What are your thoughts on Vietnam’s economic growth in 2023?

Based on the 3.72 per cent growth recorded in the first half, Dragon Capital forecasts annual growth of between 5 and 6 per cent, with a substantial acceleration to 6.3-7.5 per cent in the second half of the year. The forecast is primarily underpinned by the expectation of stronger performance in the services sector, propelled by robust domestic consumption thanks to lower interest rates and the influx of approximately 6 million foreign tourists over the remainder of the year.

However, it is important to note that the revival of export orders may encounter protracted delays due to external factors beyond Vietnam’s control. Consequently, the reinvigoration of export orders hinges upon global economic conditions and the recuperation of key trading partners.

On a more positive note, investment activity in Vietnam is anticipated to remain vigorous, with both foreign and public investments playing a pivotal role. Historically, more public investment is disbursed in the second half of a year. Despite fluctuations in figures, FDI disbursement has exhibited remarkable resilience, further bolstering the investment climate.

How will the global economic situation affect Vietnam’s economy in the closing months of the year?

There is currently a divergence in monetary policies, with Western central banks possibly continuing to raise or at least sustain high interest rates until the end of the year. Conversely, Asian central banks, especially those in Vietnam and China, are reducing interest rates to support their economies. Nonetheless, as central banks in the West approach the terminal rate, the pressure on exchange rates in these countries weakens, and this may initiate a risk-on mode, as reflected by the gradual weakening trend of the USD. Especially in countries with long-term prospects, like Vietnam, investors are likely to increase their investments. Therefore, from now until the end of the year, following the Thomson-FV Hospital merger and the VPB deal, we anticipate the occurrence of additional M&A transactions and block deals in the stock market.

China’s economy has performed more poorly than anticipated. As Vietnam’s second-largest trading partner and neighbor, China may need additional time to recover its economy after reopening. The Chinese Government is transferring its focus from traditional manufacturing and real estate to domestic consumption and high-tech industries, which may necessitate additional economic stimulus packages. This implies that Chinese businesses and citizens will prioritize purchasing “Made in China” goods and engaging in domestic tourism, thereby reducing the demand for imported goods and services and potentially effecting Vietnam’s exports. However, the restructuring of China’s industries may result in many sectors relocating to neighboring regions, and China’s weakening economy may cause a decline in global exports. Both developments could have favorable effects on the economy of Vietnam.

What bright spots and strengths will boost Vietnam’s economy over the closing months of the year?

Public investment and the impact of interest rate reductions are anticipated to play a significant role in Vietnam’s economic growth in the second half of 2023. In the first half, public investment expenditures reached 30.5 per cent of the plan, a minor increase compared to the same period of 2021 and 2022, even though this year’s plan is approximately 20 per cent higher than last year’s. Typically, a significant portion of public investment is allocated in the second half of the year, but in difficult years, such as during the Covid pandemic, this rate frequently exceeds expectations as the government uses it as a fiscal stimulus tool.

In addition, because of the State Bank of Vietnam (SBV)’s four interest rate cuts comprising 150 basis points, it is anticipated that interest rates will continue to decline, with lending rates anticipated to experience more significant decreases in the second half. This will relieve significant pressure on creditors and simultaneously encourage businesses and individuals to expand production and business activities, thereby bolstering the economic revival.

And what challenges will Vietnam’s economy face in the second half?

The first challenge possibly relates to the implementation and effectiveness of policies. The credit package of VND120 trillion ($5.3 billion) had not been fully disbursed as of early June. Despite some positive signals in terms of legal clearance for real estate projects, more time is still needed to gradually resolve the existing obstacles. Achieving the goal of constructing a million social housing units remains a monumental task. Delays or postponements in policy execution may diminish the impact and fail to optimize resources for economic recovery.

Furthermore, in July, Mexico and Canada officially replaced China as the new leading exporters to the US, demonstrating a clear supply-shift (known as near-shoring) and global production realignment. It is evident that the US, Vietnam’s largest export market, is trending towards importing fewer goods from Asia and increasing imports from neighboring countries. This poses challenges that demand Vietnam diversify its export markets to other markets, such as Southeast Asia and the Middle East and Africa, and also diversify export products while enhancing quality. We therefore anticipate that Vietnam’s export sector will continue to face difficulties in the second half of the year.

The final challenge is a longer-term factor: climate change. As evidenced by the recent storm (Talim), we are presently in the first year of a two-to-four year El Nino cycle, which may result in extreme weather conditions such as heatwaves, hurricanes, storms, droughts, and floods. Unfavorable weather conditions could impact the agriculture, forestry, and fisheries sector as well as slow down construction projects, necessitating increased investment in infrastructure, especially in the energy sector.