Vietnam Economic Recovery Projected to Pick Up in Near Term

The Asian Development Bank (ADB) lowered its projections for Vietnam's GDP growth from 6.5% to 5.8% in 2023 and from 6.8% to 6.0% in 2024, due to the impact of weak external demand on the economy.

Its Asian Development Outlook (ADO) Report cites global economic slowdown, monetary tightening in some advanced economies and supply disruptions caused by rising global geopolitical tensions as the main factors affecting Vietnam's economic performance. Inflation forecasts for Vietnam have also been revised down from 4.5% to 3.8% in 2023 and from 4.2% to 4.0% in 2024.

External demand drags Vietnam’s economic growth in the first half of 2023

Mr. Nguyen Ba Hung, ADB's Chief Economist, said that Vietnam's economic recovery was hampered by reduced external demand. Economic growth slowed to 3.7% in the first half of 2023, compared to 6.5% in the same period last year. However, domestic consumption remained strong, boosting the service sector by 6.3%, which contributed 2.7 percentage points to the overall growth. International visitors to Vietnam reached 7.8 million in the first eight months of 2023, increasing by 5.4 times compared to the same period in 2022.

On the other hand, export-oriented manufacturing industries suffered from weak external demand. The industrial production index declined by 0.4% in the first eight months of 2023, resulting in a large number of business closures. On average, each month, 15,600 companies exited the market and hundreds of thousands of workers lost their jobs. The industry and construction sectors grew by only 1.1% in the first half of 2023. However, the construction sector grew by 4.7%, higher than the 4.2% growth last year, as most COVID-19 travel restrictions were lifted. The agricultural sector maintained strong growth momentum, reaching 3.1%, thanks to increased agricultural activities after commodity prices rose.

Foreign direct investment (FDI) disbursement reached US$10 billion in the first half of 2023, equal to the level of the same period last year. However, FDI capital commitments in the first half of 2023 were estimated at US$13.4 billion, down 4.3% from the same period last year, due to geopolitical tensions and tightening global financial conditions. Weak external demand led to a decline in trade and overall growth.

Inflationary pressure eased slightly in the first eight months of the year, thanks to falling oil prices and stable exchange rates. Although overall inflation averaged 3.1% year-on-year, core inflation - which excludes food, energy and items whose prices are administered by the government - remained high at 4.6%. In response to low growth and moderate inflation, Vietnam's government pursued a pro-growth monetary policy. The State Bank of Vietnam reduced the policy interest rate four times consecutively starting from the end of the first quarter of 2023. However, credit demand remained weak, reflecting the difficulties of the real economy.

Vietnam’s economy expected to bounce back quickly in the near future

Mr. Shantanu Chakraborty, ADB's Country Director for Vietnam, said that the sluggish external environment, especially the slow recovery in China, has adversely affected Vietnam's export-oriented manufacturing industries. However, he said that the economy is resilient and is expected to bounce back quickly in the near future, thanks to robust domestic consumption, supported by moderate inflation, faster disbursement of public investment and improved business activities.

Mr. Nguyen Ba Hung said that global demand is declining, affecting the manufacturing and processing industry in Vietnam, and lowering the growth prospects of related industries. He noted that the manufacturing Purchasing Managers Index (PMI) rose above 50 in August 2023 after five consecutive months of contraction, indicating a recovery in the consumption-based manufacturing industry. A reading above 50 signifies an expansion of the manufacturing sector compared to the previous month. He projected that the industry sector will grow by 7.0% in 2023. He also said that the construction sector will grow if large infrastructure projects are implemented as planned.

He added that other sectors are forecast to have good recovery. The service sector is expected to continue to grow, thanks to the revival of tourism after COVID-19. He said that retail sales increased by 7.6% year-on-year in August this year, helping the total sales in the first eight months of 2023 to increase by 10% over the same period. The agriculture sector will benefit from rising food prices, and the sector is forecast to grow by 3.2% in 2023.

On the demand side, Mr. Hung said that domestic consumption will be supported by moderate inflation and continue to grow in the remaining months of the year. He said that public investment will be the main driving force for Vietnam's economic recovery and growth in 2023. He said that Vietnam's government is committed to disbursing about US$30 billion this year. He reported that nearly 50% of the year's public investment disbursement plan has been implemented in the first eight months of 2023, up from 33% at the end of June 2023. He expected that the acceleration in public spending would stimulate demand in the remaining months of the year. He also said that foreign investment has shown signs of recovery despite the global economic downturn, with committed FDI capital as of August 2023 reaching US$18.2 billion, up 8.2% over the same period last year. Disbursed FDI capital increased slightly by 1.3%, reaching US$13.1 billion.

He said that weakening global demand will negatively affect the trade outlook in the remaining months of 2023 and 2024. However, he noted that exports in August 2023 showed signs of recovery with a value of US$32.37 billion, up 7.7% compared to the previous month. He forecast that export-import growth would return to a modest level of 5.0% this year and next year, with the recovery of global demand.

However, he also warned that there are many risks to Vietnam's economic prospects. Domestically, he said that systemic problems in the disbursement of public investment capital and structural weaknesses of the economy are the main risks leading to a decline in growth. Externally, he said that a significant slowdown in global economic growth and a poor recovery in China could negatively affect Vietnam's exports, manufacturing activities and employment. He also said that high interest rates in the U.S. and Europe along with a stronger US dollar could make it more difficult to recover external demand, leading to a depreciation of the Dong exchange rate.

By Anh Mai, Vietnam Business Forum