World Bank: Vietnam's economy is recovering and growing

Mixed signs about recovery in early 2024

After experiencing a period of deceleration in 2023, the economy showed some signs of recovery in early 2024. Exports are recovering, and domestic consumption and private investment are also rising. Exports at constant prices are expected to increase by 3.5% in 2024, reflecting gradually improving global demand. In addition, the real estate sector is also expected to recover stronger at the end of this year and next year, boosting domestic demand as investors and consumers gradually regain confidence. Total investment and private consumption at constant prices are expected to increase by 5.5% and 5% in 2024, respectively.

In the first quarter of 2024, the economy achieved growth of 5.66% (compared to the same period last year), mainly due to the low starting point effect in exports, while consumption and investment only recovered gradually. Merchandise exports rebounded strongly, growing 17.2% in the first quarter of 2024 compared to -11.6% last year, driven by strong increases in exports to the US and Europe (respectively increased by 25.5% and 16.3% over the same period of the previous year)... Real investment (at constant prices) increased by 4.7% over the same period compared to zero growth in the first quarter of 2023. Thanks to the strong contribution of FDI, public investment rises slightly, while private investment remains weak.

Vietnam's foreign economic position improved in 2023 thanks to a large current account surplus. The balance of payments (BOP) reaches a surplus of 1.3% of GDP compared to a deficit of 5.6% in 2022. The current account surplus widened to 6.7% of GDP in 2023 from a deficit of 0.3% in 2022. The reason is that the trade balance of goods reached a large surplus (10% of GDP), and the flow of remittances continues to be maintained (estimated at 3.1% of GDP). The services trade account deficit decreased (to -2.2% of GDP for 2023 from -3.1% of GDP in 2022) as foreign tourist arrivals continued to recover, reaching nearly 12.6 million visits in 2023, compared to 3.7 million visits in 2022.

The increase in merchandise trade surplus was due to a decrease in imports (-14.1% over the same period last year), more substantial than the decline in exports (-8.5% over the same period the previous year). On the other hand, the financial account's small deficit at 0.8% of GDP, as net short- and medium-term capital outflows were higher than foreign investment (FDI) disbursements, remained steady (at 4.6% of GDP). Persistent differentials between domestic and international interest rates contribute to net capital outflows. The balance of payments surplus helps raise international reserves from USD 87.1 billion at the end of 2022 to USD 93.3 billion at the end of 2023, equivalent to 3.3 months of imports.

Policies to support growth and promote reform

The WB report commented: The Government plans to maintain a relatively expansionary fiscal policy in 2024 but will return to tightening fiscal policy in the following years. Looking internationally, the WB believes that risks and opportunities for the above forecast outlook are generally in balance, with lower-than-expected growth in developed economies and China possibly reducing foreign demand for Vietnam's export products.

Furthermore, rising geopolitical tensions and climate-related natural disasters will increase risks for Vietnam. Domestically, the recovery speed of the real estate market is not as expected, which may affect investor psychology and private sector investment.

Looking positively, higher-than-expected global growth will help Vietnam's exports recover stronger than expected. Sustained expansionary fiscal policy measures can support economic recovery while stabilizing the financial sector should remain a top priority. Policy support should continue to spur recovery.

Although the Law on Credit Institutions has been improved through recent amendments, there are still inadequacies in some contents, including the consolidated supervision of banking corporations and credit institutions, the Authority to handle weak banks, and the protection of legal risks for supervisory officials.

The priority is to strengthen the role of the State Bank in the above areas in upcoming legal reforms in the financial sector, including amending Vietnam's Law on the State Bank of Vietnam. Finally, structural reforms are essential to maintaining long-term growth prospects.

The report emphasizes the importance of supporting the economy through fiscal policy to underpin the recovery. The report recommends accelerating the implementation of infrastructure investment projects funded by public resources. This would help stimulate the economy further, with the potential for GDP growth of 0.1 percentage points for every 1 percentage point increase in public investment as a proportion of GDP. Meanwhile, regarding monetary policy, the room for further interest rate cuts is limited due to the interest rate difference between domestic and international markets.

With budget revenues likely to remain weak while public spending is boosted, including planned salary increases for civil servants and accelerated public investment, the budget deficit is expected to increase to 1. 6% of GDP in 2024 before decreasing to 1.1% of GDP in 2025, in line with the Fiscal Strategy 2021-2030.