Vietnam’s economy has expanded strongly in recent years but is likely to slow sharply in 2023 on the back of weakening global growth. A slump in the property sector is also having an impact. However, Adrian Ashurst, CEO of Worldbox Intelligence, believes that the long-term outlook remains bright.
Back in 1963, President John F Kennedy received divergent reports from two advisers who had just returned from a visit to Vietnam. One was optimistic about the progress of the war, while the other painted a far bleaker picture. A frustrated Kennedy asked, “You two did visit the same country, didn’t you?”
Anyone reading the economic reports coming out of Vietnam today might find themselves equally confused about where the economy is heading. Take these two recent conflicting reports from the Financial Times and Nikkei Asia.
According to the FT:
“After decades of showing promise, Vietnam’s economic moment may have finally arrived. It was the fastest-growing economy in Asia last year (8 per cent growth) and one of only a handful globally to achieve two consecutive years of growth since the Covid-19 pandemic.” 1
Yet Nikkei Asia argues that:
“The Vietnamese economy is facing multiple headwinds, including shrinking exports and frequent blackouts, raising concerns over the outlook for Southeast Asia’s rising manufacturing hub.” 2
Weakening global growth
Worldbox Intelligence believes the Nikkei Asia version is probably more accurate. While Vietnam has indeed performed strongly for many years, there are growing doubts about how long this can continue – in the short term, at least. Certainly, there is plenty of evidence pointing to a sharp deceleration in growth this year and next. Exports in the first five months of this year fell 11.6% from a year earlier, to US$136.17 billion, highlighting the impact of weakening external demand on Vietnam’s manufacturing-led economy.
Moreover, while Vietnam is targeting growth of 6.5% this year, down from 8.02% in 2022, independent analysts have been busy cutting forecasts. Oxford Economics, for example, lowered its forecast for Vietnam’s 2023 GDP growth to 3.0% from 4.2%, arguing that:
“Easing global growth, including a fading recovery momentum in China, mean that the depressing outlook for Vietnam’s exports has further to run, casting clouds over the prospect of any rebound in GDP growth”. 3
Property-market concerns
There are also emerging domestic problems. In particular, a slumping property sector is raising concern about the banking sector. The market turned last October, according to the Asia Times. That’s when the property tycoon Truong My Lan, chairwoman of the Van Thinh Phat Holding Group, was arrested on charges of bond-market fraud. Her arrest sparked a run on the Saigon Commercial Bank (SCB), with which Truong allegedly has a close lending relationship.
The Asia Times adds that:
“A State Bank of Vietnam (SBV) intervention, which guaranteed to cover all SCB deposits, prevented a potential systemwide run on banks. But the central bank intervention did not, however, stop an eventual rout on Vietnam’s nascent, property-oriented bond market.”
Figure 1: Vietnam’s export growth rate (% year-on-year), 2022-2023
Source: https://asia.nikkei.com/Economy/Vietnam-grapples-with-shrinking-exports-power-crunch
At the same time, the central bank raised interest rates – from 4% to 6% in 2022 – to rein in galloping inflation. The monetary authorities have reversed course this year, slashing rates to 4.5%, but that hasn’t stopped the property bubble from deflating. Dozens of developers have now defaulted on their bonds.
S&P Global Ratings warned in July that the property sector’s problems could spill over to the country’s banks due to non-payment on the commercial real-estate loans and property-related bonds they hold. In a worst-case scenario, S&P said that sector-wide non-performing loans (NPLs) would hit about 4.5%. S&P added that it expects aggregate residential sales in Vietnam to shrink by up to 20% this year, reversing the expansion of between 25% and 30% in 2022.
However, the credit rating agency said that banks are likely to manage the stresses, while the long-term outlook for the property sector remains positive. S&P cites favourable demographics, a growing middle class and a young workforce that will continue to drive up demand and support the property market’s recovery. The government has also taken a number of measures to try and stimulate the market, including relaxing the rules on foreign ownership of property.
Energy blackouts
Power cuts have also been hobbling the economy recently. That reflects decreased availability of hydroelectric power, northern Vietnam’s main source of electricity, due to depleted water resources in mountainous area. Soaring temperatures, which have caused a surge in demand for air conditioning, have exacerbated the situation, with rolling power cuts hitting industrial parks in the country’s northern provinces, where global manufacturers such as Foxconn and Samsung are based.
In many ways, Vietnam has become a victim of its own success. Foreign direct investment surged to a decade high in 2022 as manufacturers shifted out of China and into Vietnam and other countries. Vietnam’s increasingly close political relations with the US are helping to lure US companies such as Apple. The process has even been called “friendshoring”: the practice of focusing supply-chain networks in countries regarded as political and economic allies.
Chinese companies are also relocating production to Vietnam to take advantage of low labour costs, which are around half the level seen in China and possibly to avoid any US sanctions. In June, for example, two Chinese companies specialising in energy storage and battery manufacturing revealed plans to invest US$1 billion in expanding production facilities in Vietnam.
It will take time for Vietnam to absorb these investments, and they will inevitably place further strain on infrastructure, including the energy system. But they will also power growth in the long term. So, while economic growth might dip this year and next, reflecting slower global expansion as well as domestic challenges, the long-term outlook for the Vietnamese economy seems very bright.
1 https://www.ft.com/content/fa1db5ce-8f65-4b28-ab6d-b78730f98195
2 https://asia.nikkei.com/Economy/Vietnam-grapples-with-shrinking-exports-power-crunch
3 https://asia.nikkei.com/Economy/Vietnam-grapples-with-shrinking-exports-power-crunch
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