The Vietnamese economy is among the most resistant and adaptable in Southeast Asia. Notwithstanding the considerable headwinds in 2022 and 2023-to name but a few, fluctuations in global demand to a downturn in the property sector, even a crisis in the banking sector-so far, Vietnam has proved its abilities for fast-paced recovery. This was economic growth that stalled at the beginning of 2023, only to rebound rather quickly, impelled by the revitalization of its manufacturing export sector and inflows of FDI. This analysis, therefore, looks at Vietnam‘s economic challenges and what underpins its recovery and future potential.
Economic Challenges, 2022-2023
The challenges that faced Vietnam during the period 2022-2023 were indeed very complex in nature, emanating from both outside and within the country. On the international horizon, the economic climate worsened due to weak global demand and the recently tight monetary policies of the United States that have taken its toll on emerging economies in general. At home, Vietnam went through an unprecedented correction in the real estate market, wreaking consequences on its financial system. The crisis exposed the vulnerabilities of the banking sector and showed just how vulnerable the country had grown to external shocks in light of its low reserves of foreign exchange and high levels of domestic debt in some sectors.
During this period, there was a marked deceleration of the economy, as real GDP growth for Vietnam slowed to 3.3% in the first quarter of 2023 from an impressive rebound in 2022, with growth touching 8% after the pandemic restrictions were loosened. The piling up of these external and internal stresses outlined that structural reforms in financial governance and debt management were required, at least to avoid such vulnerabilities from hitting the country‘s economy in the future.
Manufacturing and FDI: Twin Engines of Growth The strong manufacturing and export performance was further bolstered by the unbroken flows of FDI. FDI from various multinationals, in particular from South Korea, Singapore, Japan, and China, reinforced Vietnam’s position as one of the important manufacturing hubs, especially for electronics. By the end of 2022, manufacturing exports accounted for a remarkable 91% of the country‘s GDP. Besides the rather friendly regulatory environment, sweetened by free trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and a trade pact with the European Union, strategic location and attractive labor costs have really paid off in this sector. Foreign direct investment has played an integral role in the expansion of export capacities across Vietnam. Since joining the World Trade Organization in 2007, Vietnam has received relatively high FDI inflows and gained importance in international production networks. These investments dipped slightly during the pandemic but remained significant, averaging USD 15.3 billion annually between 2020 and 2022. With the recovery of economies across the globe, FDI inflows into Vietnam again went up in 2023, with a 40% increase over the first three quarters compared to the same period of 2022. This is even more significant given that FDI inflows to the broader ASEAN region and Asia as a whole declined over this period, further emphasizing the comparative advantages of Vietnam.
Rebounding External Trade and Surplus Gains
The external trade sector, particularly manufacturing exports, has been a source of growth and vulnerability. The deceleration in global demand late last year and early this year temporarily set back export performance as goods exports contracted 7.4 percent year-on-year. However, by the last quarter of the year, exports started to rebound, expanding 6.9 percent year-on-year with global demand for electronics recovering. It also receives an upward revision because of higher shipments from large firms, including Samsung, which produces a considerable portion of its electronics in Vietnam.
The trade balance of Vietnam, with the contribution of lower imports and higher flows in tourism and remittances, changed from a small deficit into a large surplus in 2023. An estimated more than USD 22 billion, or over 5% of GDP – a new high for Vietnam – underpins its already strong external liquidity and solvency. Despite such progress, though, the foreign exchange reserves of Vietnam are still quite low – having shrunk from USD 109.4 billion in 2021 to USD 86.5 billion in 2022 – with only modest recovery seen in 2023.
Challenges and Prospects in Banking and Property Sectors
The prolonged pressure exerted upon the Vietnamese banking system by the crisis of the real estate market has revealed the basic undercapitalization and high credit risks therein. Confident expectations for local investors were dashed as the property market declined, along with the depreciation of the VND and increased inflation, leading to a capital flight that further destabilized the financial sector. This was reflected in the balance of payments as a sharp increase in the capital outflows under “errors and omissions.”
These were followed by some relief and gradual restoration of liquidity in the financial system with the policy actions of the government-including a reduction in the refinancing rate from 6% to 4.5%–and support measures for the stabilization of the property sector. Still, lasting stability will need structural reforms of corporate governance and more robust banking sector regulations. In 2024, export-revenue-driven economic growth is set to cushion a portion of the vulnerabilities in the banking and property sectors. These gains should be consolidated through continuous regulatory reforms that build resilience against future shocks.
Conclusion
The Vietnamese economy has been resilient amid adversity, underpinned by a mix of strong manufacturing growth and inflows of FDI, and timely and effective policy adjustments. However, in recent years, there have been underlying vulnerabilities in the financial and property sectors of Vietnam. Against this backdrop, the rapid recovery in export and FDI performance paints an optimistic outlook for 2024 and beyond. In that sense, the strategic advantages of Vietnam include a young, qualified workforce, favorable trade agreements, and balanced diplomatic relations with major global economies. This will continue to attract investment and further strengthen Vietnam’s position as an active player in dynamic global value chains.
Vietnam will achieve longer-term growth as concerns about structural vulnerabilities in the banking and property sectors are addressed and financed for more resilience against financial shocks. The experience of this country during the last two years has again driven home just how diversified trade and investment relations, combined with stable governance of key economic sectors, bear on the matters at hand. As Vietnam moves forward into a future with growth that is more sustainable and inclusive, its experience will be instructive for an entire class of emerging economies facing similar challenges in an increasingly interdependent world economy.
