Vietnam’s Economic Growth Prospects Remain Bright

9:41:07 AM | 7/12/2022

Vietnam’s gross domestic product (GDP) expanded 7.72% in the second quarter of 2022, the highest in more than a decade, bringing the six-month growth to 6.42%. This outcome shows a clearly prosperous economic prospect and a strong recovery in many fields. However, risks still linger. Our reporter has an exclusive interview with Mr. Nguyen Minh Cuong, Chief Economist of the Asian Development Bank (ADB) in Vietnam. Lan Anh reports.

Rising commodity prices, especially gasoline prices, have had a strong impact on all economic aspects, including inflation. What do you think about these impacts on the Vietnamese economy?

Inflation is the biggest risk factor for the Vietnamese economy and for the world economy as well in 2022 and 2023. There are many inflationary factors and there are two main factors. The first is the recovering global economy, which has given rise to an increase in demand, particularly for petroleum, which has led to an increase in petroleum prices. And, if China's economy had recovered without any of the current “zero Covid” measures, it would strongly affect petroleum prices. The second is the Russia-Ukraine conflict, which has disrupted petroleum supplies and increased pressure on world prices.

The above two factors have strongly impinged gasoline prices, but current development is indicating that the first factor is much subdued and world economic recession is likely to occur, especially in developing economies. At that time, petroleum prices will "cool down". For the time being, we have witnessed a decline in petroleum prices and the most potential risk to gasoline prices is thus perhaps the conflict between Russia and Ukraine. If the conflict persists, it will result in depletion of oil supply because it is difficult for Middle Eastern countries to increase supply in 2022-2023 due to limited production infrastructure. Other suppliers such as Venezuela or Iran require major political compromises, which are unlikely to come about in the short term.

In Vietnam, gasoline prices have increased 13 times this year to almost double from a year earlier; however, fortunately, food prices have not gone up that much, with some items even having their prices slashed like pork and seafood. This comes as Vietnam is a food exporter and it can partly rein in food price fluctuations. The Vietnamese economy even benefits from higher food prices as the export price has gone up.

To a certain extent, the petrol price growth has not yet impacted food prices through transportation, which will take some time, possibly into the third and fourth quarters of this year.

In general, inflation is a risk to Vietnam's economy but Vietnam's growth outlook is still bright. Export, manufacturing, agriculture and services have been, and will be, drivers of economic recovery. ADB keeps its forecast on Vietnam's economic growth at 6.5% in 2022 as it announced in April 2022, which has been unchanged up to this point. Vietnam's inflation is still under control, at about 4%. Of course, inflationary risks can still be heightened, but in the face of a possible world economic recession, ADB retains its inflation forecast at 4%.

Coupled with these effects, bad debts and how Vietnamese banks handle bad debts are also a "hot" issue. In your opinion, to safely deal with bad debts, what should Vietnamese banks do in the current context?

Bad debt and how to settle it have emerged in the Vietnamese banking system. On-balance-sheet bad debt, according to the State Bank's report, is just under 2% of total outstanding loans, but if off-balance-sheet bad debt, VAMC-held bad debts and restructured debts which are likely classified as bad debts are counted, the rate may be much higher, possibly up to 6% of total outstanding credit.

Bad debts affect banks' profitability and system safety but there are still bright points in the current "banking health picture", including a more positive debt coverage ratio. Although the bad debt ratio may increase faster than the risk hedging, banks can significantly increase their capacity to handle bad debts.

Debt restructuring stopped on June 30 as planned. This came at the right time because, if Vietnam continued to extend the debt restructuring, bad debt burdens would keep rising. This termination may have an impact on financial support for businesses recovery, though.

The banking system has provided timely support, especially for businesses during the crisis of the COVID-19 pandemic. Therefore, it is time to share more about the use of monetary policy and fiscal policy in supporting economic recovery. The support package passed by the National Assembly in January 2022 shows that more fiscal measures have been, and will be, used to reduce pressures on the banking system.

