It merely required a few months for Vietnam’s economy to transition from plummeting off the altar to maintaining a favorable stance.
According to official Vietnamese data, Vietnam’s GDP growth rate in the initial half of 2023 stood at 3.72%, significantly lower than the previously set growth target of at least 6.2%. The growth rate of only 3.32% in the first quarter, combined with the remarkable 8% growth in 2022, evokes a sensation akin to a “roller coaster.” Although there was a marginal improvement in the second quarter (4.41% growth), a substantial journey lies ahead to reach the annual growth target of 6.5%. The International Monetary Fund, in its June report, projected Vietnam’s GDP growth rate for this year to be 5.8%. Singapore’s United Overseas Bank, in its latest research and judgment, has revised down Vietnam’s economic growth rate from 6% to 5.2%.
Upon entering July, the “slight improvement” began to manifest as a resolute trend. Data from the Vietnam Bureau of Statistics reveals a year-on-year increase of 7.1% in Vietnam’s total retail sales of consumer goods and consumer services revenue in July. Imports and exports ceased their decline and rebounded, exhibiting a month-on-month growth of 2.5% in July compared to June. Notably, exports experienced a 0.4% increase, while imports surged by 4.4%. Of particular note is the captivating performance in attracting foreign investment. Foreign capital registered in Vietnam in July amounted to $2.8 billion, signifying a 9% increase compared to June and an astounding 86% surge compared to the same period in 2022. As we are all aware, Vietnam’s economy has earned the moniker of a “dark horse” in recent years, with foreign investment playing a pivotal role.
The “roller coaster” phenomenon is an exceptional case.
To prognosticate Vietnam’s economic prospects, an analysis of its prior “roller coaster” trajectory becomes imperative. In order to comprehend the present circumstances and future trajectory of Vietnam’s economy, it is essential to have a comprehensive understanding of its economic structure. Currently, Vietnam’s economic development primarily hinges upon three paramount factors: import and export trade, consumption, and foreign investment.
The extraordinarily rapid development of Vietnam’s economy in 2022 is closely intertwined with the international landscape. Specifically, it can be attributed to shifts in international geopolitics, coupled with the challenges in exporting goods due to China’s epidemic control measures and the scarcity of goods in the global market. Consequently, Vietnam’s exports to European, American, Japanese, and Korean markets witnessed a substantial upturn. Vietnam’s total import and export trade in 2022 exceeded $732.5 billion, surpassing the $700 billion threshold for the first time in history. This surge in import and export trade bolstered the growth of Vietnam’s manufacturing industry and the overall economy.
Conversely, as the Russia-Ukraine conflict escalates and geopolitical risks become more discernible, the global economy as a whole is displaying signs of recessionary tendencies. These tendencies will be particularly conspicuous from late 2022 to early 2023, resulting in diminished demand for goods in the international market. Against this backdrop, feeble market demand in Europe, the United States, Japan, and South Korea has triggered a rapid decline in Vietnam’s exports, accompanied by a significant drop in the demand for raw materials in the imported processing manufacturing industry.
Given the pivotal role of trade in Vietnam’s economy, the performance of imports and exports directly manifests in economic growth. In the first half of 2023, Vietnam’s export volume amounted to $164.5 billion, witnessing a year-on-year decrease of 12.1%. Simultaneously, the import volume stood at $152.2 billion, registering an 18.2% year-on-year decline. In terms of trade surplus, Vietnam’s trade surplus with the United States amounted to $37.2 billion, experiencing a year-on-year decrease of 24.9%, while its trade surplus with the EU reached $14.5 billion, marking a decrease of 9.8%. As for trade deficits, the deficit with China reached $24.5 billion, declining by 30.9%, while the deficit with South Korea amounted to $13.4 billion, witnessing a decline of 34.8%. The trade deficit with ASEAN reached $4 billion, showcasing a decrease of 39.1%.
Impacted by import and export trade, Vietnam’s economy experienced a rapid year-on-year decline in the first half of this year. This represents the primary reason why Vietnam’s economy recently witnessed a precipitous decline akin to a “cliff” and its previously high growth rate became a fleeting occurrence.
