Assessing the global economic outlook during the “Economic Outlook for the First Quarter: Opening the Way for the Economy in 2024” roundtable discussion co-hosted recently by Vietnam Economic Times / VnEconomy and the University of Economics and Business (UEB) at the Vietnam National University - Hanoi, Dr. Can Van Luc, Chief Economist at the Bank for Investment and Development of Vietnam (BIDV) and a Member of the National Financial and Monetary Policy Advisory Council, suggested that the global economy is likely to plateau or experience a slight decline in 2024, with growth momentum continuing to decelerate to an estimated 2.4 per cent, based on projections from the World Bank (WB) and the United Nations (UN). This slowdown is mainly attributable to lower growth rates in key economies such as the US, China, and Japan.

A WB report in April forecast Vietnam’s GDP growth this year at 5.5 per cent, while the Asian Development Bank (ADB) expects around 6 per cent. A more optimistic outlook has come from BIDV’s research team, of 6-6.5 per cent. Compared to the slight dip in average regional growth to 4-4.5 per cent in 2024, Vietnam’s growth trajectory stands out. Despite the subdued global economic environment and accompanying slowdown, Vietnam continues to maintain its positivity. However, disparities between sectors and the quality of its growth warrant further discussion.

Brightness amid the gloom

Looking at global inflation, Dr. Luc noted a decline in global CPI from its peak of 8.6 per cent in 2022 to 5.5 per cent in 2023, with 3.5-4 per cent projected in 2024. “The gradual easing of inflation holds significance, as central banks worldwide are expected to embark on interest rate cuts, to commence from the middle or the end of the third quarter,” he told the discussion. “This bodes well for the global economy, stimulating investment and consumption demand while alleviating debt repayment burdens for enterprises, thereby mitigating pressure on exchange rates, stemming from interest rate differentials between the USD and less prevalent currencies, including the VND.”

Nevertheless, four principal risks and challenges persistently loom over the global economic landscape in 2024: intricate geopolitical conflicts, particularly in regions like the Red Sea and recent escalations in the Middle East, alongside escalating strategic rivalries between major nations. Specifically, if political tensions in the Middle East escalate further, this will propel energy, oil, gold, and food prices upwards, directly impacting inflation and indirectly influencing exchange rates, as the US Fed and other central banks will exhibit a reluctance to lower interest rates. Despite the current downtrend in inflation and interest rates, they nonetheless remain relatively high, exemplified by the US, where the benchmark interest rate has been held above 5 per cent since late July 2023, with mortgage rates currently hovering at 7 per cent per annum.

Moreover, the risks associated with public and private debt persist at elevated levels. Concurrently, the deceleration of recovery in certain countries such as the US, Japan, the UK, and China portends a subdued global growth trajectory for 2023. Furthermore, enduring risks pertaining to energy and food security, alongside irregular climate patterns and seismic activity, continue to pose challenges.

For Vietnam, in contrast to global trends, inflation this year will be higher than 2023’s 3.25 per cent, ranging from 3.4-3.8 per cent. This is attributable to Vietnam’s stronger economic recovery, marked by increased money supply, accelerated monetary circulation, and the implementation of higher basic wages starting from July 1. Additionally, rises in tuition fees, hospital charges, and electricity tariffs have contributed to inflationary pressure. As a result, Dr. Luc anticipates that Vietnam’s inflation rate will rise in 2024 but remain below targets.

Following results in the first quarter of 2024, he has observed a gradual recovery in the Vietnamese economy. The second quarter has exhibited higher growth compared to the corresponding period of 2023, with GDP registering a notable 5.66 per cent increase. This is considerable, particularly when juxtaposed with previous years, though still trails behind the pre-pandemic levels of 2011-2019.

Delving deeper into the data, he underscored that the retail sales of goods and services in the first quarter posted an increase of 8.2 per cent, down from the previous year’s 13.9 per cent. Adjusted for price fluctuations, this growth was 5.1 per cent, reflecting subdued purchasing power. Consequently, the BIDV research team emphasized the importance of stimulating consumer demand to spur economic activity.

On the tourism front, Vietnam experienced a significant influx of foreign visitors in the first quarter, marking an impressive 72 per cent increase. However, revenue generated from accommodation, dining, and sightseeing services rose only 24 per cent compared to the same period of 2023. This discrepancy suggests that tourists are adopting more frugal and discerning spending habits.

