Vietnam's Economic Outlook: Growth Resilient Despite Investment Challenges

Vietnam’s economy showed impressive 7.4% GDP growth in Q3-2024, driven by exports and FDI. However, weak domestic demand, slow public investment, and financial risks remain key challenges. The World Bank’s latest Vietnam Macro Monitoring report highlights the need for policy reforms to sustain momentum.

Vietnam's economy is on an upward trajectory, with its GDP growing by 7.4% year-on-year (y/y) in Q3-2024, the highest in two years, according to the Vietnam Macro Monitoring – October 2024 report published by the World Bank. This robust expansion was primarily driven by non-tech exports and a recovery in domestic demand, positioning the country as one of ASEAN's fastest-growing economies. However, ongoing challenges such as slow public investment disbursement, rising non-performing loans (NPLs), and weak domestic consumption could hinder sustained progress.

Exports Surge While Public Investment Falters

Vietnam’s trade sector continued to flourish, with exports rising by 15.4% y/y in Q3-2024, leading to a trade surplus of $6.6 billion. The structure of exports shifted as tech-related exports slowed (-0.6%), while non-tech goods (11.2%) and textiles took the lead. The United States remained the top export destination, whereas exports to China weakened. Despite this success, the industrial sector faced disruptions due to Typhoon Yagi, which caused $3.2 billion in damages (0.7% of GDP), with agriculture suffering the most.

In contrast to the strong trade performance, public investment disbursement remained sluggish, with only 47.3% of the planned budget executed in the first nine months of 2024. Chronic under-disbursement threatens long-term infrastructure projects, potentially impacting economic stability and growth prospects.

Foreign Investment Remains Strong

Foreign Direct Investment (FDI) continued its upward trend, reaching $24.6 billion over the past 12 months, an 8.3% increase compared to the previous year. In September alone, $3.185 billion was disbursed, highlighting Vietnam's continued attractiveness to investors, particularly in the manufacturing sector, which accounted for 65% of total FDI commitments.

However, investment inflows faced temporary disruptions due to Typhoon Yagi, which affected several key industrial zones housing foreign enterprises. Despite this setback, Vietnam’s strong economic fundamentals continue to support its position as a regional investment hub.

Domestic Demand Lags as Inflation Moderates

Despite impressive external sector performance, domestic consumption remains weak. Retail sales slowed to 8.4% y/y in Q3-2024, the lowest growth rate in a year. Low consumer confidence and modest wage increases (7.3% y/y) contributed to this decline.

Meanwhile, inflationary pressures have eased, with headline inflation dropping to 2.6% y/y in September 2024, down from 3.5% in August. Declining transport costs and stable food prices were the main drivers behind this moderation, while core inflation stabilized at 2.5%.

Financial Sector Pressures Mount

The banking sector is showing improved credit growth, with total lending expanding by 15.4% year over year, exceeding the State Bank of Vietnam’s (SBV) 15% target. However, the rise in real estate loans (30.2% year over year) and high non-performing loans (NPLs) remain concerns.

NPLs have grown significantly, reaching 4.6% of total loans in H1-2024, while adjusted NPLs, including restructured loans, hit 6.9%. This trend suggests potential risks to financial stability, particularly if further loan forbearance measures delay the recognition of bad debt.

Exchange Rate and Fiscal Trends

Vietnam’s exchange rate pressures eased in Q3-2024, helped by a US Federal Reserve rate cut. The State Bank of Vietnam maintained a stable VND/USD exchange rate, using foreign reserves and open market operations to stabilize fluctuations.

On the fiscal front, Vietnam recorded a budget surplus, thanks to stronger-than-expected revenue collection (85.1% of the annual target) and slow public spending (59.3% of planned expenditures disbursed). However, persistent under-execution of public investment could slow economic expansion in the medium term.

Future Outlook: Strengths and Risks

While Vietnam’s economic momentum remains strong, certain challenges could impact sustained growth:

Manufacturing risks: Declining input stocks and lower new orders may slow industrial output in Q4-2024.

Weak domestic demand: Consumption recovery is lagging, impacting the overall economic balance.

Financial risks: Rising NPLs and potential delays in bad debt recognition may pose challenges for the banking sector.

Infrastructure concerns: Public investment bottlenecks threaten long-term growth and development.

Despite these headwinds, Vietnam's economic outlook remains positive, underpinned by resilient exports, strong FDI inflows, and stable inflation. Continued policy adjustments, infrastructure investments, and financial sector reforms will be critical to sustaining the country’s growth trajectory.

The Vietnam Macro Monitoring – October 2024 report, published by the World Bank, underscores the country’s economic resilience amid external and domestic pressures. While the short-term outlook presents some risks, Vietnam’s long-term fundamentals remain strong, making it a key player in Southeast Asia’s economic landscape.