On April 3, the Asian Development Bank (ADB) held a press conference on Vietnam’s economic prospects for 2023 and 2024.

GROWTH FORECAST 6.5% IN 2023

According to ADB, Vietnam’s growth in 2023 will be limited by the global recession, ongoing monetary tightening and the impact of the Russia-Ukraine conflict. However, China’s reopening will help offset these negative factors and the economy is expected to grow by 6.5% in 2023 and 6.8% in 2024.

Declining global demand has impacted manufacturing and processing. The global recession deepened in the fourth quarter of 2022 and is expected to continue into 2023. Falling global demand has caused the industrial production index to fall by 6.3% in the first two months of 2023 compared to the same period in 2022.

The Manufacturing Purchasing Managers’ Index (PMI) fell below 50 for the fourth straight month as manufacturing and manufacturing for exports declined, while consumer staples manufacturing failed to offset the decline; the index subsequently recovered to 51.2 in February 2023 from 46.4 in January 2023. The industry is forecast to grow slowly at 7.5% in 2023, contributing 2.7 percentage points to GDP growth. However, the construction sector can do well if large infrastructure projects are implemented as planned in 2023.

Services are expected to grow by 8% in 2023 as tourism and related services recover. First, China excluded Vietnam from the list of countries that can receive Chinese tourists abroad. However, on March 12, 2023, Vietnam was added to the revised list, allowing travel from China to Vietnam to resume from March 15. China is Vietnam’s largest tourism market, so Vietnam will benefit significantly from this change.

China’s reopening will also benefit the agricultural sector. China can create significant demand for Vietnamese agricultural exports as the country receives 45% of Vietnam’s fruit and vegetable exports. Therefore, agriculture is expected to grow by 3.2% by 2023.

Public investment will be the main driver of economic recovery and growth in 2023. A significant amount of public investment is expected to be disbursed in 2023. The government has committed to disbursing $30 billion this year and provinces to disburse from January 2023.

However, foreign investment will continue to be affected by the global economic downturn. Newly registered FDI fell by 38% and disbursements by 4.9% in the first two months of 2023 compared to the same period last year. The fiscal deficit in 2023 could be higher than the deficit target of 4.4% of GDP for the year. Going forward, Vietnam needs to implement further reforms to ensure more sustainable financing and significantly reduce its reliance on unsustainable revenue streams such as land and crude oil.

On the demand side, domestic consumption will continue to recover in 2023. Tourism is picking up, stimulus packages and new public investments will start in January 2022, and wage increases will take effect from July. 2023 is expected to help domestic consumption continue to rise despite higher inflation, which may hamper consumption recovery. However, retail sales for the first two months of 2023 were 24.9% higher than the same period of 2019 — pre-pandemic, albeit thanks in part to the Lunar New Year holiday.

The slowdown in global demand will continue to weigh on trade in 2023. Exports fell by 10.4% year-on-year in the first two months of 2023, while imports fell by 16.0%. Both imports and exports are expected to fall to 7% this year and next. Slowing trade growth could result in a current account deficit of 1.0% of GDP this year before returning to surplus in 2024.

The unexpected rate-cutting policy made Vietnam the first economy in Southeast Asia to loosen monetary policy. The State Bank of Vietnam — the central bank — has taken action as the tight capital market has curbed property lending and hurt investor confidence. Meanwhile, mild inflation and recent banking turmoil in the US are likely to prompt the Fed to ease monetary tightening, potentially lowering inflation. At the same time, pressure to maintain economic growth in Vietnam mounted as the global economy faltered.

RESPONSIBILITY TO THE FINANCIAL AND CAPITAL MARKETS

Financial fraud has had a major impact on the corporate bond market in 2022, resulting in bond issuance falling 98.8% year over year in the fourth quarter. The volume of bonds maturing in 2023 is estimated at USD 10 billion, of which 42.8% is in real estate and 30.8% in banks. With banks resilient, market volatility has not yet created serious systemic risk. The ratio of capital adequacy to risky assets remains above 8% as required by Basel II. In the fourth quarter of 2022, too, the annual financial statements of the banks are positive.

However, the risk is gradually present. Bank loans for real estate grew 24% in 2022, the fastest growth rate in the last 5 years. Gross bad debts will increase from 3.8% in 2021 to 4.5% in 2022 and may continue to increase. A higher risk of contagion could come from banks that issue real estate and construction loans and from a high proportion of real estate as collateral for banks. The loan-to-deposit ratio of many banks exceeds the 85% threshold.

According to ADB experts, the Vietnamese government reacted promptly to the deteriorating market conditions. Decree 65 was passed quickly in the third quarter of 2022 to strengthen governance in the corporate bond market. However, this did not improve market sentiment and investors abruptly stopped buying corporate bonds amid doubts about the bond’s ability to be redeemed. As a result, the government postponed the implementation of corporate bond issuance regulations, including mandatory credit ratings for private placements, by a year.

The government issued another decree on 05/03/2023, which allowed the payment of bond interest and principal not only in cash but also in physical and other assets. This raises doubts about the enforceability, since many real assets do not yet have a legal basis for the valuation. In addition, the central bank has allowed Treasury time deposits to be included in the bank’s deposits in order to improve the loan-to-deposit ratio and expand the bank’s credit room. On February 17, 2023, the State Bank of Vietnam proposed a $5 billion public housing loan program operated by four state-owned commercial banks.

The ADB recommends Vietnam continue to coordinate monetary and fiscal measures to support the economy. The implementation of the social housing program must balance the need for prudent lending to avoid future bad debts with the need for accelerated disbursement. Despite the shift to looser monetary policy, Vietnam should continue to prioritize price stability as escalating geopolitical tensions and accelerating public investment disbursements could push inflation to 4.6% in 2023, same period last year. A slight increase in inflation to 4.5% is therefore forecast for 2023.

Finally, it is very important to accelerate the disbursement of $30 billion in public investment. Along with the continued implementation of the economic stimulus package approved in January 2022, these spending will have multi-dimensional impact and provide a powerful boost to the entire economy. In the longer term, financial reforms need to continue to reduce dependence on bank capital and improve transparency in the bond market.