These are some of the topics to be discussed at the Vietnam Economic Pulse (VEP), an economic forum organised by the Ministry of Planning and Investment (MPI) and the United Nations Development Programme (UNDP). The meeting on November 22 is to address the post-pandemic economic recovery and policies to sustain growth and development for the coming year.

Ramla Khalidi - Resident representative United Nations Development Programme

VEP was launched last year by the MPI’s National Centre for Socioeconomic Information and Forecasting and the UNDP to create a new forum for informal discussion of economic issues in Vietnam, encompassing perspectives from business and academia alongside government and development partners. Each session includes an analysis of recent economic developments, contributions from experts on emerging concerns, and an open discussion of the major economic issues of the day.

In October, the International Monetary Fund raised its 2022 growth forecast for Vietnam by a full percentage point from the forecast published in April. It now expects growth to reach 7 per cent this year, and 6.7 per cent in 2023. In no other country in the region have prospects improved as quickly as Vietnam. Although higher energy prices have fed into domestic price rises, inflation is still below the government’s target, thanks to stable prices for food and other essentials.

Evidence of a strong recovery is welcome news after two years of economic disruption. Vietnamese households will enter the Year of the Cat in 2023 in better financial shape than a year ago.

Near-term risks are largely external, including the effects of the war in Ukraine, energy issues, fertiliser and food prices, the economic slowdown in China, rising interest rates, and the fiscal austerity policies in high-income countries. A deep recession in Europe and the United States would weigh on Vietnam’s exports and could reduce the volume of inward foreign investment. There is some evidence that export demand is already softening, with reports of factories moving to a four-day week or suspending new hiring until the situation improves.

Rising interest rates in the US have strengthened the value of the dollar against most currencies, including VND. Because Vietnam’s exports depend on imported raw materials and other inputs, a weaker VND does not make most exports more competitive. A stronger dollar and higher interest rates will adversely affect Vietnamese companies that borrowed money overseas when interest rates were low, especially companies that earn most of their revenues in VND.

As global interest rates rise, companies and sectors that rely on cheap credit will come under stress. We have already seen bankruptcies in the cryptocurrency market, and property price bubbles are unwinding in some countries, including the United States, Canada, the Scandinavian countries, China, and Australia. Financial instability could follow if property developers and homeowners default on their loans in large numbers.

In Vietnam, falling demand for residential property has already sent ripples through the corporate bond market, with negative spillover effects in the banking sector. Prompt action by the State Bank of Vietnam stabilised the situation, but the experience was a timely reminder that Vietnam’s capital markets will remain a risky gamble for investors until the quality of financial reporting improves.

Vietnam needs dynamic capital markets to support the country’s growth ambitions and to finance the transition from fossil fuels to renewable production systems in the energy, construction, manufacturing and agricultural sectors. Yet the development of these markets is held back by a lack of transparency among banks, borrowers, and underwriters.

Cross-ownership and connected lending in the banking sector is still widespread despite the government’s efforts to stamp out these practices after the global financial crisis in 2008. Full information on bank ownership and the financial situation of the banks and their owners is essential to build confidence in the sector.

Property developers have also been found to overstate profits, conceal losses, and inflate the value of assets. Questionable accounting practices and incomplete reporting complicate efforts of the authorities to distinguish viable from insolvent projects, which has a chilling effect on the wider financial system.

Compounding the problem is confusion and lack of clarity surrounding land ownership/rights, and development permits. Because the value of land as collateral is closely tied to its legal status, lack of transparency in the land market increases the risk of financial instability.

Vietnam’s growth prospects hinge crucially on the development of deep, liquid, and well-regulated domestic markets for bank credit, bonds, and equities. Businesses need access to long-term, domestic financing to upgrade capacity and technologies and to develop new products and services for local and export markets.

Foreign capital can be a useful supplement to domestic financing, but realistically the burden of mobilising capital for investment will largely fall on Vietnamese institutions. Closing gaps in corporate governance and reporting is an essential precondition for the growth of capital markets and Vietnam’s prospects for sustainable and equitable development.