MAJOR MACRO ECONOMIC INDICATORS
|2020||2021||2022 (e)||2023 (f)|
|GDP growth (%)||2.9||2.6||8.0||5.5|
|Inflation (yearly average, %)||3.2||1.8||3.2||3.7|
|Budget balance (% GDP)||-2.9||-3.5||-4.7||-4.7|
|Current account balance (% GDP)||4.4||-2.0||-1.3||-0.2|
|Public debt (% GDP)||41.7||39.7||40.2||40.5|
(e): Estimate (f): Forecast
- Robust economy featuring one of the fastest growth rates in the region
- Beneficiary of the US-China trade war and the China Plus One strategy
- Large labour pool and low labour costs
- Development strategy based on production-upscaling and diversification from footwear, apparel, and furniture into electronics: manufacturing accounts for 17% to GDP
- Development of fish and shellfish production
- Strong agricultural potential and solid endowment of natural resources
- Weaknesses in the business climate, related to concerns over data transparency and corruption perceptions
- Dependent on China’s supply chains, notably for electronics
- Incomplete reforms of the public sector, with a high level of indebtedness amongst SOEs
- Absence of large Vietnamese companies
- Inadequate infrastructure levels
- Increasing inequalities
- Fragile banking system
Growth to remain firm in 2023
In 2022, Vietnam posted one of the strongest economic growth rates in the region, supported by a rebound in domestic demand, as well as strong output in its manufacturing sector. Although economic activity is expected to expand at a sustained pace, growth will decelerate in 2023 amid a weakened global economy. Vietnam is expected to face declining external demand from some of its key trading partners, such as the United States (28.7% of total goods exports in 2021) and the European Union (11.9%), the latter being among the regions experiencing considerable recession risks since the conflict in Ukraine. Chinese economic slowdown, in part caused by a strict Covid-19 policy, is also contributing to fading export prospects as China is Vietnam’s second goods export destination (16.7% of the total in 2021). This is likely to weigh on the manufacturing industry (23.4% of 2021 GDP). That said, the country should continue to benefit from global supply chain diversification, driven first by the US-China trade war and reinforced by supply disruptions during the pandemic. This has notably supported the expansion of the textile, garment and electronics industries by attracting foreign investments. Hence, Foreign Direct Investment (FDI) inflows rebounded strongly on back of a nearly 90% year-on-year increase during the first eight months of 2022. Vietnam’s economic growth is also likely to be driven by growing domestic demand since the authorities began treating Covid-19 as endemic. Tourism, which accounted for nearly 10% of GDP in 2019, will further fuel domestic consumption after the country reopened its borders to international travellers in March 2022. Nevertheless, the sector will still be plagued by persisting travel restrictions in China, which was the main source of international tourists in 2019, accounting for around 32% of inbound arrivals. Household consumption (68% of GDP in 2021) should remain robust, helped by manageable inflation. Thanks to the government’s influence on retail prices, Vietnam was relatively spared from the spiking inflation that was observed worldwide in 2022. Despite this, the State Bank of Vietnam (SBV) started to tighten its monetary policy by increasing interest rates in September 2022 to address sizeable depreciation pressure on the Vietnamese Dong against the strong US dollar. This prompted the central bank to widen the Dong trading band the following month, allowing the currency to depreciate further against the USD. Credit demand will be supported by the Program for Socio-economic Recovery and Development (PSRD) through lower interest rate loans to eligible enterprises, cooperatives and business households. The SBV also lifted caps on credit growth for some banks in September 2022. In contrast, non-performing loans are set to rise after regulatory loan forbearance expired in mid-2022. The impact of the rise on the banking system will be capped by the state-owned Vietnamese Asset Management Company.
Durably supportive fiscal policy and low international reserves
The fiscal deficit widened despite a strong rebound in economic activity that could have boosted public revenue in 2022. A stimulus package under the PSRD, which represented around 4% of 2021 GDP over 2022 and 2023, has increased public expenses – particularly in digital and physical infrastructure – but also led to reduced revenue, with a temporary cut in the VAT rate (25% of total public revenue in 2019). Fiscal policy should remain supportive in 2023, which will continue to the keep fiscal deficit relatively wide. Meanwhile, the public debt-to-GDP ratio is expected to inch up. The debt is exclusively composed of medium- and long-term maturities, but is exposed to currency fluctuations as 38% of it is denominated in foreign currency.
The current account deficit is expected to narrow but persist in 2023. Although the deficit of the service balance should decline thanks to the upturn in tourism, the trade balance surplus is likely to decrease on back of slowing export growth amid weakening global demand. The significant primary income balance deficit is set to expand after a strong economic performance in 2022, supporting the value of repatriated profits and dividends. Fewer remittances - traditionally a massive source of liquidity for the country, with inflows accounting for 5.1% of GDP as of 2021 - could be affected as the main sources, namely the US, Australia and Canada, are all expected to experience softer growth. Foreign exchange reserves declined in the first half of 2022 after the SBV intervened in the foreign exchange market to limit Vietnamese Dong depreciation. With the current account deficit not entirely financed by capital and financial inflows, it also contributed to the reserves depletion. As currency reserves were estimated to cover only 3.1 months of imports in July 2022, the SBV could be forced to widen the Dong trading band again.
Relationship with Russia continues to be good
The Communist Party of Vietnam (CPV) maintains a unitary government, which has centralised control over the state, media, and military. In early 2021, Nguyen Phu Trong began a third consecutive five-year term as General Secretary of the CPV, which is unprecedented in the party’s history. He will continue his domestic agenda and focus on the anti-corruption campaign. After the resignation of two deputy Prime Ministers, and corruption scandals surrounding other ministers, President Nguyen Xuan Phuc resigned in January 2023. This has further concentrated power around Phu Trong. However, given his advanced age and fragile health since a stroke in 2019, he needs to groom a new leadership team for the party to ensure a smooth transition ahead of the next party congress that may be held before the end of his term in 2026. On the international front, Vietnam has taken a neutral stance on Russia’s invasion of Ukraine, the first being a historical ally as well as a major military equipment supplier. Vietnam’s imports from Moscow jumped by 85% year-on-year during the first half of 2022. Conserving good relations with its traditional ally is crucial given the fragile relationship with its fellow single-party Communist state, China, due the South China Sea dispute. While both countries aim to promote bilateral trade and recently vowed to make their relationship a priority, the latter will remain vulnerable to developments in the territorial dispute.
Last updated: April 2023