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Vietnam

Strong economic performance masks structural fragilities

Last update – 08.07.2021

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MEDIUM RISK FOR ENTERPRISE
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Business environment risk
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Political risk

Political risk
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GDP USD 362.638bn (World ranking 39, World Bank 2021)
Population 98.17mn (World ranking 15, World Bank 2021)
Form of state
 Communist State
Head of government
 Phạm Minh Chính
Next elections
 2026, legislative

Strengths & weaknesses

  • Low wages but relatively skilled workforce
  • Competitive manufacturing hub
  • Development potential of various natural resources, especially minerals (iron ore, copper, gold) and energy (oil, natural gas, coal)
  • Relatively open economy with growth model based on trade
  • Ongoing shift towards 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

Despite Covid-19, growth remains resilient

Vietnam is a good performer among emerging economies, with +6.8% growth on average over the past 30 years and +6.1% over the past 10 years (slightly below emerging Asia average). Despite the global pandemic and a loss of tourism revenue, the Vietnam economy was among very few to avoid recession in 2020, bolstered by its containment of Covid-19, fiscal and monetary policy support and strong domestic demand, as well as competitive exports. Growth in 2021 is likely to remain slower than before the crisis, amid a struggle to contain localized Covid-19 outbreaks and a slow pace of vaccination. Outperforming exports will remain a key driver of the recovery, while household spending and business investment remain moderate.

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

Vulnerabilities continue to weigh

Overall, indicators show that the short-term financing risk is sensitive. Indicators that need monitoring in the short run are in particular (i) public finances (fiscal deficit significantly wider than before the crisis, although likely to shrink); (ii) credit growth (accelerating in a context of low inflation) and (iii) some external vulnerabilities related to rising external debt and moderate import cover.

The main economic challenge for Vietnam is to strengthen its financial and banking sector. The official non-performing loans to total gross loans ratio is likely to be underreported, even though it shows a slight increase in 2020 from 2019. Tackling bad debt in the banking sector is likely to be reinstated as a policy priority in 2022, following the pandemic. The legislation will help to improve commercial banks' finances and aid consolidation in the banking sector as healthier balance sheets give larger lenders the capacity to acquire smaller banks. Separately, debt sustainability is not at risk for now considering economic growth prospects, debt structure (long maturities and financed by public creditors over the past couple of years), the pace of reforms (broadening the tax base) and the direction of fiscal policy (towards consolidation). Yet, authorities will need to improve their public finance to increase fiscal space.

Business environment and political developments

Vietnam is ranked 70th in the 2020 World Bank Doing Business survey, roughly unchanged from the previous year. The country’s ranking is high in terms of dealing with construction permits, getting credit, and getting electricity (in the top 30), but lower in terms of starting a business, paying taxes, trading across borders, and resolving insolvencies (below the top 100). Nonetheless, Vietnam is taking steps to improve on these measures as the government improved access to credit information, made paying taxes easier by upgrading the information technology infrastructure used by the General Department of Taxation and will implement favorable policies for foreign investors and lower trade barriers.

Political stability is expected in the coming years. Vietnam is a one-party state, tightly controlled by the Communist Party of Vietnam (CPV). Nguyen Phu Trong has been named general secretary of the CPV for the third consecutive term in early 2021. His anti-corruption drive will remain a centerpiece of government policy and can distract public attention from potentially unpopular topics (e.g. territorial disputes with China).

Trade structure by destination/origin
(% of total, 2021)

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  Exports Rank Imports  
United States 29.1% 1 33.8% China
China 17.0% 2 17.3% Korea, Republic of
Korea, Republic of 6.6% 3 6.9% Japan
Japan 6.1% 4 6.4% Taiwan
China, Hong Kong SAR 3.6% 5
 4.6% United States

Trade structure by product
(% of total, 2021)

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Exports Rank Imports
Telecommunication and sound recording apparatus 16.8%
1
21.4% Electrical machinery, apparatus and appliances, n.e.s.
Articles of apparel & clothing accessories 11.6%
2
8.5% Office machines and automatic data processing machines
Office machines and automatic data processing machines 11.6%
3
6.8% Textile yarn and related products
Electrical machinery, apparatus and appliances, n.e.s. 10.8%
4
4.7% Iron and steel
Footwear 7.6%
5

4.0% Petroleum, petroleum products and related materials

Contact 

Francoise Huang
Allianz Trade
+33 (0) 184113427
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