Vietnam Economy in 2022: Recovery Faster than Expected

7:23:19 AM | 1/17/2023

It is no exaggeration to say that 2022 is the riskiest and most challenging year for the global economy. The world has not yet escaped the severe consequences of the COVID-19 pandemic while it has suffered risks and instability due to ripple effects from the prolonged Russia-Ukraine conflict. The disruption of global food supply chains and the energy crisis caused inflation to soar. Central banks had to tighten their monetary policies to control inflation.

In response to rising inflation, the United States Federal Reserve (FED) raised multiple policy rates, resulting in US dollar strengthening while weakening domestic currencies of other countries, reversing capital flows in the world financial markets. Capital flows withdrew out of bond markets of many countries.

The drastic move to tighten monetary policies in advanced economies not only slowed economic growth but also threatened global financial stability. China's "Zero COVID-19" policy also aggravated supply chain disruptions.

Given external uncertainties, Vietnam was still a bright spot in the global economic picture last year. Vietnam's economy has recovered strongly and became one of the best performers in the region and the world. The Government's efforts in flexible and prudent economic management brought about impressive achievements in controlling inflation, maintaining macroeconomic stability and achieving higher-than-expected economic growth.

The Government's flexible changes in prevention and control of the COVID-19 pandemic, effective pandemic control and rapid vaccination coverage allowed Vietnam to reopen its entire economy from the beginning of March 2022. Its economic activity quickly returned to the "new normal". Industry, agriculture, trade and services recovered and grew to create a driving force for the economy. Growth momentum was sustained by solid macroeconomic balances, fueled by a faster-than-expected recovery in most economic sectors.

In recent years, efforts of the State Bank of Vietnam (SBV) in accommodative monetary policy have been worthy of recognition. The flexible and prudent monetary policy along with the Government-backed price management measures for essential commodities have contributed to effective inflation control. Inflation was kept below 4% as expected by the Government.

In addition, the Government has strongly directed to accelerate disbursement of public investment capital and, at the same time, implemented the economic recovery and development program to leverage growth momentum. Vietnam's public debt and sovereign debt were well controlled below the legislatively given threshold while the budget was in surplus, thus creating a solid fiscal position to effectively support a strong economic recovery.

However, besides external risk factors, Vietnam's economy still has "bottlenecks" from internal problems that have impacted its recovery and growth. The disbursement speed of public investment capital and social expenditures is behind schedule, despite urgent rhetoric from the Government. Next, capital markets such as corporate bonds and securities have revealed inadequacies in management that need to be dealt with thoroughly to stabilize the market and strengthen investor confidence. Finally, there are matters to deal with social security policies for the workforce. When the COVID-19 pandemic broke out, hundreds of thousands of workers returned to their homelands, not only causing disturbances in the job market but also placing grave pressures on authorities at all levels regarding job placement and social security.

Given strong recovery momentum, Vietnam's economy will continue to maintain growth in 2023. However, economic growth is forecast to be slightly lower than in 2022 due to weaker demands in major markets and investment activities affected by higher interest rates. The Asian Development Bank (ADB) forecast Vietnam's economy to grow 6.3% (revised down from 6.7% announced by ADB in September 2022) and inflation to rise 4.5% in 2023.

In 2023, macro balances will continue to be controlled. A good epidemic control in the country along with the lifting of mobility restrictions in many countries in the region and the world will speed up tourism recovery. Political stability, macroeconomics and an improved business and investment environment are important magnets to foreign investors. Vietnam will still be a destination for foreign investors in the coming time.

Risk factors and instability due to global geopolitical tensions will continue to affect Vietnam's economic growth prospects in 2023. Global inflation tends to cool down. Besides, China is expected to gradually reopen its economy. This can be said to be good news for Vietnam's exporting industry. The two-way trade and investment capital flows between Vietnam and China will be cleared.

Moreover, in 2022, Vietnam managed to control inflation and maintain macroeconomic stability. In 2023, the State Bank of Vietnam is expected to continue to maintain a flexible monetary policy to both control inflation and ensure credit supply for economic recovery and development. In the context that inflation still tends to look up, the room for monetary policy is still available but not much. Therefore, it is necessary to strengthen fiscal policy to support more monetary policy. Fiscal policy must be one step ahead because room remains available and stronger measures must be taken to speed up public investment disbursement.

In addition to extending bank credit for priority sectors, Vietnam needs to remove capital market problems to open up fundraising channels for enterprises to develop production and business while easing bank credit pressures. Corporate bonds and stock markets need to be handled so as not to undermine the security and safety of financial markets.

Weakening demands from major markets will cause many Vietnamese companies to face difficulties due to a lack of orders. Many workers will be at risk of underemployment or even unemployment. Hence, it is necessary to strengthen policies to ensure social security for the workforce. Adopting good social security measures will act as a vaccine to increase workforce resilience and limit the negative effects of external shocks that may occur in 2023.

With the Government's efforts, a solid macro foundation and a very active business community, we are well grounded to believe that Vietnam's economy will recover stably in 2023.

Nguyen Minh Cuong

Chief Economist of the Asian Development Bank (ADB) in Vietnam

Source: Vietnam Business Forum