GDP represents the monetary value of all goods and services produced within a nation’s geographic borders over a specified period of time. One method of calculating the GDP of a country is called the Expenditure Approach. The Expenditure Approach is calculated using the sum of four categories of expenditure of output. The four categories are:
(1) Gross Private Consumption (C)
(2) Gross Private Investment (I)
(3) Government Purchases (G)
(4) Net Exports (NX) or (X-M)
Giving the following formula: GDP = C + I + G + NX
Gross Private Consumption (C)
This category comprises all goods and services purchased by households in Vietnam and includes spending on services, non-durable goods and durable goods. With a low-inflation outlook due to low energy and food prices and a stable currency, this component of GDP is expected to remain strong in Vietnam in 2016. Interest rates, while high by international standards at 6.5%, remain low compared to recent years in Vietnam, which generally means households will save less and spend more. This is further supported by strengthening consumer confidence and the growth in private consumption.
Gross Private Investment (I)
Net private investment is gross private investment less depreciation. This category includes fixed investments (factories, machines etc.), inventory investments (material to be assembled, goods etc.) and residential investment (purchase of private properties by the household sector).
In Vietnam this category shows high growth in all areas. The rise in credit available (12% September 2015 year-on-year) and the increase in properties available for purchase (particularly in Ho Chi Minh City) supports this component of GDP. The role on effects of recent international trade agreements supports continued fixed investments into the country as FDI as companies prepare to take advantage of the new trade terms, particularly in exports. Lastly, the inventory required to support the robust growth in exports particularly in the technology sector (telephones, electronics and computers), reflects the high import content of Vietnam’s manufacturing exports.
Government Spending (G)
This category is the total spending on goods and services by local, provincial and federal government. Recent World Bank reports suggest rising government capital expenditure and this reflects the government’s commitment to the three Rs (railroads, roads, rivers) strategy to invest in infrastructure throughout the country.
This can be seen in new highways, deep-water ports and railroad improvements and new developments. Government spending will be affected by lower oil revenue and corporate tax cuts and contingent liabilities associated with state-owned enterprise debts and state-owned banks. The currency, while currently stable, could be negatively affected by rate changes in the US and this will affect the large public financing needs and the country's costs to raise funds in the international bond market.
Net Exports (NX)
This category is the value of the country’s total exports less total imports. This results in a country having a trade surplus, deficit or trade balance. Vietnam’s rising trade deficit (spending more on imports than they earn on exports) means Vietnam’s trade position weakened in 2015, narrowing the current account surplus and this is projected to narrow significantly in 2016 due to moderating exports, sustained import growth stocked by strong domestic consumer demands for foreign goods.
Two of the four categories remain strong (C) and (I) and two categories reflect drains on GDP growth (G) and (NX). The baseline outlook is positive for Vietnam on balance, however downside risks will dominate in 2016.