Confronting Headwinds: Vietnam's Economic Outlook in the Face of Global Challenges

Although Vietnam's economy grew at a slower rate in 2023 due to the country's declining export demand and the lack of electricity supply, it is still expected to grow at a rate of around 7% in 2024. The country's growth outlook is dependent on the improvement of its infrastructure, energy capacity, and private sector contribution. After experiencing two years of economic slowdown caused by COVID-19, Vietnam was able to bounce back in 2022 and grow at a robust 8.0%. In 2023, its government anticipated that the country's export-led growth would continue, especially in the tourism industry. It was initially estimated that the country's GDP would grow between 6 and 7%. Despite the positive external environment, the country's exports grew at a slower rate in 2023 due to the lack of demand from both China and the world. In the first 11 months of the year, the country's exports fell by 5.7 percent. This is a major issue for an economy where its exports almost equal its GDP.

In November, the tourism revenue had increased by 50 percent, but this was not able to offset the negative effects of the industrial production, which contracted by 1 percent. Although external factors have contributed to the slower growth, the electricity issue also affected the country's FDI realizations. These realisations grew by only 2.9 percent in dollar terms. Also, regardless of the negative effects of the electricity issue, the government was able to increase its public investment by over 20%. It also maintained the banking system's stability and inflation under control. However, the real estate sector's problems continued to affect the confidence of investors and the liquidity of exposed banks.

The positive external environment, which included the visit of United States President Joe Biden, and the upgrading of relations between the two countries, was able to encourage more technology transfer and foreign direct investment (FDI). However, Intel's decision not to expand its operations in Vietnam shows that the country's political skills are not enough to attract high-quality investments. The government's emphasis on the production of computer chips is understandable, but it might impede the country's progress in developing artificial intelligence and cybersecurity.

Lack of skilled labour:

The main issue that prevented Intel from expanding its operations in Vietnam was the country's lack of skilled labor. This issue is one of the factors that caused the company to not expand its operations in the country. Besides the lack of skilled labor, Intel also cited the country's high red tape and electricity shortages as factors that prevented it from investing in the country. The decision not to expand Intel's operations in Vietnam will affect the country's efforts to improve its competitiveness in the chip manufacturing industry. It will also make it harder for the country to attract other major firms.

Energy Problems:

The electricity shortages in the country were unexpected since Vietnam Electricity, which was supposed to grow by 8 percent annually, only experienced a half-yearly increase in its actual use. Oversupply of coal and the over-reliance on hydroelectricity led to various issues, such as the transmission capacity and maintenance problems.

Due to the El Nino weather patterns in the region, which is threatening a drought, increasing the country's renewable power generation would help alleviate the electricity shortages. This would also create a more robust and cleaner electricity system.

This year, various significant events occurred in the electricity sector of Vietnam. One of these was the approval of the Power Development Plan 8. This gave foreign investors in the country an opportunity to start planning their future investments in the sector. A major step toward addressing the country's energy problems was taken when the first phase of a partnership agreement between Vietnam and international companies was unveiled at COP28 in the United Arab Emirates. Although it wasn't what the partners had hoped for, the agreement was still a positive development.

Northern Vietnam experienced power shortages during the summer of 2023. Due to the country's electricity problems, various multinational companies, such as Canon, Samsung, and Foxconn, experienced limited operations. It was initially suggested that the approval of the Power Development Plan 8 would have a negative impact on the country's foreign investment. However, despite this, the number of foreign direct investment (FDI) into the country has continued to increase.

FDI:

The planned increase in the country's transmission capacity is expected to help improve the country's image as a safe and reliable investment destination. It will also allow the country to use more renewable energy, which is very beneficial for the country's economy. However, the lack of transmission capacity could cause fuel prices to increase again due to the European Union's supply shortages.

In order to achieve a sustainable growth rate of 6 percent for the next decade, Vietnam needs to improve its energy, education, and soft infrastructure. The country's government has set an annual growth target of 6 to 6.5 percent for 2024. Although some believe that the export growth will be slower than expected, the steady movement of some production out of China could help boost the country's exports.

In 2022, Vietnam received foreign direct investment worth over $27 billion. However, by November 2023, this amount had reached almost $30 billion, which is a significant increase from 2022. The surge in foreign investment was also made more remarkable by the global economic crisis. The influx of foreign investment into the country has been mainly concentrated in various sectors, such as banking, real estate, and manufacturing. In March, Japan's Sumimoto announced that it would invest $1.5 billion in Vietnam's VP Bank. This was a significant deal, as it was one of the biggest foreign investments in the country. Other prominent deals included an investment of over $200 million by Chinese firm Luxshare-ICT in Vietnam's Bac Giang province, and a residential project of over $700 million by Singapore's CapitaLand.

Although the country's external and internal economic conditions are expected to improve, it is still possible that the European Union and the US will slip into recession. This could cause a significant impact on the country's tourism and consumer spending. Moreover, the labor force growth rate is expected to slow down. The main factors that will contribute to the country's growth rate are the increase in productivity and the need for more capital. However, the country's private sector is still relatively small compared to China and Thailand.

World bank Predictions about 2023:

According to a report released by the World Bank, Vietnam's economic growth was expected to decrease to around 6.3 percent in 2023. It is due to the country's services growth moderating and high interest rates. Whereas, the report also noted that the country's economic growth is expected to reach 6.5 percent in 2024. It is mainly due to the improving performance of its export markets.

The outlook for Vietnam's economy is negative due to the global economic uncertainty. Some of the risks that could affect the country's growth include the slower-than-expected expansion in its major export markets, such as China and the US, as well as the rising domestic inflation. The report noted that the country's policymakers need to take additional measures to manage the risks that could affect its growth. These include implementing effective measures to address the trade-off between inflation and growth. On the other hand, a stronger recovery in global growth could help boost the country's exports.

