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Vietnam

Realizing opportunities and keeping structural fragilities in check

Last update – January 2025

Country rating 


MEDIUM RISK FOR ENTERPRISE
Economic risk

Business environment risk
Business environment risk
Political risk

Political risk
Commercial risk
Financing risk
Financing risk
Commercial risk
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Form of state
 Communist party-led state
Head of government
 Nguyễn Xuân Phúc (PM)
Next elections
 2026, legislative

Strengths & weaknesses

  • Low wages but relatively skilled workforce
  • Competitive manufacturing hub
  • Development potential of various natural resources, especially minerals (iron ora, copper, gold) and energy (oil, natural gas, coal)
  • Relatively open economy with growth model based on trade 
  • Ongoing shift towars higher value-added sectors
  • Lack of transparency
  • A fragile and opaque banking system
  • Infrastructure to be improved 
  • A complicated business environment
  • Low external reserves 
  • Recurrent tensions with China

Economic overview

A growth outperformer regionally and globally

Vietnam is a good performer among emerging economies, with around +7% growth on average in the three decades before the Covid-19 pandemic, and +4.5% on average over 2020-2022. Against the backdrop of the global economic growth slowdown and weaker external demand, real GDP growth declined from +8.1% in 2022 to +5.0% in 2023. A recovery in global trade, especially in consumer electronics, supported Vietnam’s manufacturing sector in 2024. We expect robust growth to persist in the coming years at +6.6% in 2025 and +6.4% in 2026. As such, Vietnam will remain one of the fastest-growing economies in the Asia-Pacific region in the upcoming years. Outperforming exports, especially of electronics, machinery and footwear, will remain the key growth drivers, supported by the trend of international firms diversifying their supply chains and relocating their operations to Vietnam. Additionally, domestic demand will be supported by monetary easing, with in particular a recovery of the flagging property sector. Impacted by higher global commodity prices and the stronger USD since 2022, inflation in Vietnam accelerated and reached an average 3.2% in 2022 and 3.3% in 2023 (from 1.8% in 2021). We expect inflation to remain elevated in the coming few years.

Over the longer term, the economy is expected to remain a sturdy growth performer in the region, helped by foreign direct investment, solid demand from Asian and Western markets, strong competitive advantages (low labor costs, high productivity growth and a strategic location), increasing integration in global supply chains and a positioning as a global manufacturing hub. Vietnam may also benefit from some firms’ will to diversify from China and find new production sites.

Liquidity risk under control for now but needs monitoring

Overall, indicators show that Vietnam's short-term financing risk is medium, with monitoring needed when it comes to elevated credit growth, the banking sector, foreign exchange reserves and external debt.

Real domestic credit growth remains elevated. We estimate it showed a downtrend at the beginning of 2023, dropping from nearly +14% y/y in January 2022 to +6.6% y/y in January 2023. However, it has then remained at a relatively elevated level and visibly accelerated in late 2024 (+13% y/y in September 2024), in part on the back of low inflation and easy monetary conditions – the State Bank of Vietnam cut the benchmark refinancing rate from 6% to 4.5% in 2023. On the one hand, these policy moves helped alleviating a credit crunch in the property sector, where many firms were facing repayment and refinancing difficulties, leading to an increasing risk of bad debts in the banking sector. On the other hand, continuously rising credit will raise private sector debt-sustainability risks if the economy slows down more than expected.

Foreign exchange (FX) reserves in Vietnam peaked in early 2022 and declined quickly through the year, before roughly stabilizing. The ratio of money supply M2 to FX reserves increased from 529% at the end of 2021 to nearly 820% in August 2024 (a ratio below 400% is considered adequate). Likewise, the number of months of imports that is covered by FX reserves decreased from 3.9 at the end of 2021 to 2.5 in August 2024 (at least four months is usually deemed appropriate). A heavily managed exchange rate regime so far sustained the risk of a large depreciation of the VND. However, if external demand conditions were to deteriorate significantly and FX reserves to fall further, the central bank may at some point no longer be able to defend the VND. External debt of around 35% of GDP is relatively elevated for an emerging country, but it remains at a decent level when compared to exports.

Business environment and political developments

Vietnam’s business environment score is below average and close to the median in our assessment of 185 economies. The Heritage Foundation’s Index of Economic Freedom 2023 survey assigns Vietnam rank 72 out of 184 economies (a steady improvement from rank 105 in the 2020 survey), reflecting good scores with regard to the fiscal health, government spending, trade freedom, tax  burden, business freedom and monetary freedom, while weaknesses remain particular in the areas of judicial effectiveness, government integrity and investment freedom. Some of these points are underscored by the World Bank Institute’s annual Worldwide Governance Indicators surveys, which indicate considerable weaknesses with regards to the regulatory and legal frameworks, as well as measures to combat corruption. Our proprietary Environmental Sustainability Index puts Vietnam at rank 92 out of 210 economies, reflecting strengths in energy use per GDP and water stress, but weaknesses in terms of renewable electricity output, the recycling rate and climate-change vulnerability.

Political stability is to be expected in the coming years. Vietnam is a one-party state, tightly controlled by the Communist Party of Vietnam (CPV). Tô Lâm was appointed general secretary of the CPV in August 2024, shortly before the death of his predecessor, Nguyễn Phú Trọng, who had held the position since 2011. In October 2024, Lương Cường was appointed state president, thus reestablishing power-sharing among the top four leaders (CPV general secretary, state president, prime minister and chairman of the National Assembly). The next national congress of the CPV will take place in 2026, and competition within the party for the top positions is likely to persist until then. The policy agenda is likely to continue focusing on a high-level anti-corruption campaign, efforts to attract foreign investment and reduce state involvement.

Trade structure by destination/origin

(% of total, 2023)

Trade structure by product

(% of total, 2023)

Contact 

Francoise Huang
Allianz Trade
+33 (0) 184113427
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