This article first appeared in Vietnam Investment Review on November 12, 2024.

Super Typhoon Yagi made headlines when it hit Vietnam in September. Torrential rains, flooding and landslides caused substantial casualties and extensive damage to roads, agricultural areas, factories, and ports in northern Vietnam, including Hanoi and major ports in Hai Phong.

While the typhoon has hindered economic recovery, fallouts are expected to be short-lived.

The Vietnamese economy continued to gather momentum. In the first three quarters of 2024, GDP growth accelerated to 6.7 percent year-on-year, well above the 4.4 percent growth in the same period of 2023.

The recovery of export demand and strong inflows of FDI were the main growth drivers. In contrast, Vietnamese household spending remained weak as households adopted a cautious attitude and tightened their belts. Micro, small and medium enterprises (MSMEs) that focus on the domestic market continued to lag the recovery of export-oriented firms.

Despite the fallouts of the typhoon, the economic outlook for Vietnam is still improving in the near term due to resilient demand for export orders and an increase in tourist arrivals.

Risks to growth outlook are tilted toward the downside as export outlook also faces uncertainty resulting from possible changes in US trade policy after the November US presidential election.

Besides potential external headwinds, the recovery of domestic demand and the performance of MSMEs will hinge on how quickly the current export recovery leads to positive spillover to the broader economy. A potential rise in consumer price inflation, driven by the typhoon, may dampen domestic consumption.

The financial sector also faces growing credit risks due to the uneven pace of recovery in different sectors, the damages caused by the typhoon, and housing market challenges.

Over the longer term, inadequate infrastructure development and lack of skilled labor continue to pose challenges to Vietnam’s growth potential. 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 a rapidly aging population are growing threats to Vietnam’s macro-financial stability in the long run.

Supporting domestic demand

In light of short-term risks, the authorities should recalibrate macroeconomic policies to support domestic economic activity and the vulnerable segments.

Vietnam’s ample fiscal space allows the government to provide targeted support to vulnerable segments of the economy, while expediting the disbursement of the budget for public investment.

To the extent that inflation is well anchored and has been brought under control, the monetary stance can remain accommodative to support a more broad-based recovery.

Addressing real estate challenges

Since the new real estate laws took effect in August 2024, the housing market in certain regions has shown signs of recovery. However, unresolved legal bottlenecks continue to hinder broader market activity. A robust recovery in the housing market will largely depend on how swiftly these laws and their subordinate regulations are fully implemented.

While the recovery path of the housing market remains uncertain, several real estate developers are burdened with substantial bond repayments obligation until the end of 2025.

With the new real estate related laws taking effect, subordinate regulations should be rolled out in a timely manner to boost housing market activities.

To curb speculative demand in the real estate market in the future, the authorities should consider the introduction of a tax on capital gains or stamp duty on the purchase of a second property and beyond.

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 introduced.

Strengthening banking sector soundness

Vietnam’s banking sector faces lingering risks including rising non-performing loans and exposures to the real estate sector, which lending alone accounts for 21 percent of banks’ total outstanding loans.

To complement the effects of the new credit institution laws, commercial banks should continue to build up their capital buffers and improve corporate governance and risk management. The process of bad debt recovery should be improved to facilitate offloading of commercial banks’ non-performing assets. At the same time, the banking resolution framework should be strengthened.

Promoting sustainable growth

In the longer horizon, the authorities should continue to promote a more inclusive and sustainable development. It is important to upgrade infrastructure, upskill workforce, and encourage firms to improve the quality of their products.

With higher frequency of extreme climate events, stronger coordination among public agencies is necessary to raise the efficiency of efforts related to 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.

In 2024, Vietnam’s economy has exhibited solid improvement. However, as the recovery is not yet broad-based and is confronted with various challenges, targeted policy support remains vital to navigate the economy through uncertainty.