Vietnam’s Economic Growth Moderates, Inflation Rises

Vietnam’s economic recovery was impressive in 2022, supported by exports, robust foreign direct investment and rebounding domestic consumption. The pandemic nevertheless exposed structural issues that are among the main downside risks to the economy. Growth is forecast to moderate in the coming two years and inflation is expected to edge up. A particular challenge is managing problems that have built up in the financial sector, including a proliferation in nonperforming loans.

Both imports and exports are forecast to shrink by 7% this year and slowing trade could create a current account deficit that equals 1% of GDP this year, before moving back into surplus in 2024

According to ADB, Vietnam’s economic growth is expected to moderate at 6.5% this year and further expand at 6.8% in 2024. Mr. Andrew Jeffries, ADB Country Director for Vietnam, said the economic growth will be constrained in 2023 by the global economic slowdown, continued monetary tightening in advanced economies, and spillover from global geopolitical tensions. However, Vietnam’s growth support policy with monetary easing, a large amount of public investment to be disbursed in 2023, and the reopening of China will help the country counter these headwinds.

Emerging risks

According to the Asian Development Outlook (ADO) April 2023, the global economic slowdown deepened in the fourth quarter of 2022 and will likely continue to do so in 2023. Falling global demand is expected to weigh on industrial growth. The Manufacturing Purchasing Managers’ Index (PMI) sank below 50 for four consecutive months as export-driven manufacturing contracted while consumption-led manufacturing was unable to take up the slack, then the index revived from 46.4 in January 2023 to 51.2 in February 2023. Industry growth is forecast to slow to 7.5% in 2023, contributing 2.7 percentage points to GDP growth. Construction could pick up, however, if major infrastructure projects can be implemented in 2023 as planned.

Tourist arrivals from China starting March 15 are expected to benefit the tourism and services industry in Vietnam, with the sector forecast to grow by 8.0% this year.

China’s reopening will also benefit agriculture. China could generate significant demand for Vietnam’s agricultural exports, as the country receives 45% of Vietnam’s exports of fruit and vegetables. Agriculture is therefore expected to expand by 3.2% in 2023.

Public investment will be the key driver for economic recovery and growth in 2023. A considerable amount of public investment is scheduled to be disbursed in 2023. The government is committed to disbursing US$30 billion in the year, of which 90% had been allocated to disbursing ministries and provinces as of January 2023. Foreign investment, however, will still be hampered by the global economic slowdown. Newly registered and disbursed FDI fell by 38% and then 4.9% year on year in the first two months of 2023. The fiscal deficit in 2023 could exceed the deficit target, which is 4.4% of GDP. In the future, Vietnam should continue to reform to make its finances more sustainable, significantly reducing dependence on unsustainable revenue sources such as land and oil.

Both imports and exports are forecast to shrink by 7% this year and next. Slowing trade could create a current account deficit that equals 1% of GDP this year, before moving back into surplus in 2024.

Notably, according to the ADB, surprise policy rate cuts make Vietnam the first economy in Southeast Asia to ease monetary policy. The State Bank of Vietnam (SBV) cut the discount rate from 4.5% to 3.5%, the overnight rate for interbank electronic payments and clearing through the central bank from 7% to 6%, and the interest rate cap on short-term VND loans to priority sectors from 5.5% to 5%—all cuts effective on 15 March. The central bank kept the refinancing rate unchanged at 6%.

Managing financial and capital market stresses

Financial markets were turbulent last year, raising risks. Financial fraud hit the corporate bond market in 2022, causing bond issuance in the fourth quarter to plunge by 98.8% from a year earlier. Bond repayment due in 2023 is estimated at US$10 billion, of which 42.8% will be from real estate and 30.8% from banks. As banks are resilient, market turbulence has not yet caused serious systemic risks. The capital adequacy ratio against risk-weighted assets is still above 8%, as Basel II requires. Banks’ financial statements were still positive in the fourth quarter of 2022 although risks are becoming evident. Bank credit to real estate in 2022 grew by 24%, its highest growth rate in the past five years. Gross nonperforming loans reached 4.5% in 2022, from 3.8% in 2021, and may continue to increase. Further risk of contagion may come from banks’ exposure to real estate and construction and a high ratio of property in the collateral held by banks. Many banks’ ratio of loans to deposits breached the 85% threshold.

The government responded quickly to worsening market conditions. Decree 65 was passed swiftly in the third quarter of 2022 to strengthen governance in the corporate bond market. However, according to ADB, it did not improve market sentiment, and investors abruptly paused their corporate bond purchases because of doubts about bond repayment.  The government then deferred for one-year compliance with regulatory requirements for corporate bond issuance, including the mandatory credit rating for private bond placement. The government issued another decree on March 5, 2023 to allow bond interest and principal to be paid not just in cash but also using physical and other assets. This raised doubts about enforcement as many of the troubled physical assets have no legal status for valuation. Further, the central bank included time deposits of the State Treasury into banks’ deposits to improve the ratio of loans to deposits and expand bank credit space. On February 17, 2023, the State Bank of Vietnam proposed a credit program worth US$5 billion for social housing to be implemented by four state-owned commercial banks.

According to ADB, in this context, monetary and fiscal measures should continue to be coordinated to support the economy. The issuance of Decree 65 was timely, and its implementation should be resumed as delays may worsen future bad debts. The implementation of a social housing program should balance the need for prudent lending to avoid future nonperforming loans with the need to speed up disbursement.

ADB said, a more accommodative monetary stance notwithstanding, Vietnam should continue to prioritize price stability because escalating geopolitical tensions and accelerating disbursement of public investment may still stoke inflation in 2023. Average inflation in the first two months of 2023 rose from 1.7% a year earlier to 4.6%. Inflation is therefore forecast to increase slightly to 4.5% in 2023.

Additionally, it is critical to accelerate the disbursement of US$30 billion in public investment. Along with the continued implementation of the stimulus program endorsed in January 2022, this spending will generate substantial multiplier effects, creating a strong motivation for the whole economy. In the long term, financial reform should continue, to reduce dependence on bank finance and enhance transparency in bond markets.

Quynh Anh (Vietnam Business Forum)