In its latest report released on May 13, ADB sees a very optimistic prospect for post-COVID-19 economic recovery in Southeast Asia, but there are still persistent risks. For Vietnam, how are its prospects and risks and what needs to be done to solve them?

ADB is seeing a positive economic outlook for Southeast Asia. As for Vietnam, ADB maintains its growth forecast at 6.5%. For economies around the world, inflation is considered the biggest risk, but in Southeast Asia, it is below 5%, a tolerable level.

There are many reasons for inflation in Southeast Asian countries staying low. Supply chain disruptions are not as severe as in developing countries, which is measured by faster delivery than in developing countries. Some countries, including Vietnam, are not very dependent on imported food supplies.

Another very important reason is that the "stimulus package" of countries in Asia and in Southeast Asia is also smaller than that of developed countries and its impact on inflation is lighter as well. These reasons make inflation growth in Southeast Asian countries lower than that of developed countries. However, this does not mean that there are no inflation risks, and there are still unpredictable things that may happen.

Besides, the United States Federal Reserve System (Fed) raised policy interests too fast and too strongly, causing a reversal of fund flows and causing local currencies of Southeast Asian countries, including Vietnam, to depreciate. This is also considered a major risk.

The world economic recession crisis, forecast to occur at the end of 2022 and 2023, will undermine consumption and import demands in major markets. That will have a strong impact on exports of Southeast Asian countries, especially Vietnam. 

However, the forecast of a world economic recession is a bit excessive, according to many experts, even though it is probable, but to what extent is still a big question because a global recession following a strong recovery is perhaps obvious. The "COVID-19 shock" led to a very strong policy response. Increased stimulus packages in developed countries as well as developing countries pumped a lot of money into economies in a very short time. An unprecedentedly fast and strong amount of funds was supplied to prevent an economic collapse and start economic recovery. When economies recover, inflationary impacts are understandable. Central banks of developed countries are forced to take drastic and quick tightening measures, which may lead to a "deceleration" but the economic recovery will continue. To be precise and appropriate, it is not necessarily an economic recession but a "deceleration".

Unknown factors are unpredictable geopolitical developments, especially the Russia-Ukraine conflict. 

For the Vietnamese economy, the upside is inflation is controlled and the downside is exports are reduced. However, in any respect, the internal forces of the Vietnamese economy at the end of 2022 and 2023 are still strong enough to withstand those two impacts.

What sectors of Vietnam will recover quickly and sustainably and which will face difficulties in the coming time?

The sectors that directly depend on petroleum will certainly be strongly affected and the transportation sector will be the hardest hit. In addition, logistics and transportation services are also seriously struck. Export-related industries/fields will continue to develop, such as manufacturing, processing and agriculture. Domestic tourism and services will also continue to thrive. But it is also important to note that rising inflation will weaken import demands in Vietnam's major markets. Therefore, exports may be hit in the second half of the year. Moves to gradually normalize U.S.-China trade relations may also partly limit the penetration of Vietnamese goods into major markets, especially the U.S.

Can you tell us about ADB's cooperation and support plans for Vietnam, as well as for businesses in the coming time?

ADB is about to approve a partnership strategy with Vietnam, built on two main pillars: Supporting Vietnam in response to climate change, economic recovery and green growth; and supporting Vietnam, especially businesses, to continue working as a locomotive and growth engine for the economy. In addition to two main pillars, there are five cross-cutting priorities: regional cooperation, gender, green finance, digital growth, and management capacity building.

For the first priority of supporting green growth and sustainable development, ADB plans to support businesses by providing unsecured loans for renewable energy and technology application and energy conservation improvement by lending to them to fund projects on consolidating and expanding energy transmission, applying science and technology to reduce carbon emissions, and manufacturing electric vehicles. 

For the second pillar of supporting businesses, both State-owned and private, ADB will continue to assist in reforming State-owned enterprises (SOEs) and helping private companies in global value-added chains, especially in public-private partnership projects. For the financial sector, ADB will focus on supporting private companies to carry out green finance. In the health sector, ADB will help infrastructure expansion in hospitals and social insurance through companies in these fields.

Thank you very much!

By Vietnam Business Forum