Rise of emerging middle class catches interest of foreign firms looking for profits in Vietnam: HSBC
The proliferation of an emerging middle class has not gone unnoticed by international firms that look to capitalize on the rising demand for spending by Vietnamese households and a strong pickup in Japan’s FDI in retail and financial services is a notable example, write HSBC analysts in their "Vietnam at a glance: Consumer pulse check" report.

Despite the growing wealth of the population, almost 80% of the population is still unbanked or underbanked, according to the Asian Development Bank (ADB). Photo courtesy of Bach Hoa Xanh grocery chain.
Short-term pain
After a challenging Year of the Cat, the backdrop for Vietnam is set to be better in the Year of the Dragon. Despite much attention on the critical export cycle, it is also key to examine how domestic demand has been faring.
The short answer is: as much as it aims to offset the sluggish external sector, domestic demand has also been under mounting pressure, but it is set to improve, as first suggested by some recovering consumer stocks.
In fact, Vietnam has a large domestic consumption share with over 50%. Expanding at an average annual pace of 7.5% prior to the pandemic, private consumption was significantly weighed down by the pandemic, except during the re-opening in 2022.
In particular, growth in private consumption halved in 2023, reflecting an evident economic slowdown among households. Part of the reason was the wealth effect due to a cyclically weak property sector, but the other part of the equation also reflects a structural change of consumer behaviour since the pandemic. Consumers are prone to economic uncertainties, thus increasing their propensity to save as well. While 2023 data is not yet available, a notable higher saving rate of 40% in 2022, nonetheless, illustrates the trend.
A quick look at Vietnam’s labour market is warranted. While the unemployment rate remained low, at 2.3%, job growth slowed in 2023 and is still on the way towards a full recovery. Lest we forget that a large part of Vietnam’s labour market is still concentrated in the informal sector, a trend that is no stranger to ASEAN as a region. The ratio is as high as almost half in textile manufacturing and even reaches 60% in various tourism-related services.
No doubt, Vietnam is waiting anxiously for a cyclical recovery in global trade, the bread and butter for the job market. Fortunately, recent green shoots have emerged in the electronics sector, signalling the worst for the trade sector has passed. However, nuances remain, as the recovery is still uneven. Other sectors that provide a sizeable number of jobs, including textiles and footwear, are not completely out of the woods yet. Asia is still at a nascent stage of a trade recovery, as more evidence needs to show that this will be a sustained from the forceful support of global major economies.
Meanwhile, a full recovery in the tourism sector is also crucial for the labour market, lifting those working in the services sector. Thanks to favourable policies to extend the visa-free stay for foreign tourists from certain countries and grant e-visas to foreign tourists from all countries from mid-August, Vietnam’s arrivals of around 12.6 million (70% of 2019’s level) foreign tourists well exceeded the authority’s initial target of 8 million.
That said, regional tourism competition is intensifying. While the recovery in Chinese tourists has been much slower than one had expected, a full recovery in ASEAN tourism requires a meaningful return of tourists from China, the single largest source of tourism. Regional peers, including Thailand, Malaysia and Singapore, have all introduced visa-free waiver programmes for Chinese tourists, increasing the attractiveness of an “impulse trip” for travellers.
Long-term gain
Despite the near-term cyclical challenges, we believe structural trends continue to look promising for Vietnam. Given the impressive development in the past 20 years, the general rise in wealth has promoted a higher propensity to consume, triggering a shift towards discretionary goods and services. As a proxy for discretionary spending, we look at the population’s purchase choices. Although the share of motorcycles as a mode of private transport remains high in Vietnam, with ownership of 70%, car purchases have been increasing gradually.
What is more indicative of the rise in consumer purchasing power is the divergence in the purchase trends for sport utility vehicles (SUVs) versus sedans, with the former generally more expensive than the latter. However, this is not just a recent phenomenon. In fact, average incomes have risen faster than expenditures over the years, helping to buttress growing consumption.
The proliferation of an emerging middle class has not gone unnoticed by international firms that look to capitalize on the rising demand for spending by Vietnamese households. A strong pickup in Japan’s FDI in retail and financial services is a notable example.
Despite the growing wealth of the population, almost 80% of the population is still unbanked or underbanked, according to the Asian Development Bank (ADB). The most recent Financial Inclusion Database of the World Bank also corroborates this point that Vietnam possess significant potential for growth in formal lending channels, which remain at a nascent stage of development.
Despite the rosy potential, we need to be mindful of associated risks. The primary concern is rising household debt. While there is no data to measure it in Vietnam, we have come up with estimates by analyzing the balance sheets of four major banks, which might include loans to small business households. Between 2013 and 2022, household debt rose sharply, from 28% of GDP to 50% of GDP. Unsustainably rising consumer leverage could pose significant risks to Vietnam’s banking sector, as well as drag down future consumer spending as more income has to be diverted to servicing debt.
Fortunately, the government has implemented a flurry of support measures for both firms and households in 2023, including tax cut extensions, interest rate cuts, and payment deadline extensions, just to name a few. While financial stresses are likely to remain and will need to be monitored in the near term, there are some signs that the worst has passed. Cautious but improving sentiment towards the real estate sector will boost consumer sentiment as well, in our view. Meanwhile, a better outlook for the labour market should support wage growth, thus improving households’ debt-servicing ability.
According to a Savills Global study in October 2023, the urban population is forecast to double by 2050, constituting 70% of the world's population. While rapid urbanization presents significant housing and infrastructure challenges in developing countries, it also offers opportunities for real estate investors seeking rental growth.
Notably, in the Asia-Pacific region, including Vietnam, many areas are poised for continued remarkable growth, driven by a youthful population and rising incomes, factors that will continue to stimulate the commercial real estate market.
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