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Fitch: TPP Could Give Vietnam a Major Long-Term Growth Boost

Vietnam could see a significant boost to long-term economic growth, investment and exports, should the Trans-Pacific Partnership (TPP) agreement drafted on 5 October be ratified, says Fitch Ratings. Of the 12 countries that are party to the TPP, models suggest Vietnam would see the biggest benefits in terms of economic impact.

Vietnam could see a positive economic growth effect in excess of 10% over the 10 years to 2025 under the TPP agreement, according to the estimates of one study by Petri, Plummer and Zhai. Fitch believes that the agreement would have significant impact on two key areas in Vietnam - trade and domestic economic policy.

The free trade elements of the TPP will lower tariff barriers, giving Vietnam greater access to large consumer markets in the US, Japan, Canada and Australia. TPP signatories accounted for 39% of Vietnam's total exports and 23% of imports in 2014. The potential positive effect on trade could be transformative, with the aforementioned study estimating the TPP will boost Vietnam's exports by over 37% over 10 years. Notably, Vietnam in August also concluded the terms of a free trade deal with the European Union, putting it on course to complete free trade agreements with three of its four largest export destinations - the EU, Japan and the US.

The most significant aspects of the TPP pertain to setting of rules for future economic integration (see "Fitch: TPP Would Set Key Precedents for Global Integration" published on 7 October on www.fitchratings.com).

The agreement does much more than just lower tariff barriers - it also aims to address wide-ranging barriers to trade by setting rules governing intellectual property rights, business competition policies including those related to state-owned enterprises, public procurement policies, supra-national dispute resolution, and labour standards. As such, the TPP has the potential to act as a key policy anchor for structural reforms and economic liberalisation that could bolster productivity and foreign investment for Vietnam.

Vietnam already benefits from high GDP growth and stable FDI inflows. GDP growth accelerated to 6.5% over the first three quarters of 2015, implying a 3Q growth rate of 6.9% yoy versus 6.5% in 2Q. Strong and improving macroeconomic stability was a key driver of Vietnam's upgrade to 'BB-' in November 2014.

But further upside for Vietnam's rating will likely continue to be challenged by wide fiscal deficits and high public debt. Fitch estimates the general government deficit will rise to 6.9% of GDP in 2015 from 6.1% in 2014. Public debt levels (excluding guarantees) have grown to 45% of GDP, though this is broadly in line with the 'BB' peer median of 41%. External finances have been a strength for Vietnam in recent years, but a pick-up in credit growth thus far in 2015 has spurred demand for imports and squeezed the trade account. Fitch estimates this will likely drag the current account surplus to under 1% in 2015 from 5% in 2014.

Implementation risks could be significant as the TPP agreement heads to national legislatures for ratification. Opposition in the US from Congress and leading presidential candidates in the lead up to the 2016 elections there could yet scupper or delay the TPP. Within Vietnam, while ratification is more likely, there could be difficulties in implementing some areas of structural reform.

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