. Substantial construction projects are underway in the country’s transport, water and telecommunications infrastructure sectors, all of which can smooth the flow of yet more trade and investment.
The China question
Considering Vietnam’s successful track record and Myanmar’s promising future, the picture seems rosy. Yet there is one hitch: both countries rely heavily on China as the buyer of their exports. For example, China is responsible for 38% of Myanmar’s exports – its top trade partner – while for Vietnam the figure is 10%. Chinese demand has supported strong growth, which makes China’s recent economic underperformance a concern – suggesting both countries can no longer rely on it for future growth. Indeed, the IMF’s GDP growth forecast for China in 2017 is 6.6%, the weakest growth in over a quarter of a century.
This high dependency on China is reflected across the Asean region, and is, in fact, growing – increasing from approximately 11% of Asean trade in 2010 to more than 15% in 2015 (see Figure 3). Meanwhile, the proportion of Asean’s trade with other global partners, and of intra-Asean trade, has reduced.
So the question is: how can Vietnam and Myanmar preserve trade-led growth while accounting for potentially slacker demand from their important consumer?
New export horizons
The answer is surely to broaden the scope of their export markets. One opportunity is to pursue deepening commercial ties with the West. Once characterized by isolationism, Vietnam has become a leading advocate of globalization – especially since joining the World Trade Organization (WTO) in 2007. The country’s streets bear witness to progress already made: the signs of local and Chinese businesses have to a great extent given way to western advertising as trading networks with Europe and America have grown. Myanmar, too, could seek to develop such ties – using the sanctions relief as a springboard.
The Regional Comprehensive Economic Partnership (RCEP), the free-trade agreement set to be cemented later this year, represents a further possibility to broaden Vietnam and Myanmar’s trading horizons across the Pacific. In this respect, both countries could use their already-close trading connections with South Korea and Japan as foundations for closer trading relationships with the other Asean members, as well as with Australia, New Zealand and India.
Yet another prospect lies in Asean itself, which is marking its 50th anniversary this year. The Asean Economic Community (AEC) – envisioned to act as a regional single market, facilitating the free flow of capital, goods, services, and labour – was launched in late 2015. If Vietnam and Myanmar want to reduce their dependence on the Chinese economy, the capacity to do so might be in their own backyard – one containing around 600 million consumers.
Myanmar certainly seems hot on Vietnam’s heels as it makes steps towards its own development. Both nations should keep their trading options open.
Agnes Vargas is regional head, Greater China and Asean at Commerzbank