Vietnam’s High GDP Growth Rate Masks Its Economic Difficulties

Vietnam registered a solid economic recovery in 2022, with its gross domestic product (GDP) growing at 8.0 per cent, the fastest pace in 25 years. Although this is a remarkable and encouraging achievement for the country after two years of sluggish growth due to the Covid-19 pandemic, a closer examination shows that the country is not really out of the woods yet.

The high GDP growth rate can be explained by several factors. The low base in 2021 — when the economy expanded by only 2.6 per cent, the lowest rate since Vietnam started economic reforms in the late 1980s — is an obvious reason. Experts have also cited other reasons, such as strong domestic consumption, robust export performance and improved foreign direct investment (FDI) disbursement.

Specifically, Vietnam’s retail sales of goods and services in 2022 stood at US$240.2 billion, 19.8 per cent higher than in 2021 and 15 per cent higher than the pre-pandemic level in 2019. Vietnam’s export turnover also increased by 10.6 per cent to reach an estimated US$371 billion. This helped Vietnam’s total trade turnover in 2022 to hit more than US$730 billion. Meanwhile, foreign investors disbursed US$22.4 billion in 2022 to implement their projects in the country, a 13.5 per cent year-on-year increase and the highest rate in five years, suggesting that Vietnam is benefiting from international investors’ efforts to diversify their production base away from China.

The impressive GDP growth rate hogged the headlines of most local newspapers and was reported widely by international media outlets after the data was released by the General Statistics Office on 29 December. Yet, readers’ responses to the news and other reports carried by the media painted a rather different picture.

For example, in the same report published on 30 December that explains Vietnam’s strong GDP growth in 2022, VnExpress, Vietnam’s most-read news site, also carried out a survey asking respondents if their income increased, decreased or stayed the same in 2022. 58 per cent of the 5,672 respondents (as of 3 January) indicated that their income decreased, 21 per cent said it stayed the same, and only 21 per cent said their income increased in 2022.

The impressive GDP growth rate captured the headlines of most local newspapers and was reported widely by international media outlets after the data was released by the General Statistics Office on 29 December. Yet, readers’ responses to the news and other reports carried by the media painted a rather different picture.

Interestingly, such grim responses can be explained in part by two other reports displayed below the above article. The first told the story of how Vietnamese investors in the real estate sector, despite a promising start at the beginning of 2022, suffered “shocking losses” at the end of the year due to falling property prices. The second described a similarly dire situation at the country’s garment companies. They had bagged fat profits at the beginning of the year thanks to expanding demands in Western markets. But they did not have enough orders to maintain their operations in the latter half of the year. The two stories succinctly summarise the economic challenges Vietnam is currently facing.

Starting from March 2022, Vietnam has conducted a campaign to clean up the corporate bond market, which has expanded excessively over the past five years and generated significant risks for the financial system. Apart from introducing stricter requirements for new corporate bond issuances and prosecuting owners of some major corporate bond issuers like Tan Hoang Minh and Van Thinh Phat for misusing bond proceeds, the government has also asked most major bond issuers to deleverage by redeeming their bonds early to pay back banks and bondholders.

This, coupled with rising interest rates and the tightened credit room due to the central bank’s efforts to curb inflation and support the domestic currency, led to a severe credit crunch. The most affected are the real estate and renewable energy sectors, which had to depend on bonds and bank loans to finance their projects. However, companies in other sectors were also hit as they could not issue bonds or get access to bank loans to support their operations. Some businesses have had to sell off their assets to redeem their bonds. Many others have scaled down their operations or even shut down their businesses, leading to mass layoffs, especially in the real estate industry. 

To make things worse, Russia’s invasion of Ukraine in February 2022 and the subsequent Western sanctions on Russia caused food and energy prices to surge, leading to higher inflation rates worldwide. The global demand for Vietnam’s exports therefore shrunk, causing its factories to cut wages or lay off employees. As a consequence, there have been reports of unemployed workers queueing overnight to withdraw their social security funds despite the government’s warnings about their future financial insecurity.

The fact that Vietnam recorded the fastest GDP growth rate over the past 25 years while domestic firms faced mounting difficulties underlines a major issue of the Vietnamese economy: its over-reliance on foreign direct investment and exports. Indeed, in explaining Vietnam’s strong economic performance in 2022, experts have cited two key drivers: robust export performance driven by foreign-invested firms (which account for 74 per cent of Vietnam’s total exports) and improved FDI disbursement. The third factor — increased retail sales of goods and services — suggests that Vietnamese consumers are now generally wealthier and becoming an increasingly important driver of Vietnam’s economic growth. Juxtaposed against the grim responses to the income survey by VnExpress, however, it also hints at the widening income gap in the country.

The year 2022 ended on a high note for Vietnam as it became one of the fastest-growing economies in the world. However, there is little ground for officials in Hanoi to be complacent. Given the mounting difficulties domestic firms are facing and the ongoing global uncertainties, they should brace themselves for a challenging year ahead.

2023/04