According to Carolyn Turk, the Country Director of the World Bank in Vietnam, the country has the necessary resources to implement its various economic policies and programs. These include the implementation of public investments, which are expected to boost the country's growth.

The World Bank's special report on Vietnam's services sector identifies several key reforms that can help the country's service industry become more competitive and contribute to the country's employment. In order to achieve its goal of becoming an industrialized nation by 2045, Vietnam must heavily utilize its services industry, which has the potential to contribute significantly to the country' s growth, according to an analysis conducted by the World Bank. This would require the country to undertake various reforms to boost the sector's productivity.

Only a small portion of Vietnam's total services exports are specialized knowledge-based services, which include financial, professional, and information technology services. These sectors are some of the country's most productive and contribute over 6 percent of the country's employment. The report noted that various factors such as the small size of firms and the lack of technological adoption in the country can affect the productivity of the service industry.

Vietnam's Economic Performance in 2023: A Reality Check

The country's GDP grew at a slower rate of 5.05% in 2023 from an increase of 8.02% in 2022. It was below the government's target of 6.5% and was also lower than the average annual growth rate of 5.87% during the past decade. It is estimated that Vietnam's gross domestic product reached a value of around 10.2 quadrillion dong in 2023. It is expected to have a per capita income of around 101.9 million dong.

In addition to being a manufacturing hub, Vietnam also relies heavily on trade. In 2023, its exports decreased by 4.4% to reach $355.5 billion, mainly due to the decline in shipments of smartphones. It's industrial production and consumer prices both increased in 2023. Retail sales also grew by 9.6%. Vietnam's imports decreased by 8.9% to reach $327.5 billion in 2023. This resulted in a trade surplus of almost $28 billion for the year. Although a large trade surplus is beneficial for the dong currency as it supports the country's manufacturing industry, a sharp decline in imports could suggest a possible slowdown.

According to data released by the Vietnam State Bank, credit growth in the economy during November was at 8.2%. It noted that the country's economy was still experiencing difficulties due to a slow recovery. To help compensate for the decline in exports, the government of Vietnam decided to extend the value-added tax cut for another year. It also launched various measures to accelerate the country's public investment.

This year, public investment in the country has been relatively slow due to the government's ongoing anti-corruption campaign. In November, the country's Ministry of Investment and Planning estimated that the total amount of public funds allocated for the year ended at 461 trillion dong, which is only 65% of the target. In addition to the anti-corruption campaign, other factors such as the implementation of new regulations on the bond market have also affected the country's real estate sector. These regulations made it difficult for firms to access capital, which led to them postponing their projects. The government eventually decided to suspend the implementation of the bond regulations. However, the damage caused by these regulations had already been done, and the real estate market would continue to be affected throughout the rest of the year.

However, foreign real estate firms were able to capitalize on the opportunities in the country's real estate market. Several prominent international companies, such as Singapore's CapitalLand, Malaysia's Gamuda, and Japan's Marubeni Corporation, announced their intention to expand their operations in Vietnam. This allowed foreign investors to gain a vital life line in the country's real estate industry. As the real estate market continues to struggle, M&A activity is expected to increase in 2024.

Vietnam's Consumer market:

There is a rise of the middle class consumers that has been attributed to Vietnam's increasing number of consumers and the country's growing diversity. It is expected that by 2035, over half of the nation's population will be part of the global middle class. This will create more disposable income and boost consumption. According to a study conducted by McKinsey, the country's gross domestic product (GDP) is expected to grow by around 2% to 7% during the next decade. The rapid development of Vietnam's economy can be attributed to its core factors. For instance, the country's manufacturing industry has the lowest wages in Southeast Asia. Its labor force is also highly educated. It is still expected that the country's population will be affected by the upcoming changes in its economic environment. e.g. due to the global economic slowdown, the demand for Vietnam's exports has decreased. This caused the country's export growth to decrease to around 10% in 2023 from 14% in 2022. Inflation is also expected to rise to around 3.8 percent in the year. This can be considered as an alarming figure for low-income consumers. This could cause the mortgage market to experience liquidity issues, which could affect the consumption and wealth of property owners. Hence, even after the slow recovery, Vietnamese consumers are still optimistic about their country's economy. In 2022, over 60% of the country's consumers said they were optimistic that the economy would bounce back soon. This sentiment continues to be true in 2023, as over 70% of the consumers are planning on spending the same. The consumers intend to spend more on luxuries and treat themselves.

Conclusion:

In order to boost the country's services industry, Vietnam should reduce its restrictions on foreign investment and services trade. It should also implement reforms that will improve the access to finance for local firms. These reforms should help improve the skills of workers and managers and encourage the adoption of new technology. In the future, Vietnam is expected to continue growing as foreign companies look to diversify their supply chains through regional expansion. It is also likely that more projects and real estate investments will be launched by multinational firms. According to the Asian Development Bank's latest Outlook, Vietnam's gross domestic product is expected to grow at a rate of around 6% next year. This is still not as fast as it was before the COVID pandemic. This outlook is dependent on global events. For instance, the US and the European Union's monetary policy actions have affected the Vietnamese economy in 2023. These are expected to continue affecting the country's economy in the future. Despite the various challenges that the country has faced, it is still expected to continue growing. Its young and talented workforce and competitive wages are some of the factors that will help make Vietnam an ideal location for foreign companies and the country's backbone is its consumers who are still optimistic about its future.

Pic Courtsey-VNA

(The views expressed are those of the author and do not represent views of CESCUBE.)