Vietnam's economy: positive changes but concerns persist

Vietnam's economic picture is looking more positive with numerous bright spots, but many difficulties remain, especially market confidence, concerns about private investment, and social consumption, writes Dr. Vo Tri Thanh, director of the Institute for Brand and Competitiveness Strategy.

The world economy is in a difficult and complicated period, with instability, uncertainty, and irregularities, coupled with competitive tensions, geopolitical conflicts, economic and technological fragmentation, and extreme weather caused by climate change. The global economic recovery process is facing a sea of obstacles.

This can also be seen through Vietnam's economic growth figures. In 2020 and 2021, Vietnam achieved very low annual GDP growth at 2.9% and 2.6%, respectively. In 2022, the economy recovered significantly, growing 8% year-on-year, but many difficulties emerged in the second half of the year. In 2023, Vietnam's GDP expanded nearly 5.1%, much lower than the target of 6-6.5%.

Vietnam's economy entered 2024 with many questions to answer. Is the economic recovery clear, and what are the main concerns? And looking further ahead, what is the economic outlook?

From the end of 2023 to March 2024, most forecasts showed that Vietnam's economic recovery this year will be more positive, with growth projected from over 5.5% to even 6.7%, quite consistent with the target set by the National Assembly (6-6.5%).

There are many reasons behind these numbers. First, despite the difficult world context, there are more positive signs and changes. The 2024 world economic growth, according to many forecasts, may be slightly higher or lower than in 2023 (2.9% as predicted by the International Monetary Fund in October 2023, and 3.1% in its January 2024 projection, compared to 3% in 2023), and the possibility of a recession is low, especially in large economies such as the U.S., Europe, and Japan.

Second is the financial and monetary conditions. Inflation in the world decreased significantly to 5.9% in 2023 from the peak of 9% in 2022, and is forecast to further decrease to 4.8% in 2024 (2.6% in developed countries and 6.6% in developing economies).

Thanks to this positive signal, central banks of those with key currencies such as the USD and EUR have stopped raising interest rates and will likely gradually reduce them from the second half of 2024. Interest and exchange rate pressures on monetary policies in other countries, including Vietnam, will ease, thereby creating flexible room for macroeconomic policies, especially monetary policy, to support the recovery process.

Vietnam has overcome enormous pressures of exchange rates, interest rates, inflation and liquidity as well as the "shock" of the financial market in the second half of 2022, basically maintaining macroeconomic stability. CPI-based inflation was relatively low, increasing by 3.3% year-on-year in 2023 and 3.8% in Q1/2024. In 2023, the State Bank of Vietnam lowered policy interest rates four times and committed to keeping the current rates at least until mid-2024. In addition, deposit and credit interest rates of commercial banks have also decreased significantly.

In general, Vietnam’s financial and monetary markets have operated normally. The corporate bond market in particular has seen positive changes, as expected.

More positive factors can also be seen in the real economy. GDP in Q1/2024 was estimated to increase by 5.7% compared to 3.3% in the same quarter of 2023, higher than the estimated growth rate set by the government. With the figure of 5.7% and the quarterly cyclical factor, forecasts favor Vietnam's growth scenario of over 6% in 2024.

The manufacturing and processing industry has shown signs of a recovery, from minus 0.4% in Q1/2023 to 3.6% for the whole of 2023. In the first three months of this year, it expanded nearly 7%, resuming its position as a key growth driver.

The Purchasing Managers Index (PMI) for most of 2023 (except February and August) was lower than 50, but hit 50 and above in Q1/2024. Exports soared from minus 11.9% in Q1/2023 and minus 4.4% last year to 17% in Q1/2024. Imports also surged 13.9% and the trade surplus hit $8.1 billion in the first three months of this year.

Besides production and exports, foreign direct investment (FDI) and public investment have also seen notable changes. Specifically, continuing the upward momentum in 2023, FDI in Vietnam increased sharply in Q1/2024. Last year, FDI commitments and disbursements reached $36.6 billion and $23.2 billion, up 32.1% and 3.5% year-on-year, respectively. The corresponding numbers for Q1/2024 were $6.2 billion and $4.6 billion, up 13.4% and 7.1% (the highest Q1 levels since 2020).

In 2023, the disbursement of public investment hit a rather surprising number of VND676 trillion ($26.67 billion), equal to 95% of the plan and VND146 trillion ($5.76 billion) higher than in 2022. This work has been promoted since the start of 2024, reaching VND162.7 trillion ($6.42 billion) in Q1, an increase of 4.9% over the same period last year.

