Vietnam on the path to growth

Vietnam is well-positioned for growth as it is an example of a country experiencing success in navigating multilateral trade, wrote Nathan Hunt, head of content, social media & digital marketing, S&P Global.

Geopolitical analysis has an affinity for simple narratives. Superpowers, frequently in conflict and wielding power within circles of influence, rise and fall. But the fact remains that most of humanity exists outside of these tidy narratives. Countries that forge trade agreements across geopolitical fault lines can be more economically successful due to their ability to sell into multiple markets. Vietnam is an example of a country experiencing success in navigating multilateral trade.

Like the rest of the world, Vietnam’s economy declined under the Covid-19 pandemic. When lockdowns were implemented in mid-2021, GDP growth in Vietnam slipped to 2.6%, following 2.9% growth in 2020, the first year of the pandemic. However, Vietnam is one of several export-dependent emerging market economies that roared back in 2022. The country’s real GDP grew 8% year over year in 2022 as domestic demand and manufacturing export production returned.

For the first quarter of 2023, Vietnam’s GDP growth moderated to 3.3% due to a slowdown in demand from leading export markets such as the U.S. and EU. Vietnam's exports fell 13% in the first four months of 2023 compared to the year-ago period. The manufacturing sector in Vietnam has also been plagued by repeated power outages due to a lengthy heatwave.

Despite the headwinds, Vietnam is well-positioned for growth. According to S&P Global Market Intelligence, Vietnam’s GDP growth is forecast to grow at about 6.5% in 2023, with sustained strong growth of about 6.7% per year from 2024 to 2026. Vietnam’s projected growth is driven by its status as a low-cost manufacturing hub and an alternative to China, where rising wages, supply chain concentration and geopolitical issues are creating concerns. Vietnam enjoys a large, well-educated workforce and openness to foreign direct investment.

Vietnam’s greatest relative strength may be its growing network of free trade agreements. Vietnam is currently party to the Association of Southeast Asian Nations Free Trade Area, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, EU-Vietnam Free Trade Agreement, and Regional Comprehensive Economic Partnership. These agreements and organizations give Vietnam a wide range of export markets without tying Vietnam to other countries’ geopolitical leadership.

Still, headwinds remain. Many global technology manufacturers have expressed an interest in moving out of China into Vietnam, among other countries, but shifting supply chains will be difficult and inefficient, according to S&P Global Ratings.

Some Taiwanese electronic manufacturing services companies have existing facilities in Vietnam and may be looking to expand their presence. Property developers in Vietnam have also been hit with deteriorating credit quality in the wake of the pandemic. According to S&P Global Ratings, this may impact access to funding and lead to a crisis in investor confidence.