Rising Risks to Vietnam's Economy

12:55:26 PM | 12/1/2022

“Given strong growth through September, we revised up our GDP growth forecast for Vietnam in 2022 from 6% to 7.5%. However, due to slowing external demand and tighter financial conditions, the growth forecast for 2023 is 5.8%. Inflation is expected to rise, before gradually returning below 4%.” 

This remark was made by Mr. Francois Painchaud, IMF Resident Representative in Vietnam and Laos, at the second Vietnam Economic Pulse themed “Extending Economic Recovery – Drivers for Growth” held in Hanoi recently. The forum was jointly organized by the National Center for Socioeconomic Information and Forecasting under the Ministry of Planning and Investment (NCIF-MPI) and the UN Development Program (UNDP) to analyze and assess the economic recovery process after the COVID-19 pandemic and policies sustain growth and development in the coming year.

External headwinds

In 2022, Vietnam outperformed other countries in the region following a rebound in consumer spending, several quarters of robust export growth, and the gradual return of international tourism. GDP growth in the third quarter of 2022 exceeded all forecasts, estimated to increase by 13.67% year on year, bringing GDP growth in the first nine months of 2022 to 8.83%. Core inflation was still below the annual target (4% per year). However, a global slowdown and heightened risks of financial instability could weigh on growth in 2023 and 2024.

According to UNDP Resident Representative for Vietnam Ramla Khalidi, Vietnam has bright economic prospects, but risks are multiplying. “Evidence of a strong recovery is welcome news after two years of economic disruption caused by the pandemic. Vietnamese households will enter the Year of the Cat in 2023 in better financial shape than a year ago,” she said.

She said that risks to sustaining the recovery are mostly external. War in Ukraine, the economic slowdown in China, rising international interest rates, the strengthening U.S. dollar, and the growing risk of recession in Europe could affect demand for Vietnam’s exports and increase the risks of macroeconomic instability.

There are also domestic risks, especially in the banking and bond markets, which are sensitive to rapidly changing conditions in the property sector. Negative impacts of climate change will increasingly weigh on agricultural production and the health and well-being of communities. Therefore, Ms. Ramla Khalidi said, policymakers must remain vigilant, adjusting fiscal and monetary policy promptly as global conditions evolve.

Defending financial stability

According to Mr. Francois Painchaud, to deal with current challenges, protecting financial stability should still be a top priority. Policies must be carefully calibrated, coordinated, and communicated to manage negative risks and reduce policy trade-offs, especially trade-off between growth and inflation. In the current context, monetary policy should focus on price stability, and consider a tighter monetary policy position if inflation pressure mounts. Although bank asset quality has improved since the end of 2021, negative risks to growth increase, tensions in the property sector and corporate bond markets, tight bank liquidity conditions and higher interest rates require close monitoring of financial stability risks. In addition, fiscal policies need to be more flexible and targeted if inflationary pressures rise.

Dr. Tran Toan Thang, Director of Industry and Enterprise Economic Forecasting Department, NCIF-MPI, said that the economic recovery in 2023 will continue to benefit from the implementation of the 2022-2023 Economic Recovery Program. Vietnam is forecast to maintain the target of stabilizing interest rates and exchange rates, keeping interest rates low to support growth. Regarding fiscal policy, the investment component of the Support Program - rising to about 1.6% of GDP - is expected to be mainly implemented from 2023 onwards. Nevertheless, with a fairly high growth in 2022, Vietnam’s economic growth in 2023 will slow down, gradually returning to its pre-COVID-19 state, as the domestic demand rebound may not be as strong as that of 2022. Rising raw material prices begin to translate more clearly into production costs. Import and export may increase more slowly than in 2022 due to the prolonged difficulty of Vietnam’s main export markets. Foreign investment attraction is forecast to remain low due to increased global economic risks.

He added, with the above internal and external influencing factors, Vietnam’s economy in 2023 could be predicted in two scenarios. Scenario 1, economic growth may be only 6-6.2% if risk factors outweigh the established recovery trend in 2022. Scenario 2, more optimistic, economic growth may reach 6.5-6.7% if the recovery process is more favorable and the impacts from the international context are not too significant.

According to experts, despite difficulties, the foundation of Vietnam's economic development is still exports. Elevating the role of the processing and manufacturing industry in growth needs to upgrade value chains and strive to enter higher segments in global value chains. It needs to focus on high-valued agricultural products, which are in high demand in advanced countries. Furthermore, the Government needs to deal with internal economic weaknesses and promote public investment disbursement, and increase funds for socioeconomic recovery.

Dr. Jonathan Pincus, UNDP Senior International Economist
Growth of exports is still the most important factor influencing Vietnam’s economic growth over the long period. Growing exports means producing competitively, but also producing ‘dynamic’ goods and services that are growing as a share of total global trade. ‘Dynamic’ goods are often sophisticated manufactured goods, but also higher value-added agricultural products that are in high demand in advanced countries. 
The policy implication is that government can use public investment, education, and information to help exporting firms to produce ‘dynamic’ goods and services for exports.

Mr. Nguyen Quang Thuan,CEO of FiinGroup
Key risks to the economy include increased social unrest which affects public confidence in the financial system, not only new bonds issuance, in the banking sector and equity market. Refinancing cannot be made under public offerings even with good credit performance issuers. 
Besides, another key risk is bond defaults and cross-defaults. Cross-defaults to banks as investors: banking asset quality (although exposure is still very insignificant: below 3% interest earnings assets). This will impact banks as bond issuers and interbank market players. Corporate debt liquidity crunch - Corporate insolvency is also a risk, resulting in deterioration in banking non-performing loans.

Before this reality, in the short term, Vietnam needs to do special reviews on major issuers that pose risks to individual bondholders, real estate credit programs, and stimulate public offering bonds. There is a need for stronger messages from the Government to restore debt market confidence. In the medium term, it needs information transparency. Perhaps, a centralized secondary market may be launched in June 2023 as required by Decree 65. At the same time, it needs to develop and expand grassroots investors and build green credit.

By Anh Mai, Vietnam Business Forum