Colors of the world and Vietnam's economies

The Vietnamese and global economies experienced major fluctuations in 2022. Let’s look back at how the economic pictures have altered in recent years and predict prospects for 2023.

Global economy

Perhaps what people have talked about the most are the terms “uncertainty”, “risk”, and “trend”. The world is facing a troubled present and a rough future with the risk of both geo-political and geo-economic fragmentation. This leads to both fresh challenges and opportunities for the development and prosperity of mankind. That reality was clearly reflected during two years of the pandemic from 2020 to 2021 and the events of 2022.

With loosened monetary and fiscal policies, unprecedented socio-economic support packages, gradual easing of "social distancing" measures and acceleration of vaccinations, the global economy saw quite a strong recovery in 2021, with growth of 6.1% compared to a contraction of 3.1% in 2020. Entering 2022, although most economies were living safely with the pandemic, the world economy was still forecast to slow down as many countries gradually cut support packages and "normalized" macroeconomic policies, especially monetary policy.

In fact, the situation got worse. The forecasts and calculations made by international organizations about global economic growth in 2022 were revised down continuously. In January, the IMF predicted global expansion at 4.4%; but in its later three projections published in April, July and October 2022, the figures were only 3.6%, 3.2%, and 3.2%, respectively. The pictures in key economies and major trade and investment partners of Vietnam, including the U.S., many European economies, Japan, and China, became darker. Moreover, the world faced energy and food crises. The outlook for 2023 is even worse, especially in the Eurozone and the U.S. The global economy is expected to grow 2.7%. Some economies may even fall into recession.

When Covid-19 eased, disruptions to global value chains decreased and supplies for production and business were better guaranteed. Therefore, the high inflation in the second half of 2021 was considered temporary and was forecast to fall. But in fact, inflation soared in 2022 and is projected to persist.

According to an IMF report in October 2022, the world consumer price index surged from 4.7% in 2021 to 8.8% in 2022, and will stay at 6.5% in 2023. The respective 2023 figures are 3.1%, 7.2% and 4.4% for developed economies and 5.9%, 9.9% and 8.1% for emerging and developing economies.

Stagflation was a real policy challenge for many economies. The U.S. Federal Reserve (Fed) prioritized strong measures against inflation, with six interest rate hikes until November 2022, of which there were three 0.75 percentage-point hikes. The dollar appreciated strongly and a "race" to raise interest rates among central banks broke out in many countries.

Besides inflation, other risks also increased. The Covid-19 pandemic continued to dog the world while China continued to apply a “zero-covid” policy. Weather and climate became more extreme, with severe droughts and floods. The real estate market shook in some countries, including China. The problems of debt and default/default risk emerged in many developing economies.

The World Bank warned the world could face a bad debt crisis in the near future. But perhaps, the biggest factor behind the challenges, risks and uncertainties was the Ukraine-Russia conflict, which broke out on February 24, 2022 and is yet to come to an end. Not only having a very negative impact on the world economy, the war has also greatly influenced many trends in the global political-economic order.

An indicator reflecting both the present and future prospects was the shifting of global capital flows, especially foreign direct investment (FDI). Global FDI in 2021 grew 64% to $1.6 trillion, surpassing pre-Covid-19 levels, according to the World Investment Report 2022 compiled by UNCTAD, the UN’s trade and development body. However, nearly three-quarters of additional FDI were recorded in developed economies. The FDI recovery in developing economies was modest while FDI inflows into investment fields promoting the realization of the sustainable development goals (SDGs) such as new energy, healthcare, education and infrastructure were much lower than expected.

There are no statistics for 2022, but in the context of numerous risks and uncertainties, global FDI is likely to have fallen. Data for the first quarter of 2022 showed that the number of greenfield projects dropped by 21% and international project finance contracts were down 4%.

Vietnam economy

Despite the negative impacts of the pandemic, Vietnam's economy bucked the global trend. In 2020, Vietnam was among the few economies to post positive growth (2.9%) in a world of severe recession, while in 2021 its growth reached 2.6% in a world of strong recovery.

