A flurry of digital-related investments has been taking place in Southeast Asia. Microsoft recently announced a number of investments in Indonesia, Malaysia and Thailand. In Vietnam, Alibaba plans to construct a data centre to accommodate rising digital demand. Clearly, with much focus on tapping into the rising digital economy in Vietnam, we take a closer look at some of the fundamentals at play.

With a population of over 100 million and a working age share of close to 70%, we see the strong potential for Vietnam’s digital consumption. According to the e-Conomy SEA 2023 report, Vietnam was the fastest-growing digital economy in ASEAN with impressive growth of 20%. Measured by gross merchandise value (GMV), the country has the potential to become the second-largest digital market in the region by 2030, just after Indonesia. HSBC expects the expansion to be led by a rapidly developing e-commerce ecosystem, supported by a rising consumer base.

But it is not just the demographic tailwinds - Vietnam’s rapid rise in internet users also helps expand its digital market. Almost 80% of Vietnam’s population now use the internet, thanks to smartphone ownership more than doubling from a decade ago. However, despite the considerable growth in internet users, the application of digital technologies in certain areas has lagged behind. According to the World Bank’s 2021/22 data, Vietnam lagged behind Singapore, Thailand and Malaysia in terms of using non-cash payment methods, although efforts to transition to digital payments have accelerated since then.

Meanwhile, digital transformation has more room to run in areas beyond consumers. Trade, for example, is still relatively paper-based. This can risk imposing additional costs and delays, serving as a bottleneck on trade flows. Although increasing use of the National Single Window, an online platform to process trade documents between firms and the government, has led to material improvements in customs clearance efficiency, some hurdles remain. For example, the use of digital signatures remains limit ed, meaning some procedures still need to be handled by paper. The alternative measures of digital integration within trade suggest further room to transition to paperless paperwork.

“That said, part of the challenge stems from lagging digital literacy of the population, which has hindered the adoption of digital tools and constrained their effective use. In terms of digital skills and talent, Vietnam lagged its peers limit ing the upside from digitalisation”, said HSBC.

Encouragingly, the government is well aware of these challenges, and has been playing an active role to facilitate the digital transformation of the economy. In accordance with the National Digital Transformation Program through 2025 with a vision to 2030, Vietnam aims to build the three pillars of digital government, digital economy, and digital society. The government has correspondingly laid out a number of ambitious targets in recent years, including handling all administrative procedure applications online by 2030.

The national strategy opens up opportunities in a wide range of sectors. In particular, digital literacy is relatively low among the rural population and in the agricultural sector. At the end of 2021, there were more than 27k agricultural cooperatives, but only c2k applied ‘high-tech’ and digital technology in production. Furthermore, these groups typically still depend more on traditional financing methods.

While state-led initiatives to drive rural digitalisation have spurred progress in building a digital economy, it is important to note that private businesses can also play a role in accelerating the transition. For example, Grab conducted training workshops for over 800 cooperatives to help farmers learn about digitalisation and related business opportunities.

Another important consideration, in HSBC’s opinion, is how to secure the additional energy needed to fuel the momentum. A contributing factor is Decree 53, originally introduced in 2022, which requires firms to store data locally. Future proliferation in the volume of local data suggests more data centres being built, as was likely a partial factor in Alibaba’s decision to construct a data centre locally. This highlights the linkage between growth in the digital economy and the availability of energy, of which the latter has already seen some challenges. Power outages last May and June were estimated by the World Bank to have costed 0.3% of GDP, particularly affecting manufacturing firms. As electricity demand looks set to expand further, expanding and improving Vietnam’s energy supply and infrastructure will become more important.

HSBC said, all in all, digitalisation brings both opportunities and challenges to Vietnam. In order to leverage its favourable demographics and achieve its digital ambitions, investments need to be channelled into not just new areas such as artificial intelligence (AI), but also foundational areas such as digital education and traditional infrastructure. In fact, this drive is not just happening in Vietnam, but in ASEAN as a whole.

According to a recent HSBC survey, more than 40% of surveyed businesses operating in ASEAN rank digitalisation as a top priority. Therefore, active dialogue and partnerships between the public and the private sector can help accelerate these developments to prepare for a more digitally fit population.