Vietnam's economic picture is looking positive with many bright spots, but difficulties remain, especially market confidence, concerns about private investment, and social consumption.

Private investment has slowed, nominally increasing 2.4% and 4.2% in 2023 and Q1/2024, respectively.

Not only that, credit growth in Q1/2024 was very low, only 0.26% (even minus 1.1% in the first two months). Furthermore, although the real estate market has seen improvements in both transactions and liquidity, in general, it still faces numerous difficulties and not yet recovered clearly.

In particular, the number of businesses leaving the market in 2023 surged 20.5% year-on-year to 172,600, or 14,400 a month. The situation in Q1/2024 was even more alarming, with 74,000 companies or nearly 24,700 per month leaving, compared to 59,900 businesses joining the market or close to 20,000 a month.

Consumption, a driving force that has maintained growth momentum for many years, has seen its growth gradually decrease. For the whole of 2023, total retail sales of goods and consumer service revenue, excluding price factors, increased by 7.1%, much lower than the expansion of 10.4% in Q1/2023. The figure in Q1/2024 was 5.1%.

There are many reasons behind the issue of market confidence, such as private investment, the survival of businesses, especially micro, small and medium enterprises, and consumption.

An open economy like Vietnam is very sensitive to the international situation and the world economy, currently associated with instability, abnormality, and uncertainty. Another is the internal problems of the economy, typically fluctuations in the financial and monetary markets.

Basically, Vietnam has maintained macroeconomic stability, but looking more broadly, the macroeconomy is facing many challenges. For example, Vietnam must maintain relatively low inflation and interest rates, limit exchange rate fluctuations, and ensure the balance of international payments. Or it must increase money supply and credit supply, but not let bad debt exceed the ceiling level (in fact, bad debt has tended to increase since from 2023).

While many banks meet Basel II standards, others are not healthy enough, or even under special control. We have had a bank restructuring program since 2012, and that needs to continue for the 2021-2025 period. It is an arduous process that requires a lot of effort.

Confidence recovery is related to domestic and world economic indicators, but more deeply and importantly, it depends on Vietnam's own policy and reform efforts.

We have been implementing different groups of policies. First is a group of policies to stabilize the macroeconomy, keep inflation at a relatively low level, and ensure the healthy operation of the financial market, banking system, and real estate market.

Second is a group of policies to stimulate demand (consumption, investment, export) and support businesses through fiscal and monetary policies (such as extending payment deadlines of and reducing taxes and fees; freezing debt, reducing lending interest rates; and credit incentive packages). Looking further, this is creating platforms to support and ensure the rapid and sustainable development of the country.

It should be noted that although the growth target for 2024 is feasible, achieving the average growth target of 6.5-7% for the entire 2021-2025 period will still be very difficult.

To realize it, growth in 2024 and 2025 must be over 8% per year - a very high number in the current conditions. That's not to mention the aspiration to become a high-middle-income economy with modern industry by 2030 and a developed country by 2045.

For Vietnam's economy to take off, overcoming immediate difficulties is not enough. It is necessary to have longer-term policies, more radical reform efforts, and more drastic actions. This is also a way to reduce short-term hardships to be faced in the future.

These policies include a strategic vision (associated with national, regional, and local master plans); institutional breakthroughs (improving the traditional legal framework and meeting new requirements, and state governance); developing quality infrastructure (both hard and soft infrastructure); and developing quality human resources (talent training, attraction and utilization; both skilled workers and engineers, especially for industries that gradually create technological leaps for Vietnam).

Along with stabilizing the macroeconomy and enhancing resilience, it is necessary to promote economic restructuring, targeting the state-owned enterprise sector, public investment, the finance-banking system, and private sector development (both small and medium-sized enterprises with appropriate support for large enterprises).

Another point is the transformation of growth model, relying more on increased productivity, technology and innovation; keeping pace with new trends; meeting "greener" and more digital requirements; and cashing in on the shift of global supply chains associated with investment choices of large corporations around the world.

When we have a desire, we need to have a faith. Talking with domestic and foreign experts about some of Vietnam's long-term development goals at some seminars, I often asked: "Vietnam has such aspirations, do you believe Vietnam can do it?". And the answer I always got is: "Vietnam can, but there are conditions."

Time does not wait for us. In Vietnam's reform history, every time we have faced difficulties, we have made transformations and breakthroughs. Although the remaining time is relatively short, Vietnam can still achieve its goals when it seizes opportunities, reforms, and acts decisively.