Overall, it seems that Vietnam's economy in 2022 bounced back strongly from the low "bases" two years ago. Its growth reached 8.02%, the fastest recorded from 2011-2022, going beyond expectations. Total retail sales, investment and merchandise exports all recorded impressive growth. The recovery occurred across the agriculture, industry and services sectors, albeit unevenly. The macro economy was relatively stable, with average inflation below the target of 4%. The operating interest and exchange rates fluctuated across a moderate range compared to many other countries in the world and the region.

However, the overall view may mask the challenges and difficulties facing the economy, especially from the end of the third quarter of 2022 and possibly the whole of 2023.

First of all are aggregate demand factors driving growth. Total sales of goods and services in 2022 increased by 15% compared to pre-pandemic 2019 thanks to "compensating" consumption and domestic tourism.

This growth will be difficult to maintain in 2023 when outbound tourism is promoted, unless international tourism prospers. In fact, Vietnam failed to fulfill its goal of attracting 5 million foreign tourists, a figure much lower than the 18 million recorded in 2019.

In late 2021 and early 2022, Vietnam hoped that public investment would be the driving force for the recovery. It also launched a recovery and development program for 2022-2023 with a budget of nearly VND350 trillion ($15.42 billion at that time). However, the implementation was very slow, although there were some improvements in the fourth quarter of 2022.

By the end of last November, less than 60% of the public investment plan had been realized. The recovery and development program had disbursed only about VND60 trillion, or 17% of the total. Private investment slowed down and only FDI disbursement was good, rising 13.5% year-on-year to $22.4 billion in the year to December 20.

Therefore, building confidence and promoting public investment and the recovery and development program with flexible adjustments will greatly impact the country’s growth in 2023 and beyond.

Exports also saw positive results in 2022, reaching more than $371.85 billion, up 10.6% year-on-year. But declining export growth was seen clearly as the nine-month figure was 17.3%, with orders plunging in many fields of the processing industry.

The recovery and development program has taken into account macro risks such as inflation, public debt and financial speculation. But until the second quarter of 2022, financial-monetary pressures were not fully recognized. Those pressures gradually increased, especially at the end of the third quarter and the beginning of the fourth quarter.

Vietnam's consumer price index (CPI) in 2022 increased 3.15% year-on-year, while core inflation went up 2.59% year-on-year, showing that changes in consumer prices have been driven mainly by food, petrol, oil, and gas prices.

The VND depreciated by 3.8% against the U.S dollar in 2022, forcing the central bank to raise the operating interest rate twice, 1 percentage point each time, in more than one month. The liquidity of the banking system and the whole economy became a big problem. Meanwhile, the stock and corporate bond markets wobbled when multiple legal violations were uncovered, gradually stealing market confidence.

In addition, room for macro policies, especially monetary policy, to achieve the goals of maintaining macroeconomic stability, ensuring the safety of the finance-banking system, and supporting recovery and growth became narrower. The period of easy and cheap money was over. Tight financial conditions plus shrinking international markets made it more difficult for the smooth functioning of the real economy.

Despite these difficulties and challenges, there are also many expectations and hopes for a brighter 2023. Many forecasts say that if there is a recession, it will be a mild recession. The U.S. economy may experience a soft landing. China's economy in 2023 will grow better than 2022 thanks to the lifting of the zero-Covid policy and the stabilization of the real estate market. ASEAN-5, including Vietnam, is predicted to slow down a bit but its resilience will be quite high.

Financial and monetary pressures from outside are likely to ease. The Fed’s policy will be more dovish, both in terms of intensity and frequency of interest rate hikes. High global inflation will peak and gradually decline next year. The development of the financial and monetary markets in the beginning of December 2022 felt that easing, with the State Bank of Vietnam’s move to extend the credit room by 1.5-2 percentage points in late 2022.

The implementation of public investment and the recovery and development program will certainly be accelerated. Clear commitments and appropriate measures to tackle outstanding financial and monetary issues, coupled with continued structural reform and improvement of the business investment environment, will restore market confidence, thereby boosting both investment and consumption.

Vietnam has set a growth target of 6.5% for this year, lower than the 2022 figure, and an average inflation rate of about 4.5%, higher than last year’s figure. Beyond these numbers is a message: In a world of uncertainty, changes, full of bright and dark colors, it is very necessary to "overcome dangers, take advantage of opportunities", "rethink, redesign, rebuild", and "act decisively, wisely and flexibly". It is hoped that Vietnam's economy will continue to develop stably and sustainably this year.