SINGAPORE, October 9, 2024 – The Vietnamese economy continues to gain momentum and is forecast to grow at 6.2 percent, with a positive outlook, in 2024 led by the recovery of export demand and strong inflows of foreign direct investment (FDI). However, despite the robust growth, household spending remains weak while micro, small and medium enterprises (MSMEs) continue to lag behind. Most recently, Super Typhoon Yagi has caused extensive damage to the northern provinces. In light of these considerations, macroeconomic policies should be recalibrated to support domestic economic activity and the vulnerable segments.

This is according to the preliminary assessment by the ASEAN+3 Macroeconomic Research Office (AMRO) after its Annual Consultation Visit to Vietnam from September 11-24, 2024. The AMRO team was led by Lead Economist Sumio Ishikawa, while AMRO Director Kouqing Li and Chief Economist Hoe Ee Khor participated in the policy meetings. The discussions focused on Vietnam’s recent economic developments and outlook, risks and vulnerabilities, and policy response.

Economic developments and outlook

“The Vietnamese economy is forecast to grow at 6.2 percent in 2024 before rising to 6.6 percent in 2025,” said Dr. Ishikawa. “However, the uneven economic recovery calls for a recalibration of macroeconomic policy mix to promote a more broad-based recovery, while safeguarding financial stability.”

Despite the temporary economic disruption caused by Super Typhoon Yagi, the outlook for Vietnam is improving in the near term due to resilient demand for export orders. Although food prices are expected to rise in the coming months as a result of disruption to agricultural production by typhoon Yagi, inflationary pressure remains contained, owing to weak domestic demand, the recent decline in global oil prices, a tightening in liquidity condition, and the appreciation of the Vietnamese dong. Headline inflation is projected to rise from 3.3 percent in 2023 to 4.1 percent in 2024, remaining below the State Bank of Vietnam’s target ceiling of 4.5 percent.

The rebound in exports contributed to the current account surplus, while resilient FDI inflows continued to bolster the financial account. However, large net errors and omissions, partly due to unrecorded transactions such as the purchase of virtual assets overseas, have resulted in a deficit in the balance of payments and a decline in international reserves this year. As of the latest data, foreign reserves stood at USD83.3 billion in July 2024, equivalent to 2.5 times of short-term external debt.

Risks and vulnerabilities

Risks to the growth outlook are tilted toward the downside. A weaker-than-expected consumer demand in the U.S., a sharp growth slowdown in Europe, or a slower growth in China could disrupt the recovery of Vietnam’s exports and weaken its growth. Export outlook also faces uncertainty resulting from possible changes in U.S. trade policy after the U.S. Presidential election.

The financial sector faces increasing credit risks from an uneven economic recovery and damages from the typhoon. The loan moratorium program also masks the underlying weak credit quality. Some developers are struggling with debt repayment and refinancing as the housing market outlook is clouded by delays in the implementation of the new real estate-related laws.

Over the longer term, Vietnam faces challenges from inadequate infrastructure development and supply of skilled labor to match its rapid growth. The under-development of domestic supporting industries and MSMEs has hindered the country’s efforts to move up the global value chains. Emerging challenges from cyber threats, extreme weather conditions and rapidly aging population are growing threats to macro-financial stability.

Policy recommendations

Vietnam’s ample fiscal space continues to allow the government to provide targeted support to vulnerable segments of the economy, while expediting the disbursement of the budget for public investment. Nevertheless, revenue collection can be improved by broadening tax base and enhancing compliance of tax laws. To expedite infrastructure development, lack of consistency and clarity in the laws pertaining to public investment, which lead to slow disbursement, should be addressed.

To the extent that inflation is well anchored and has been brought under control, the monetary stance can remain accommodative to support more broad-based recovery. To deepen financial market developments in tandem with rapid economic growth, the monetary policy reform should adopt a more market-based interest rate approach, while further enhancing exchange rate flexibility as a buffer against external shocks.

To complement the amended credit institution laws, the banking system soundness should be enhanced by increasing the capital buffers of commercial banks, improving the process of bad debt recovery, and strengthening the bank resolution framework.

To contain financial risks arising from the real estate sector, macroprudential measures such as loan-to-value ratio, debt service to income ratio, and credit concentration limits should be considered. Commercial banks should continue improving corporate governance and risk management. With the new real estate related laws coming into effect in August 2024, subordinate regulations should be rolled out in a timely manner to boost housing market activities.

To promote a more inclusive and sustainable development, it is important to upgrade infrastructure, upskill labor, and encourage firms to improve the quality of their products. The rapid digitalization of the economy necessitates more pro-active actions to prevent cyber threats. Stronger coordination among public agencies is necessary for climate change mitigation and adaptation. Enhancing the financial sustainability and transparency of the social insurance fund is crucial for Vietnam to prepare for the challenges posed by a rapidly aging population.

On behalf of AMRO, the mission team would like to express their appreciation to the Vietnam authorities and other counterparts for their cooperation, insightful discussions, as well as hospitality.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute toward securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support regional financial arrangements, and provide technical assistance to the members. In addition, AMRO also serves as a regional knowledge hub and provides support to ASEAN+3 financial cooperation.

AMRO Director Kouqing Li, Chief Economist Hoe Ee Khor, and the AMRO team paid the courtesy call to the Vietnam Vice Minister of Finance Vo Thanh Hung.

AMRO Chief Economist Hoe Ee Khor and the AMRO team met with Director General To Huy Vu, the State Bank of Vietnam.