Trade Deficit in Vietnam: Good or Bad?

If you read my last article, you will notice that Vietnam’s trade deficit is on the rise for the past 5 years. Furthermore, the growth seems to be exponential rather than a constant level. What does this mean? Are Vietnamese spending too much instead of saving? Is Vietnam’s economy unstable and will collapse in the near future? Let us take a closer look at some statistics to get a better idea of what is happening.

At the first glance, Vietnam’s trade deficit is indeed on the rise for the past couple years:

(source: IMF data bank)

As we can see, the $14 billion deficit is about 15% of the country’s total output of $90 billion in 2008. This seems very alarming for many. But before we are all panicked, let’s take a step back and understand the concept of trade deficit.

By definition, trade balance is the sum of total exports and imports in a country. If export amount is greater than import, trade surplus exists. If import is dominant, then we have a trade deficit. What many people don’t notice is that trade balance is a component of a bigger equation:

Balance of Payments = Current Account + Capital Accountt

where  
Current Account = Balance of Trade + Net Transfer

Capital Account = Foreign Direct Investment + Portfolio Investment + Foreign Reserve

This is important because the Balance of Payments usually sum up to zero. That means that any current account deficit will be counter-balanced by a capital account surplus. Let’s take a look at some of these key statistics:

(source: IMF data bank)

This Net FDI graph shows that international investors are gaining confidence in the Vietnamese market and putting down larger sums of money for investment. This increase in the Net FDI is also consistent with the increase in Vietnam’s foreign reserve since international investors are bringing foreign currency to Vietnam to invest:

(source: IMF data bank)

All these indicators are showing that Vietnam is rapidly becoming a very profitable place for investment which attracts a large inflow of capital from other countries. This phenomenon also results in an increase in trade deficit in Vietnam as the country is importing more capital than exporting goods.

All the signs are consistent with an expanding economy. Then, is trade deficit good or bad?

You decide.