Home Economy, Policy & Business Is politics holding Vietnam’s economy back?

Is politics holding Vietnam’s economy back?

Priyanka Kishore
We speak with a leading Asia economist about the implications of political developments on Vietnam’s economic and investment prospects
An interview with
Economic and Forum Director at IMA Asia

As Vietnam grapples with political headwinds that have dented business confidence, it is likewise confronted with forces that may threaten its role as a prime investment destination in Asia.

We speak with Priyanka Kishore, economic and forum director at IMA Asia, to learn more about Vietnam’s outlook in the face of internal and external uncertainties, and what it can look forward to in realising its growth potential, particularly at a time when investors and multinationals continue to look beyond China. She speaks about the importance of skilling Vietnam’s labour force as it looks to compete for investment with countries such as India.

Unravel: Let’s start with the political situation in Vietnam. Is the country in the midst of a power struggle?

Priyanka Kishore: The government’s anti-corruption drive, overseen by General Secretary Nguyen Phu Trong, has dominated politics for the past several months. It was initially welcomed by businesses as a step to reduce pervasive corruption that has troubled the private sector for years. But following the appointment of President Vo Vanh Thuong, it has become clear the campaign has acquired political overtones. His predecessor, Nguyen Xuan Phuc, and two deputy prime ministers, were forced to resign at the start of the year with no clear reasons provided. The political aim is to accelerate a transition plan to place Trong loyalists in key party and government positions in preparation for his retirement. 

Unravel: When is political stability likely to be restored?

Ms Kishore: The anti-corruption campaign has taken a backseat amid rising evidence of an economic slowdown. The realisation that Vietnam will miss its 6.5% growth target for 2023 by a wide margin has served as a wake-up call for authorities and paused the dismissal of senior leaders. Prime Minister Chinh survived the Central Party Committee’s vote of confidence in May and will likely continue in office until the 14th Party Congress in 2026. Still, a full resolution of the political uncertainty is unlikely until Trong’s preferred successor, National Assembly Chair Vuong Dinh Hue, is widely accepted by the party.

Unravel: How has the political upheaval impacted business environment and sentiment?

Ms Kishore: The political situation has introduced a level of risk that’s causing the private sector to hesitate before investing. Investment, including inventories, grew just 1.2% year-on-year in the first half of 2022, after rising 5.8% in 2022. 

While the government is trying to show that it’s back in business by approving long-pending projects, such as a $135-billion power plan focused on green energy, its likely to be a while before businesses’ investment appetite recovers. This is particularly true for the real estate sector, where almost half of the $10.7 billion in property developer debt that’s maturing this year could default. This poses a problem for the financial sector, which has responded by lowering its funding exposure to builders. Risks may slowly spread to other sectors too.

In all, a strong pick-up in business and residential investment is unlikely until the government signals a clear end to the corruption crackdown. We forecast investment to grow 2% this year from 6% in 2022, 3.7% in 2021 and a trend rate of 7%, with the pace recovering to 5.5% in 2024.

Unravel: How has the economy fared so far and what is the outlook for 2023-24?

Ms Kishore: A surge in tourist arrivals to 5.6 million in the first six months of 2023, which is 66% of the 2019 level, lifted services GDP by 6.3% year-on-year in the period. This supported GDP growth of 3.7% year-on-year in the first six months of 2023, even as manufacturing growth slumped to 0.4% and construction grew at a below-trend pace of 4.7%.

We look for slightly faster growth in the second half of the year and forecast 2023 growth at 3.9%. This is supported by a strong recovery in tourism, which has cushioned employment and household incomes from the manufacturing slump, and is positive for consumer spending. The unemployment rate has been steady at around 2.3% and retail sales are up 10.9% year-on-year to date, after rising 19.8% in 2022. With the State Bank of Vietnam (SBV) pivoting to rate cuts and the government announcing a 2% cut in the VAT rate over July-December 2023, consumer demand should lift from the second half. We forecast private consumption to grow 4% in 2023 and 5.8% in 2024 from 7.8% in 2022 and 6.6% on average in 2010-19.

The outlook for manufacturing and investment growth is hampered by weak external demand and political uncertainties. The US is Vietnam’s largest export destination, followed by China. With economic momentum likely to slow in both places over the next three to four quarters, we have moderated our expectations of Vietnam’s 2024 growth recovery to 5.7% from 5.9%.

Unravel: What is your view on the current inflation situation and its impact on Vietnam’s monetary policy?

Ms Kishore: The headline inflation rate was at 2% in June 2023, and core inflation was at 4.3%, both below the SBV’s 2023 target of 4.5%. This gives the central bank some room to focus on growth risks and we believe it may cut another 50 basis points from its policy rate this year. This would fully offset the rate hikes from 2022 and likely lead to a weaker Dong.

Unravel: Finally, is Vietnam still a promising option for firms with a “China+1” strategy?

Ms Kishore: Vietnam has been a beneficiary of manufacturing migrating out of China from much before 2016, when US protectionism escalated under the Trump administration. Cheap labour costs, rising infrastructure investment, and a favourable climate for FDI made it an attractive alternative to China and this remains the case. Once the dust settles on the political campaign, it’ll likely fare much better on corruption perceptions too.

However, Vietnam faces strong competition from India, which is doubling down on its efforts to attract supply chains migrating out of China. While Vietnam benefits from an existing supply chain and industrial setup, India’s advantage lies in a more skilled labour pool, as reflected in the large number of STEM graduates, and a significantly larger consumer base. It is also considered to be more independent of China.

A 2019 study by Japan’s Nomura Bank showed that of the 56 firms that left China between April 2018 to August 2019, only 3 came to India, while 26 went to Vietnam. But the table seems to have turned now. According to a FT report, India received 27% of the FDI coming to Asia Pacific in 2022, as opposed to just 9% for Vietnam.

This isn’t to say that Vietnam will not continue to attract new investments. But to improve its lure, it needs to focus more on skilling its labour force and raising the supply of engineering and managerial talent.

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Priyanka Kishore
Economic and Forum Director at IMA Asia

Priyanka Kishore has more than a decade’s experience in macroeconomic research and forecasting, with a special focus on Asia. She is currently the Asia Economist for a leading peer group forum for CEOs and senior executives in the region, IMA Asia. Previously, Priyanka was Oxford Economics’ Chief India and South East Asia economist.

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