Vietnam's economic challenges for the year ahead

Online economic forums are crowded with discussions about the economic challenges Vietnam will face next year. An October report by the International Monetary Fund (IMF) highlighted many "headwinds" pushing against both the global and Vietnamese economies. A government report to the Vietnam National Assembly's most recent session repeated the word "difficult" over and over again.

Other utterances I often hear when talking about the future of both the local and global economic landscapes include "recession" and "broken trust."

Meanwhile, reports from various agencies and organizations claim that Vietnam's economy is recovering and strong -- bright spot regionally and globally. They say that Vietnam's credit rating has been upgraded, and that people are looking here as a destination for investment, tourism and settling down after the pandemic.

We need a more comprehensive and multidimensional assessment of Vietnam's place in the global economic situation.

Vietnam's economy recovered well in most fields and localities during 2022. Economic growth for the year is estimated to reach 8%, while average inflation increased by more than 3%, exports increased by about 12%, final consumption increased by over 10% and investment increased by about 9%. The three main reasons for this performance are: 1) Vietnam adjusted quickly to the Covid-19 pandemic, which enabled economic activities to return to normal. 2) The country's economic recovery policies patiently and persistently created macroeconomic stability and controlled inflation. And finally, 3) The growth indicators mentioned above correlate with the relatively low values of the previous year.

Next year, Vietnam’s economic progress should be bolstered by many favorable headwinds blowing from both inside and outside the country.

The favorable external context is clear. The global economy might continue to stumble next year, but this will mainly affect a few specific regions and localities (the U.S., Europe, the U.K., etc.) only mildly and for the short term. Global economic growth of about 2.2% is expected next year (down from 3% in 2022), before returning to pre-epidemic levels of 2.5 to 3%. Global inflation is easing, the price of oil, gasoline and other commodities are decreasing slightly, and the global consumer price index (CPI) is predicted to increase by about 6.5% in 2023 (from an average of 8.5% in 2022) and it might even return to 4% by 2024.

Within this context, countries (especially the U.S.) will tone down the escalation of interest rates, and might even slightly reduce interest rates by the end of 2023. Thus, external pressures on Vietnamese inflation, interest rates and exchange rates will also ease. As a result, risks in the manufacturing, financial-monetary and real estate sectors will also decrease.

Even so, external challenges are still present. The first is that the pandemic has not gone away and different countries are handling it differently. The second is that geopolitical risks and strategic competition between countries are disrupting supply chains, coupled with an increase in trade and investment protectionism. The third is that the global economy minor recession (in which China's growth remains low at about 4.5%) has reduced Vietnam's demand for international trade, investment and tourism. The fourth is that global financial-monetary, liquidity and real estate risks are still high, affecting Vietnam's financial-monetary and real estate markets due to the country's deep integration.

A staff holds stacks of cash at a bank in Ho Chi Minh City, November 2022. Photo by VnExpress/Thanh Tung

According to the IMF's quantitative model, the latter three challenges caused Vietnam, Singapore and Cambodia to suffer many negative effects (down about 2 percentage points of growth) as they are the three countries with the largest trade and investment openness in Asia.

In that general context, favorable internal winds include Vietnam's 2022 recovery momentum, which has created the foundation and resources for policy management next year. Vietnam's high 2022 growth rate has helped realize the nation's 5-year socio-economic development plan. Well-controlled, prudent and adaptive inflation and monetary policies (rather than just strict tightening across the board), a low budget deficit and meeting state revenue targets have allowed room for expansion in accordance with fiscal policies, etc.

Many medium and long-term development programs and plans have been approved. These include initiatives for public investment disbursement, as well as procedures for packages under the recovery program and national target programs that have been approved. All of the above will allow for the faster implementation of growth policies and projects next year. Some inadequacies in the land, finance, real estate, labor and healthcare markets have also been identified and gradually rectified. With these advantages, Vietnam has a huge opportunity to "overcome difficulties" in the coming year.

But internal headwinds are also numerous. The global economic downturn (albeit local and mild) slowed Vietnamese exports, foreign direct investment (FDI) and the mobilization of external resources. Vietnam's inflation increased due to a lag caused by high imports, resulting in the current larger-than-normal money supply. Next year is also when Vietnam will have to accept increasing some state-managed items such as minimum wages, electricity prices, as well as healthcare and education fees. The pressure of rising interest and exchange rates is still large and a challenge for macroeconomic management. State revenues will also encounter difficulties because businesses are still struggling with profits.

Policies and solutions to make the stock and real estate markets healthier have more or less negatively affected the market and investor sentiment. Legal, capital, market and labor issues for businesses will also take time to be resolved.

Therefore, if Vietnamese management is not serious and clever, achieving a growth target of 6.5%, as well as the average CPI increase target of 4.5% (as well as other goals) will be extremely challenging.

In my opinion, it is necessary to analyze and closely forecast the situation both domestically and abroad, and proactively create both immediate and long-term solutions. Analysis and predictions need to be realistic and ignore fantastical achievement obsessions in order to create these effective solutions. Violations of capital market regulations should be curbed, resolved quickly and fairly, ensuring the legitimate interests of investors.

Other tasks such as harmonizing macroeconomic policies, balancing interest rates and exchange rates, balancing the control of inflation and growth, balancing government support of both individuals and businesses while also balancing immediate and long-term budgets will be key. Removing economic obstacles -- especially in terms of legal red tape surrounding capital -- for businesses and investors will also be crucial. Accelerating the disbursement of public investment and recovery programs while resolving lingering issues will all require a willingness to take responsibility in management.

In 2023, the fight against corruption will continue. The fear of making mistakes, the shying away of taking responsibility may still take place, so we'll need flexible solutions and mechanisms to protect enterprising people. Businesses and investors should also restructure, promote digital transformation, reduce costs, increase openness, transparency, professionalism and employ better risk management.

These policies and solutions should be a crucial therapeutic medicine to help increase the self-reliance and resilience of the Vietnamese economy so we can continue to improve in 2023.

*Can Van Luc is an economist. He currently works as chief economist with state-owned lender BIDV.