Interest rates and inflation outlook

As the Russia-Ukraine war rages on, energy prices will remain volatile, which will have an implication for domestic prices due to the products Vietnam imports.

“We do not expect domestic consumption to increase substantially this year, which should reduce upward pressure on prices too,” Dr. Daniel Borer, Interim Program Manager of Global Business, RMIT University (Australia) commented.

This year’s inflation may, nonetheless, experience upward pressure due to a possible, stronger depreciation of the VND as capital may flow out of Vietnam, seeking to benefit from the increased interest rates in other currencies like the euro or US dollar.

“This would make imported goods more expensive, which are part of the consumer basket of average Vietnamese households,” Dr. Borer added.

Dr. Ha Thi Cam Van, course coordinator for Macroeconomics at RMIT Vietnam shared that this tendency may be offset due to domestic interest rate increases which are already happening and are expected to continue to be raised to up to 15% for fixed/term deposits offered by private banks.

“The interest rate increases this year will continue to put pressure on the real estate market, where demand is dwindling due to increasing mortgage rates,” said Dr. Van.

For investors into real estate, as sellers will be slow to adjust their prices downwards as a response to the demand decrease, it may be advisable to wait until the second quarter of 2023 to benefit from a better bargaining position.

The two experts expected the State Bank of Vietnam to maintain inflation rates below 5% for this year, which would add to their success as guardians for price stability.

Exchange rates, trade and FDI

Keeping prices stable will also reduce the depreciation of the exchange rate. A simplistic forecasting model suggests that inflation differentials of currencies represent the expected change in the exchange rate.

Dr. Borer shared that while this relation is true in the long run but not on a year-by-year basis, the moderate inflation of the VND should keep depreciation pressure of the domestic currency at bay.

“Looking at the last 20 years, the VND has inflated by 4.3% more than the USD annually, which should translate into a gradual depreciation of the VND towards the USD of this amount,” Dr. Borer analyzed.

Hence, to create a more stable trade environment and reduce market uncertainty, Dr. Borer and Dr. Van suggest a gradual depreciation band of 3-4% to be introduced for the VND versus the USD. They believe that this system could add stability and promote exports for Vietnam.

Dr Van explained: “The export sector could need any help it can get, as the main export markets, namely the US with one-third of all Vietnamese exports and the EU, just entered recessions. China, the second largest customer of Vietnamese export goods, is also not in a good shape for 2023, though it may not enter a recession yet.

“Although exports were growing greatly in 2022 by approximately 10.6% from 2021, with seafood and textiles achieving record heights, this will not be the case for this year.”

FDI also rose in 2022 achieving a 5-year height with US$ disbursed. The main investing countries are typically Singapore, South Korea, and Japan – regional partners taking advantage of cheap labor costs in Vietnam.

Dr. Borer emphasized that while low labor wages are attractive in the short and medium run, a growing economy will eventually translate into higher GDP per capita, and hence, higher labor costs.

“This is desirable, as it represents increased wealth for citizens. Hence, it is high time for Vietnam to seriously identify and build strengths in other aspects beyond low salaries”.

Building a reliable, safe, eco-friendly, and stable economic environment will be the key for sustained future growth, which will attract FDI despite increasing domestic wages.

To this end, Dr. Van indicated that focus should be put on combating corruption at all levels; increasing transparency of policy decisions; and strengthening environmental efforts.

“Corruption is highly discouraging to FDI as the investor is unsure about the future costs of the investment as well as bringing uncertainty with respect to the rule of law and rule of property,” Dr Van said.

In the Asian region, the countries/territories with the least corruption – Singapore, Hong Kong, Japan, Taiwan, and South Korea – are the wealthiest of the region as well.

“The message is clear, corruption needs to be eradicated,” Dr. Van added.

Furthermore, increasing transparency, for example as mentioned earlier with a clearly ruled depreciation rate of the currency, will make Vietnam a more reliable and trustworthy partner for trade.