Vietnam’s economic growth rate soared to 8.02% in 2022 primarily due to external circumstances propelling its import and export trade. As mentioned earlier, sudden shifts in the international geopolitical environment and epidemic-related lockdownsresulted in supply chain disruptions worldwide. Vietnam, with its growing manufacturing sector and favorable trade agreements, became a preferred destination for businesses looking to diversify their supply chains. This led to a surge in foreign direct investment (FDI) and export growth, driving Vietnam’s economic expansion.
However, the global economic landscape has evolved since then. The ongoing Russia-Ukraine conflict and other geopolitical tensions have created uncertainties and dampened global economic prospects. Slower growth in major economies and reduced demand for goods have affected Vietnam’s export-oriented industries. Additionally, the scarcity of goods in the global market has made it challenging for Vietnam to sustain its export momentum.
The decline in exports, coupled with a drop in demand for imported raw materials, has impacted Vietnam’s manufacturing industry and overall economic growth. Consequently, the GDP growth rate for the first half of 2023 was 3.72%, significantly below the target of 6.2%. This downward trend has prompted revisions of growth projections by international organizations and research institutions.
Nevertheless, there are positive signs that indicate a potential recovery in Vietnam’s economy. In July 2023, Vietnam experienced an increase in total retail sales of consumer goods and services revenue, indicating a rebound in domestic consumption. Imports and exports also showed a month-on-month growth, and foreign investment continued to flow into the country, albeit at a slower pace than before. These factors suggest that Vietnam’s economy is gradually stabilizing and adapting to the changing global environment.
Moving forward, Vietnam’s economic prospects will depend on several factors. The resolution of geopolitical tensions and the recovery of major economies will play a significant role in reviving global trade and boosting demand for Vietnamese exports. Additionally, Vietnam’s ability to attract foreign investment and stimulate domestic consumption will be crucial for its economic recovery. The government’s policies and initiatives to support businesses, enhance infrastructure, and promote innovation will also impact Vietnam’s long-term economic growth.
It is important to note that economic forecasts are subject to change as the global situation evolves. The trajectory of Vietnam’s economy will continue to be influenced by external factors and the effectiveness of the country’s domestic policies in navigating these challenges.
In the U.S. Indo-Pacific strategy, Vietnam is regarded as one of the important targets. On July 20 this year, when U.S. Treasury Secretary Yellen visited Hanoi and met with Vietnamese Prime Minister Pham Minh Chinh, she said that Vietnam is a member that plays an important role in the U.S. Indo-Pacific strategy and that the United States hopes to build a comprehensive cooperative partnership and mutual trust. Strengthen cooperation with Vietnam in the supply chain and support Vietnam in improving its production capacity of semiconductors and renewable energy.
According to a report released by the Japan External Trade Organization in February this year, Japanese companies have given positive evaluations of Vietnam’s business prospects, and 60% of the surveyed companies said they will expand their business in Vietnam in the next one or two years. This ratio ranks highest among ASEAN countries. What Japanese companies take a fancy to is Vietnam’s high economic growth potential, in order to achieve revenue growth through business expansion in Vietnam.
Korean companies are not far behind when it comes to investing in Vietnam. Samsung Electronics is the Korean company with the largest investment in Vietnam. Currently, the company has completed approximately US$20 billion in investment in Vietnam, and the largest R&D center in Southeast Asia built in Vietnam has been put into operation. In addition, Korean companies such as LG Electronics, LG Display and LG Innotek are also expanding their business in Vietnam, trying to build Vietnam into an overseas manufacturing base for automobiles, electronics, and home appliances.
Preben Elnef, vice president and general manager of LEGO Vietnam, a world-renowned toy manufacturer, said when talking about why he chose to invest in Vietnam that Vietnam has had an open and stable investment environment for many years, which is why foreign investment an important factor that investors consider when determining the best locations to invest in the Asia-Pacific region. In his view, Vietnam will maintain its long-term leadership in attracting foreign investment.
