Vietnam went through a number of difficulties in 2022 and 2023, related to the deterioration of the international environment, the severe correction in the property sector, the crisis of confidence and liquidity tensions in the banking sector. Economic growth stalled in early 2023, but then quickly accelerated again. Most notably, activity in the manufacturing export sector has been recovering for a few months, buoyed by healthy foreign direct investment inflows. These trends are expected to continue in the short term, with Vietnam being one of the major beneficiaries of the ongoing adjustments to global value chains.
Vietnam benefited from a solid recovery in its economic growth in 2022, supported by the dynamism of both the export sector and domestic demand. However, the country has also become increasingly vulnerable to the deterioration of the international environment. Exports fell in Q4 2022 and these difficulties are expected to persist in the short term. Inflation accelerated in 2022, the dong depreciated under the effect of US monetary tightening and capital outflows, and the Central Bank began to increase its policy rates. In addition, there was a confidence shock caused by reports of fraud in the local bond market. Against this backdrop, liquidity tensions emerged in the financial sector
Vietnam weathered the 2020 health crisis without any major waves of infection, without a contraction in GDP and without a notable deterioration in its macroeconomic fundamentals. In 2021, the situation was much more complicated. In Q3, an upsurge in the number of Covid-19 cases and strict lockdown measures brought the economy to a standstill. The epidemic curve deteriorated further in Q4, but the economy picked up again thanks to the increase in vaccinations and the adjustment of the “zero Covid” strategy. In the manufacturing sector, production and exports rebounded, and growth prospects are still solid. In contrast, private consumption and activity in the services sector remain weak. The government still has some manoeuvring room to boost its fiscal support.
The Covid-19 epidemic was well controlled last year and lockdown was swiftly eased. Productive activity has rebounded vigorously since May, notably driven by a solid recovery in exports. Fiscal support measures have been moderate, primarily based on the accelerated implementation of already-planned investment projects. In the end, economic growth and macroeconomic balances were only moderately and temporarily affected in 2020. However, there remains a weak link in the economy: banks are insufficiently capitalised while corporates, especially state-owned enterprises, are excessively indebted. Some of these institutions could be severely weakened when monetary support measures come to an end in 2021.
Given its dependence on foreign trade and its integration within Asian supply chains, the Vietnamese economy is squeezed by the weakening in global demand and Sino-American trade tensions. Real GDP, exports and industry have all registered a growth slowdown in recent months. Yet Vietnam could also benefit from China’s troubles: in the short term, it could benefit from some carry-over effects if merchandise is shipped directly to US businesses seeking to avoid the new tariff barriers. Vietnam could also benefit from new foreign direct investment projects of international groups seeking to manufacture outside of China. Moreover, Vietnam’s external financial position is also expected to continue to improve.
Vietnam is a densely populated, emerging economy that has implemented market-oriented reforms since 1986 and benefited from large foreign direct investment inflows since its accession to the World Trade Organization in 2007. Macroeconomic conditions have become more stable since the mid-2010s, and real GDP growth averaged 6.9% in 2014-2019. Continued foreign direct investment (FDI) inflows have led the export industry to expand rapidly, diversify toward higher value-added products and integrate the regional supply chain. The current account balance posts surpluses and external liquidity has strengthened gradually. Public finances also improved in the few years prior to the Covid19 shock thanks to fiscal consolidation efforts and slow privatisation of state enterprises. On the negative front, vulnerabilities have remained, including Vietnam’s high credit risks resulting from the excessive debt of corporates (state enterprises in particular) and banks’ very weak capital buffers. Asset quality problems could rise in the short term.
Vietnam successfully contained the COVID-19 epidemic in 2020 and both the export sector and domestic demand proved to be resilient. However, the country was hard hit the new resurgence of contaminations in summer 2021, which in turn constrained industrial and services activity. Given its very high degree of trade openness, Vietnam is vulnerable to US-China tensions. However, Vietnam is likely to attract new FDI projects from corporations seeking to move their production centres outside of China.
