Vietnam — with its economy growing at its fastest pace in eight years in the first half of 2018 — is defying the stress in emerging markets as its Southeast Asian rivals face an uncertain outlook driven by trade war risks and a stronger dollar.
The threat of an escalating global trade conflict is weighing on prospects for export-dependent economies like Singapore and Malaysia, while Indonesia and the Philippines face challenges funding their high levels of external debt as their currencies come under pressure from a rising U.S. dollar.
Despite the spillover into Asia, Vietnam's geographical proximity to China and its historically strong political and economic links with Beijing are paying dividends. Facing cost pressures created by U.S. trade tariffs, Chinese manufacturers are starting to shift production away from the mainland into cheaper Asian locations such as Vietnam and Bangladesh. South Korean, Japanese and Taiwanese firms are already invested in Vietnam.
Many of the countries in ASEAN — the Association of Southeast Asian Nations — are in a far stronger economic position than during the financial crisis of the late 1990s. But the latest fluctuations from emerging market worries, together with global trade frictions, raise questions about who will be impacted the hardest, what the contagion risk for the region will be like, and how best to limit the impact of outflows and currency weakness.
Policymakers and business leaders meeting in Hanoi at the World Economic Forum on ASEAN will attempt to discuss ways to mitigate what Mizuho strategists call a "double-barrelled U.S. shotgun" of a more hawkish Federal Reserve and U.S. President Donald Trump "upping the ante on trade war risks."
"What we are looking at now is a sign of regional EM (emerging markets) differentiation, because certain markets don't warrant the negativity," said Dwyfor Evans, the head of Asia Pacific macro strategy at State Street Global Markets.
"If the U.S. is unable to offset lower Chinese imports by reshoring manufacturing, then continued strong demand conditions in the U.S. will have to be met from alternative sources," he said. "I will not import toys from China. Instead, I will import from Vietnam, so trade wars and protectionism actually end up as a positive for Vietnam."