Vietnamese economy anticipated to see strong growth amid potential risks in 2023

Similar to other nations in the group of emerging Asian countries, strong growth is expected to continue in the country, with the IMF predicting that the Vietnamese economy will grow by 6.1% this year, the World Bank (WB) giving a growth forecast of 6.4%, and the ADB anticipating a growth rates of 6.7%.

Such growth would make the country one of the fastest growing economies in the world. Indeed, this optimistic growth outlook is largely due to the fact that COVID-19 has been brought under full control through a rapid vaccination programme which resulted in the nation fully lifting restrictions to allow all social activities to return to normal.

Vietnamese inflation has risen, but only exceeded the official target of 4% by a small margin in November as it reached 4.37%.

A cautious rate hike by the central bank is therefore viewed as a positive step in keeping inflation under control and maintaining confidence without putting growth at risk.

The State Bank of Vietnam (SBV) should continue to be cautious, particularly as inflationary pressures may increase and the exchange rate has the potential to drop, a factor which will affect import prices and push up inflation over the coming months.

The objective of the monetary policy is to bring inflation back to the official target within a reasonable and short period of time.

Maintaining rapid growth amid a weakening global economy will certainly pose a challenge.

Exports have been one of the country’s traditional growth engines, although exporters will face a slowdown in demand from both North American and European customers.

Foreign direct investment is also a traditional growth driver for the nation, with many success stories being recorded in the electronics sector.

The investment expansion announcements of Samsung, LG, Foxconn, and Lego can be seen as evidence of the unrelenting appeal of the Vietnamese market.

However, multinational corporations (MNCs) are currently facing pressure to resume production, boost job creation in their home countries, make supply chains more resilient, and strengthen national security, all of which could weaken foreign investment flows over the coming years.

Real estate investment has also been a key growth driver in recent years, despite their large financial risks. Low interest rates and easy credit conditions have fueled a property boom, with housing prices rising rapidly.

The SBV has already moved to raise interest rates and tighten credit to combat inflation, while the housing price increase cycle is coming to an end.

Vietnamese homebuyers will be more cautious moving forward and it is likely that developers will delay the construction of new projects, leading to a freezing market. This will could a key cause in stifling the growth engine in the near future, with investment in carbon reduction potentially becoming a key growth driver in the short and medium term.

Despite the country committing to becoming carbon neutral by 2050, there is not much time left to make major investments needed to cut emissions.

Although there have been more projects making use solar batteries and wind turbines than before, coal remains the mainstay of the nation’s electricity industry and the largest source of greenhouse gas emissions.

Vietnam requires large investments to decarbonise electricity generation, strengthen the grid, and to popularise the use of electric vehicles in transportation.

The nation has pledged to limit the electricity sector's emissions to 170 million tonnes of carbon dioxide by 2030, with half of its electricity coming from renewables.

This level of investment will be supported by a package of grants from advanced economies, with the ultimate goal mitigating the negative impacts of climate change.

Risk identification

These projections depict an optimistic outlook showing robust growth and falling inflation, although rarely has forecasting been as difficult as it is now.

Vietnamese businesses and consumers should be ready for new shocks and possibly a new crisis while the geopolitical situation remains as dire as it currently does.

Conflicts typically create waves of global upheaval, with dramatic effects on energy, food, and financial markets.

How these geopolitical tensions will play out therefore remains unpredictable.

It is hoped that peace can be achieved, although dangerous incidents can still be viewed as very worrying.

The global fight against inflation is also a major risk. Although according to the Fed, inflation has slowed down over the past few months and it is still too early to confirm success.

In the Eurozone, inflation has not yet peaked and some more hikes are expected to come from the European Central Bank (ECB).

Much higher interest rates in these regions will pull capital back into high-yield markets which in turn puts additional pressure on the currencies of emerging economies like Vietnam. Despite these difficulties ahead, the nation still has high hopes for a successful 2023.