Vietnam’s economy suffers from four difficulties

Vietnam’s economy is facing major challenges, including weak external demand for manufacturing exports, severe power shortages, increasing external debt risks, and too much low-quality and ineffective economic expansion. What is the problem?

The complex turbulence of the global economy, as well as the tightening impact of the US high interest rate policy on global demand, has also deeply and strongly affected Vietnam. On October 31, the Vietnamese media VN Express reported that the Vietnamese economy is facing serious challenges that may cause its economic miracle to disappear and return to normal in the short term.

The data show the basic trend of Vietnam’s economic slowdown in 2023:the growth rate in the first half of this year was far below the 6.2% target, only 3.72%, the lowest level in nearly a decade. Meanwhile, industrial production rose 5.1 percent year on year in September, but in the first eight months of the year, it fell 0.4 percent year on year. Although GDP grew by 5.3% year on year in the third quarter, slightly higher than 4.1% in the previous quarter, it is worrying that the slowing trend of economic growth has not improved, and the economic vulnerabilities causing the slowdown are as fierce as the obstacle.

Decline in external demand

One reason for the slowdown is a slowdown in external demand. The United States and Europe account for 42% of Vietnam’s merchandise exports, and the long-term economic slowdown in Europe and the United States has slowed down Vietnam’s manufacturing exports. In the first three quarters of this year, Vietnam’s merchandise exports fell 8.2 percent year-on-year. The United States is one of Vietnam’s largest export markets, accounting for 29.4 percent of total merchandise exports. In recent years, the US merchandise trade deficit with Vietnam has widened significantly from $55.8 billion in 2019 to $116 billion in 2022. However, in the first eight months of this year, Vietnamese goods exports to the US fell 19.3 per cent year-on-year. Among them, exports in some areas such as computer electronics and parts increased slightly, exports of mobile phones and parts fell by 39.1 percent year-on-year, and exports of textiles and clothing fell further by 22.4 percent.

At the same time, the decline in Vietnam’s construction industry has also had a negative impact on manufacturing output. In the first two quarters of this year, cement sales fell 21 per cent year-on-year, while steel sales and production fell 17.5 per cent and 20.9 per cent, respectively. The Vietnam manufacturing purchasing Managers’ Index stood at 49.7 in September 2023, slightly lower than 50.5 in August. Whether the index indicates that the business environment for Vietnamese manufacturers is still contracting remains to be seen.

Power shortage

Since May this year, Vietnam has been hit by a series of hot weather, once as high as 44 degrees Celsius, breaking the high temperature record in 2019, and some northern provinces have received only 20% of last year’s rainfall. The demand for electricity soared by 20% in the hot summer, and the drought in the north and central region caused the water level of the reservoir to be seriously low, and the power generation of the 11 major power plants in the north and central region was seriously hindered by the lack of water, less than 25% of the power generation capacity. Hydropower consumption in North Vietnam is second only to coal, accounting for 43% of the total energy consumption. The shortage of water and electricity directly leads to power shortage, only in the flood season before the restoration of water and electricity from neighboring countries to buy a large number of electricity. Electricity generation and imports rose 3.4 percent in June from a year earlier and 2.2 percent in the first half of the year. Even so, in July, Vietnam’s national power supply has not fully returned to normal, waiting for flood season power generation and a large number of imported electricity, in order to alleviate the power shortage.

The power shortage seriously affected the industrial operation of Vietnam. Bac Ninh and Bac Giang are two provinces with large population in Vietnam, attracting the most foreign investment and the highest industrial output value. Samsung, Canon, Foxconn, and Microsoft all have factories or large production bases. The two provinces suffered frequent power outages, and several industrial parks in Bac Ninh province briefly halved power supply. In addition to the manufacturing industry, aquaculture farmers and small businesses are also generally damaged by power shortages. The power shortage has exacerbated the pressure on the manufacturing sector, causing a large number of international manufacturers to close factories and withdraw from Vietnam.

Foreign debt risk

In recent years, Vietnam has attracted large and rapid investment from international manufacturers, and some problems have emerged and accumulated, which may have a more profound impact on its economic growth and financial markets. In the meantime, foreign debt has soared to 70% of the country’s GDP, which is undoubtedly a major challenge.

At present, the return of US dollars has caused the price of Vietnam’s imports to rise, and the shift in US monetary policy has put its international reserve assets under great risk pressure. In addition, Vietnam needs to deal with the risk of bad loans, which have contributed to the recent slump in the Vietnamese stock market. According to the latest data released by Vietnam’s Statistics Bureau, as of October 5, the total debt of the country’s banking system increased by 12.62 percent compared to the end of 2021. Credit growth will reach 21.02%, up another 5.37% from October last year. At the same time, Vietnam’s total external debt is about $187 billion, of which dollar-denominated external debt accounts for 186.1% of international reserve assets, and Vietnam’s financial share of external debt is even higher at 47% and is still expanding.

In an environment of persistently high interest rates from the US Federal Reserve, Vietnam’s efforts to defend currency stability could deplet its foreign exchange reserves. This passive situation will not improve in the short term. This shows that Vietnam’s debt service costs are starting to increase exponentially, the risk of default is soaring, and US capital is most likely to accelerate its pace of harvesting wealth in Vietnam.

Vietnam’s central bank has adopted an aggressive monetary tightening policy to resist the appreciation of the dollar. This has led to a decline in corporate debt issuance, while public investment payments have slowed, and there is hardly enough liquidity in the economic recovery. All these problems have had a direct and indirect impact on the Vietnamese economy. Vietnam’s stock market has struggled with volatility recently. Considering the Russia-Ukraine war and the Gaza War, global energy prices may further rise, the Federal Reserve will continue its high interest rate policy to deal with inflation, and the negative impact of the external environment on Vietnam’s economy and finance will continue…

Ineffective extension

Vietnam’s rapid economic expansion, weight rather than quality of the problem is very prominent, resulting in many ineffective growth risks. On October 30, 2023, NGO TRI LONG, former director of the Price Market Research Institute of the Ministry of Finance of Vietnam, confessed to the media that Vietnamese companies only focus on the quantity of investment, while ignoring the efficiency and quality of investment. This means that Vietnam’s high growth figures were achieved in the past by accumulating high-risk debt and foreign debt. The mountain of debt could cause volatility in Vietnam’s markets and crowd out international investment. As a result, Vietnam’s international reserve assets could quickly dry up, leading to a storm of debt and exchange rate risks.

This will make Vietnam’s economy and financial markets more risky and challenging. Therefore, the Vietnamese government must take active measures to address these challenges and ensure stable and sustainable economic development. For example, more policies to encourage effective growth, improve the efficiency and quality of investment, and reduce economic vulnerabilities.

In short, the Vietnamese economy faces major challenges, including weak external demand for manufacturing exports, severe shortages of electricity, increased external debt risks, and too much low-quality and ineffective economic expansion. The four tigers have added to the instability of Vietnam’s economic markets and may lead to the withdrawal of international capital, exposing the vulnerable parts of Vietnam’s economic miracle to deteriorating prospects. Stabilizing the economy and ensuring sustainable growth and development requires the active efforts of the Vietnamese government to maintain the sustainability of its economic miracle in the current unfavorable international economic environment.