Moreover, in terms of commercial activities, the first quarter saw a resurgence in exports, which climbed 17 per cent, and in imports, which rose 13.9 per cent, partly due to a low baseline, thereby fueling the recovery of production, particularly in sectors like textiles, footwear, and wood and wooden products. Notably, exports to key recovering markets saw promising growth rates, with those to the US increasing a notable 26 per cent, to Europe 16 per cent, to South Korea 13 per cent, and to ASEAN nearly 10 per cent, compared to negative levels recorded in the same period last year.

“While orders are bouncing back, they are shorter in duration, typically lasting only a few quarters, with clients demanding price stability,” he explained. “However, businesses are encountering challenges due to escalating input costs, such as rising logistics expenses, labor costs, and factory rentals, which have led to narrowed profit margins in sectors like electronics, timber, footwear, and textiles.”

Public investment continues to offer critical impetus, with the country expected to ramp up disbursements to nearly VND700 trillion ($27.5 billion) (including carry-over funds) this year, marking a 12 per cent increase over 2023. This upwards trend will persist month-by-month, while FDI inflows will remain positive. New and additional registered FDI capital reached $6.17 billion in the first quarter, marking a 13.4 per cent increase, while disbursed FDI capital amounted to $4.63 billion, up 7.1 per cent.

Growth catalysts for 2024

Following the economic trends seen in the first quarter and evaluating growth catalysts for 2024, Dr. Luc underscored the well-established macro-economic fundamentals and risk management. Though rising, inflation remains within acceptable limits and is lower than in many of Vietnam’s global counterparts. Factors such as public debt, foreign debt, budgetary deficits, and debt obligations in relation to State budget revenue are all deemed to be within the parameters set by the National Assembly, thereby placing fiscal risks at a moderate level. Consequently, he believes that Vietnam retains the fiscal policy flexibility needed to introduce fresh support measures, albeit with a focus on prioritization. Hence, the BIDV research team continues to advocate for the rollout of support packages akin to those deployed during the Covid-19 pandemic, particularly emphasizing tax reductions, deferments, and exemptions.

Moreover, efforts to restructure the economy, notably in sectors such as State-owned enterprises (SOEs) and weak financial institutions, alongside enhancements to institutional frameworks, are actively underway. This includes providing guidance on the implementation of various laws, including the Land Law, the Law on Housing, the Law on Real Estate Business, and the amended Law on Credit Institutions. With these legislative changes coming into effect at the beginning of the year, a positive market response is anticipated. Additionally, the issuance of foundational local plans and the implementation of specialized mechanisms for key cities such as Ho Chi Minh City, Hanoi, Da Nang, Hai Phong, and Can Tho are seen as crucial drivers fostering regional connectivity and spurring growth.

Of particular note is the outlook on interest rates, with assurances that they are expected to remain low throughout 2024, possibly experiencing localized increases in select banks rather than across the board. This is attributed to ample system liquidity and the proactive stance of credit institutions aiming to stimulate credit demand. A gradual recovery of the real estate and corporate bond markets has also been observed, while recent stock market fluctuations are primarily attributed to sentiments related to ongoing global conflicts. Looking ahead, anticipation over a credit rating upgrade is expected to sustain momentum in the stock market, resulting in heightened market activity during the next 12 to 18 months.

Moreover, Vietnam persists in seizing opportunities presented by emerging forces like the digital economy, the green economy, the circular economy, and energy transition. There is a concerted push for international integration through the enhancement of strategic partnerships with the US, Japan, and Australia, fostering advancements in trade, investment, tourism, and various other domains.

Underlying risks

Despite the array of opportunities, Dr. Luc also highlighted that Vietnam’s economy remains exposed to various risks and obstacles. These include the global economic slowdown, elevated inflation, and persistently high global interest rates, which all impact demand and hinder the rebound of exports, investments, consumption, and tourism. Moreover, the distribution of public investment has yet to see significant progress, with discrepancies observed between different regions and sectors.

Consumption continues to experience gradual recovery, while private investment growth remains subdued, registering a mere 4.2 per cent increase compared to approximately 4.9 per cent in the public sector and nearly 9 per cent in FDI. It is evident that both consumption and private investment require a boost.

Regarding growth quality, Dr. Luc’s analysis of the Incremental Capital - Output Ratio (ICOR) from about a decade ago, during the 2011-2013 period, revealed that the State sector and public investment consistently exhibited lower efficiency compared to the private and FDI sectors. Furthermore, a declining trend in growth quality is noticeable based on the ICOR of the private sector. While the ICOR of private investment stood at around 4.2-times in 2011, it surged to 8.4-times in the first quarter of 2024, indicating a pressing need to address investment efficiency.

