Vietnam's Economic Outlook Remains Weak

Several major international institutions have revised their projections for Vietnam’s economic growth from their previous forecasts announced earlier this year.

It is critical to evaluate and eliminate any regulations that hinder business operations, thereby enhancing their productivity and performance

Strong pressure at home and abroad

The Asian Development Bank (ADB) recently revised down its GDP growth forecast for Vietnam from 6.5% to 5.8% in 2023 and from 6.8% to 6.2% in 2024. According to its Asian Development Outlook July 2023 report released on July 19th. The report states that weak external demand continues to put pressure on industrial production and manufacturing, although domestic conditions are expected to improve. Vietnam’s inflation is forecast to slow to 4% in 2023 and 2024.

According to the World Bank’s June 2023 Global Economic Prospects report, Vietnam’s GDP growth forecast for this year has been downgraded to 6.0% from the 6.3% announced in March 2023. Although the tourism sector is still recovering, growth in the service sector is slowing due to the effects of the COVID-19 pandemic. Domestic demand is expected to be affected by higher estimated inflation of 4.5% on average in 2023. In the first half of 2023, the rate of growth in manufactured exports slowed due to weak demand in the U.S. and the Eurozone while China’s economic recovery remains uncertain. According to the World Bank, Vietnam’s economic growth is expected to rebound to 6.5% in 2024 as its main export markets are recovering.

Dr. Tran Thi Hong Minh, Director of the Central Institute for Economic Management (CIEM), has stated that several difficulties have arisen in the global and domestic economic context in recent times. Economic experts and international institutes all agree that global aggregate demand is declining. In the first six months of 2023, the global economy continues to face steep challenges such as the Russia-Ukraine conflict, geopolitical competition among major nations, inflationary pressure and tight monetary policies in many countries, as well as the impacts of climate change.

Several international institutes such as the World Bank and the International Monetary Fund expect slower global economic growth for the whole year 2023, commonly at 2-3%. According to Statista (Germany), the global Purchasing Managers’ Index (PMI) registered 47.1 for new export orders and 48.8 for manufacturing. A PMI reading below 50 indicates a contraction in output. Therefore, Dr. Tran Thi Hong Minh believes that the prospect of recovering demand for Vietnam’s export goods remains weak in the coming time.

Domestically, in recent years, room for economic growth in the traditional growth model has decreased significantly. Along with the decline in global aggregate demand, components of domestic aggregate demand such as final consumption and investment spending are affected negatively. According to the General Statistics Office, in the first six months of this year, final consumption increased by 2.68% over the same period in 2022 and accumulated assets increased by 1.15%.

Institutional reform is a prerequisite

Given the context of global economic uncertainty and a drop in demand in Vietnam’s key export markets, it is essential for businesses to expand their reach beyond traditional markets and explore new opportunities. Dr. Tran Thi Hong Minh, Director of the Central Institute for Economic Management (CIEM), stated that “the shift in business operations will be most effective only if an overall policy framework is put in place to improve the economy’s self-reliance in the context of international economic integration. It is here that the role of policies in promoting economic recovery and development, restructuring the economy, increasing labor productivity and growth quality, and expanding economic space for the private sector is very important.”

Ms. Minh said that reforming economic institutions in the context of proactive and active international integration is not merely about adjusting regulations and laws to implement integration commitments but rather improving the domestic investment and business environment to create maximum advantages for enterprises and investors.

According to Ms. Minh, in order to remove difficulties and expand economic space for businesses in the coming time, it is necessary to improve the quality of consulting work to support businesses in adapting to the new situation. “Still, most businesses, including export businesses, are not clear about the application of new technical standards and regulations in export markets. As a result, it is critical to strengthen government-business dialogues and share good practices and examples with businesses. Businesses must also seek out new markets and research domestic consumer tastes to capitalize on the advantages of their home turf,” shared Ms. Minh.

Moreover, the government needs to expand new economic models as soon as possible and as sustainably as possible. Vietnam needs more specific regulations and policies for the digital economy, green economy, circular economy and night-time economy, as these models are relatively new and lack the information required to conduct impact assessment reports in a systematic way.

At the same time, it is necessary to continue to remove difficulties in accessing capital for businesses. Dr. Tran Thi Hong Minh said that the government needs to ensure effective mobilization and use of resources to promote investment capital in production and business activities. Schemes and policies should be put in place as soon as possible to assist businesses with credit and interest rates. Furthermore, Dr. Minh believes that launching a national program to increase labor productivity is necessary to promote economic growth. It is also critical to review and remove regulations that cause difficulties for businesses in order to help them improve production and business efficiency.

By Anh Mai, Vietnam Business Forum