From slowing consumer demand in developed markets to domestic concerns about the property sector, Vietnam faces a number of challenges in the post-Covid world. Nevertheless, the country is keen on maintaining its growth momentum by positioning itself as a manufacturing and tourism hub in the region.

Foreign direct investment (FDI) into Vietnam reached US$27.72 billion in 2022, up 13.5% from the previous year and the highest amount in the past five years, according to the country’s General Statistics Office. The country’s GDP grew by 8% in 2022 and is estimated by the World Bank to further expand by 6.3% this year.

At Fitch on Vietnam, an in-person event in Hanoi organized by The Asset Events in association with Fitch Ratings, experts discussed the macroeconomic and capital markets situation in the country.

Nguyen Quynh Nhu, president, National Institute of Finance, ministry of finance, Socialist Republic of Vietnam, talked about government efforts to support the country’s socio-economic recovery, including a programme amounting to US$15 billion, or about 4.5% of the GDP, under Resolution 11.

Nguyen also shared how the country was improving the legal framework to develop green finance such as ESG disclosures and a domestic carbon trading market. About US$1.5 billion of GSS (green, social, sustainability) bonds were issued in 2021, almost five times the US$300 million raised in 2020.

He cautioned that challenges do remain in the global economy, which could impact Vietnam such as weak export demand and high interest rates. Nevertheless, he reaffirmed the government’s commitment to stabilize the economy and implement business-friendly policies.

“We need to stabilize the macroeconomy and control inflation. We want to increase FDIs and look to support businesses with tax exemption/reduction and improve transparency for businesses,” Nguyen says.

Experts discuss the prospects and challenges facing Vietnam's economy at Fitch on Vietnam, an in-person event in Hanoi organized by The Asset Events in association with Fitch Ratings. 

Asset quality concerns

His in-depth presentation was followed by a series of informative sessions focusing on current developments in the domestic economy, including in the banking and property sectors.

“In terms of Vietnamese banking sector assets, [they represent] about 190% of GDP and credit growth continues to be high,” says Sagarika Chandra, director, Asia-Pacific sovereigns, at Fitch Ratings. “We still have concerns around asset quality. Those are factors that continue to constrain the country’s sovereign rating.”

However, Chandra stresses: “When we look at some of the measures that the authority has taken so far, it appears that some of the credit stresses are easing. This is something to monitor. We see the rate cuts as being related to easing the pressure from the property market.”

Willie Tanoto, director, Asia-Pacific banks, at Fitch Ratings, agrees that the banking sector is something to keep a close eye on. “My concern here is that banks are growing too much rather than too little. For years, banks in Vietnam get a quota from the State Bank of Vietnam. Normally, by June, it’s exhausted and they ask the SBV for more. Things look OK when the economy is growing at around 6.5% every year but when things slow down, there is not a lot to fall back on,” he explains.

The government is quite aware of this risk and has provided support. “The amount of liquidity in the banking system has improved and the central bank of Vietnam has reacted promptly, injecting liquidity into the system. This has translated to lower cost of deposits, which is a positive for the bank’s profitability as well,” comments Alexandre Macaire, group chief financial officer at Techcombank.

Also discussed in the event is the need for increased infrastructure investment to boost the economy. The recent approval of Power Development Plan 8 (PDP8) has laid the foundation for the country’s transition to carbon neutrality by 2050. This includes major milestone goals to be achieved in 2030 such as minimum 30.9% of power from renewable energy sources and liquefied natural gas (LNG) accounting for 24.8%, a fourfold increase in capacity compared with 2020.

“It’s important to have a target. However, it is too early to say because PDP8 is still a very high-level document and 2030 is not that far off,” notes Sajal Kishore, head of Asia-Pacific infrastructure & project finance at Fitch Ratings. “We need to see how they plan to implement it. That is where the challenge comes in because so far what we have seen is that most of the funding has been taken by the state-owned banks. To reach the targets of PDP8, they need to rely more on private financing than has been done previously.”

Critical part of the law

Muralidharan Ramakrishnan, head of South & South-East Asia energy and utilities at Fitch Ratings, highlights that the goals of PDP8 go beyond just phasing out coal. “They need to show how they are implementing the other projects they have in the plan, including offshore wind and other forms of renewables. The investment requirement for generation is around US$120 billion worth in the next seven years. [If] the issues around [power purchase agreements] and tariffs are not transparent, there will be challenges.”

Details such as the tariff rate will help give banks a clearer picture of the projects they would be supporting. “The most critical part of this new law is the tariff rate. It’s all about the project finance sort of funding. The debt needs to be financed by the banks but they can evaluate your capability to repay if you can’t calculate what you are going to get in terms of cash flow,” says Ismael Pili, head of research at VinaCapital.

Despite the short-term hurdles for the country the long-term sentiment remains encouraging, given the growing sophistication of the middle class.

“The middle income group is still emerging. This kind of group has been changing their consumer behaviour drastically compared to the previous time. The older generation tends to save then they consume, but now people can start consuming and pay later and that provides significant opportunities for new financial services. Now people can do transactions via smartphones and that offers the chance for e-commerce,” observes Nguyen Anh Duong, director, department for general economic issues and integration studies, at Central Institute for Economic Management (CIEM).

Finally, FDI is expected to remain robust, from neighbouring Asian countries as well as Western markets.

“Certainly, FDI will continue to flow into Vietnam. Vietnam will not replace China. The size of the economy is very different. However, we do see an increase of investment into Vietnam from China. We see all the biggest banks in China all present in Vietnam. In other markets we just see two or three of them. They see Vietnam as a key market,” explains Dang Quoc Hiep, deputy general manager, executive director, non-Japanese head of Vietnam, at Mizuho Bank.

To learn more about the event, including future post-event content, please go here.