Additionally, businesses continue to encounter various challenges, including legal complexities, financial obligations, and soaring input costs, which impede their recovery. With approximately 25 per cent of businesses temporarily suspending operations in the first quarter of 2024 and a 10 per cent increase in dissolved businesses, it is evident that many are struggling. Furthermore, the influx of new businesses entering the market is lower than the number exiting, signaling that some sectors and industries may have reached their limits due to prolonged adversity and insufficient adaptability and management. Continuous monitoring of this situation is imperative.

The challenges in the corporate bond and real estate markets require a gradual process of resolution and rejuvenation. Despite overcoming difficult periods, the maturity of corporate bonds in the real estate sector remains a significant hurdle for certain businesses this year.

Additionally, the restructuring efforts of SOEs and financial institutions encounter various obstacles. Exchange rate fluctuations and the increase in non-performing loans (NPLs) are notable, although they are currently manageable. As of the end of 2023, the NPL ratio on domestic balance sheets had risen to 4.55 per cent, up from 2 per cent in 2022. However, excluding NPLs from institutions under special supervision, the domestic NPL ratio remains below 3 per cent, which is relatively reassuring. This is particularly significant given the strengthened financial resilience of financial institutions compared to previous periods.

Moreover, the development of regulations for emerging sectors like the digital economy, the green economy, and the circular economy is progressing at only a sluggish pace. Meanwhile, issues related to fear of error, accountability concerns, and slow implementation of duties persist.

Into the future

Amid a mix of brightness and gloom, achieving Vietnam’s growth targets for 2024 requires prioritizing fiscal policy as the key driver, with an emphasis on “expansion with focus”. This entails considering further reductions in value-added taxes until the end of 2024 and allowing reductions in registration fees for domestically-manufactured cars. Lowering registration fees for cars can effectively stimulate demand, despite reduced budget revenues, as the sale of cars would generate higher value-added taxes and other fees, offsetting the reduction. Additionally, promoting and strengthening consumer credit serves as a stimulus solution.

Regarding monetary policy, Dr. Luc suggested a set of “supportive” policies that are actively managed and flexible, allowing for debt restructuring by permitting extensions to the end of 2024. Furthermore, enhancing the efficacy of policy coordination, especially among monetary policy, fiscal policy, and other macro-economic policies, is essential to promote growth, ensure macro-economic stability, stabilize exchange rates and financial markets, and guarantee social security.

Strengthening institutional reforms remains a priority, with a particular emphasis on (i) promptly issuing and effectively enforcing policies and measures to address various hurdles, especially concerning legal issues, land valuations, VAT refunds, access to capital, and social housing development; (ii) timely promulgation of decrees and guidelines to ensure consistency and coherence between laws passed by the National Assembly, including the Land Law, the Law on Housing, the Law on Real Estate Business, and the Law on Credit Institutions, along with complementary legislation to resolve overlaps and obstacles and ensure robust enforcement; and (iii) the early establishment of institutions and legal frameworks to foster the development of the digital economy, the green economy, the circular economy, and energy transition.

Dr. Luc underscored the importance of not overlooking emerging growth drivers such as the digital economy, green growth, regional connectivity, economic institutional reforms, workplace productivity, and the increased contribution of total factor productivity (TFP) to growth. Leveraging these drivers effectively could potentially bolster GDP by an additional 0.9-1.4 percentage points both in the short term, amid global economic downturns, and in the long term.

With government support, he encourages businesses to proactively propose specific, accurate, and persistent solutions rather than merely express grievances. Businesses should also focus on proactive restructuring, prioritize risk management encompassing information security, cash flow, interest rates, exchange rates, and debt maturity, and actively seek out and utilize government programs and support packages, particularly those related to financial assistance, tax incentives, credit access, and debt restructuring.

Furthermore, it is essential for businesses to continue diversifying their capital sources, markets, partners, and supply chains while enhancing their adaptive capacity, business management capabilities, and green transformation efforts. This is particularly crucial given the increasing demand for green standards in challenging markets such as the US and the EU. Implementing comprehensive digital transformation strategies, integrating technology investments, and boosting digital workforce development, data management, and risk mitigation measures are also imperative in navigating the evolving business landscape.