The Vietnamese government is well aware of these external favorable factors and is using specific policy actions to raise its emphasis on foreign investment to a new historical height. On April 24 this year, Vietnamese Prime Minister Pham Minh Zheng led Deputy Prime Ministers Liming Kui and Tran Liu Quang, as well as ministerial-level senior officials from the Ministry of Planning and Investment, Industry, Trade, Finance, Education and other departments to attend the meeting of representatives of the Association of Foreign Investment Enterprises and Enterprises held in Hanoi Meeting. From the level and size of Vietnamese participants, we can get a glimpse of the Vietnamese government’s attitude towards foreign investment.
At that meeting, Pham Minh Ching made a commitment to foreign investors and stated that he would continue to improve Vietnam’s business environment. Investors from Germany, South Korea, Japan and other countries have also promised to expand investment in Vietnam in 2023. Most of the investment areas promised by foreign companies are areas where the Vietnamese government prioritizes attracting foreign investment and provides policy incentives, such as green production, renewable energy, medical equipment, etc. It is not difficult to see that Vietnam is guiding the operation of foreign investment and integrating it with Vietnam’s medium and long-term national development strategy, and it is producing initial results.
As early as the 13th National Congress of the Communist Party of Vietnam in 2021, Vietnam made medium and long-term plans. According to the report of the 13th National Congress of the Communist Party of Vietnam, Vietnam’s goal is to “become a developing country with its industry developing in the direction of modernization by 2025, surpassing the level of lower-middle-income countries” and by 2030 “become a middle-income country with its industry developing in the direction of modernization”. upper-income developing country” and “become a high-income developed country” in 2045. The reason why Vietnam sets the annual GDP growth rate at 6.5% to 7% is also based on the above planning goals.
“Unique” advantage blessing
If external factors are worthy of separate analysis, then the Chinese factors are worthy of separate analysis. Being adjacent to China, the world’s second largest economy, and maintaining the overall stability of bilateral relations are Vietnam’s “unique” advantages over other Southeast Asian countries. Specifically, the “connections” formed with the Chinese economy through various chains have objectively become an important source of power for Vietnam’s economic growth. Compared with the large-scale investment and large-scale project implementation by European, American, Japanese and Korean companies, the growth momentum generated by the economic “connection” between China and Vietnam is more hidden, but it cannot be ignored.
Vietnam is more likely to become one or several “workshops” of the “world’s factory”, and its impact on China’s manufacturing industry will be more of a replacement than a replacement.
To a certain extent, China has long been a natural “supporter” of Vietnam’s economic development. Since Vietnam embarked on the road of reform and opening up, China has always been an important import and export target country for Vietnam. China is currently Vietnam’s largest importer and second largest exporter. Vietnam’s economy relies heavily on agriculture, processing and manufacturing, China’s raw materials, and especially China’s intermediate products.
According to 2021 data released by China Customs, China is Vietnam’s largest supplier of intermediate products, accounting for 41.5% of Vietnam’s total imports. About 54% of Vietnam’s mechanical equipment and parts, 52% of textile and leather raw materials, and 40% of mobile phones and parts come from China. From these proportions of close to or more than half, it is not difficult to see that without intermediate products from China, Vietnam’s strong manufacturing exports will be unsustainable. Moreover, the economic “connection” between China and Vietnam is formed based on objective laws such as geographical convenience and economic efficiency. This is an important reason why some countries’ “decoupling and disconnection” based on political intentions are unlikely to become mainstream in development-oriented Vietnam.
In the context of strategic competition between China and the United States, Vietnam’s economy has become a “dark horse”, triggering some obviously directional speculations, such as whether Vietnam will replace China and become the next “world factory.” From a practical and logical perspective, this is unlikely, if not impossible. Vietnam’s economic size cannot be compared with China’s, and it does not and cannot build a complete industrial manufacturing system comparable to China’s. In this sense, Vietnam is more likely to become one or a few “workshops” of the “world’s factory”, and its impact on China’s manufacturing industry will be more of a replacement than a replacement.
Of course, there is a theoretical possibility that Vietnam and other Southeast Asian and South Asian countries can jointly divide labor and cooperate to form a complete industrial chain system. The possibility of such a situation is worthy of China’s vigilance. Considering that the US “Indo-Pacific Economic Framework” has a clear intention to reshape the supply chain and industrial chain, even if it is a theoretical possibility, China cannot take it lightly and must make forward-looking thinking and layout.