Lastly, according to Dr. Borer, foreign consumers are becoming more sensitive and inquiring about how environmentally friendly, or unfriendly, the products they buy are. With 53% of energy coming from coal plants, Vietnam is still a long way from becoming environmentally friendly. Aspects like these will soon deter FDI.

Dr. Borer also shared: “Any possibility to reduce energy consumption as well as making energy greener needs to be explored. One key item on the agenda is to build mass rapid transport systems to reduce the usage of vehicles in HCMC and Hanoi.”

Furthermore, the national cargo train system needs attention to reduce reliance on trucks which would also decongest traffic and make Vietnamese products more environmentally friendly.

“Even policy recommendations like changing the time zone to GMT+8, as outrageous as they seem, would reduce energy usage as well as align the country closer to the main trading partners in the region,” Dr. Borer said.

Tourism sector in 2023 – cautiously optimistic outlook

Vietnam welcomed 3.66 million foreign visitors in 2022, 23.3 times higher than the figure in 2021, but still down 79.7% compared with the pre-pandemic level in 2019.

While the domestic tourism market rebounded spectacularly during last year, and contributed to offset the losses from international tourism, domestic spending and average length of stay are still low, according to research on the domestic tourist market in 2016-2022 conducted by the Vietnam Institute of Tourism Development.

According to RMIT Vietnam Deputy Senior Program Manager for Tourism and Hospitality Management Dr. Nuno F. Ribeiro, the outlook for 2023 is cautiously optimistic.

“A flurry of high-profile media exposure and a variety of international travel awards in 2022 may bring the needed turnaround. Optimistic projections point towards 10 million international arrivals, with most international tourists coming from South Korea, Japan, the United States, and several European Union countries.

“The relaxation of COVID-19 travel restrictions is also helping towards this growth,” Dr Ribeiro said.

The Vietnamese Government’s efforts in promoting Vietnam as a “green”/sustainable destination have already bore some fruit, as was demonstrated, for example with the ecological tourism project in Phu Yen and in the Mekong Delta region.

Several indices show Vietnam’s improvement, though there is still much to do to achieve top ratings. Vietnam placed 52nd in the Travel & Tourism Development Index (TTDI) in 2021, an increase of eight places from 2019. Last year, Vietnam was placed 23rd in the Asia Pacific Risk Reward Index according to Fitch Solutions.

Dr. Ribeiro added: “Vietnam will increasingly attract tourists who seek to visit sustainable tourism destinations, and that offer a combination of tourism products – these include traditional sun, sea, and sand destinations like Phu Quoc, cultural heritage destinations such as Hoi An, and interesting urban centers such as Hanoi and Ho Chi Minh City.”

“However, Vietnam will also have to contend with competition from neighboring tourism markets such as Thailand, Singapore, Indonesia, and Malaysia, which were faster in removing COVID-19 restrictions and already benefit from less stringent visa and arrival procedures.”

To strengthen the tourism sector, Dr. Ribeiro offered two recommendations:

First, addressing the tourist visa issue. Increasing the number of countries that are granted visa-on-arrival, and increasing tourist visa length from 15 to 30 or even 60 days would lead to an increase in international tourism and consequently a rise in tourism receipts.

Second, increasing the sustainability of Vietnamese tourist products by forming public-private partnerships that specifically address international tourists’ needs. These needs are quality consistent tourism service delivery by duly qualified and trained human resources; offering ecologically sustainable products and services and offering tourism products that combine multiple attractions such as beach destinations, cultural sites, and city centers.

Overall, the year 2023 will be a very interesting but also a challenging year. Most of the economies on the globe will be struggling with decreasing economic growth bordering recessions. Vietnam will not be an exception to this, as we rely heavily on international trade. But it is also a year of great opportunities to set the base for future, sustainable growth becoming more transparent, less corrupt, and “greener.”