Cautious approach is optimal in order to stimulate growth

The Vietnamese government is making efforts to reap a growth rate of 8 per cent upward this year, laying a foundation for hitting double-digit growth as from 2026. What could be the key drivers for materialising this plan?

Wanwisa Vorranikulkij, senior economist at the ASEAN +3 Macroeconomic Research Office in Singapore

Vietnam’s economy is projected to grow at 6.5 per cent in 2025, moderating from 7.1 per cent in 2024 due to rising global uncertainty. Strong export performance driven by front-loaded orders - particularly from the US - is expected to continue in the first half of 2025 before easing later in the year.

Meanwhile, although employment has weakened, private consumption remains resilient. The expansion of the government’s capital investments to meet its socioeconomic targets for the 2021-2025 period will also play a crucial role in supporting economic growth.

As Vietnam’s merchandise trade surplus with the US has grown significantly – exceeding $123 billion in 2024 – the risk of being hit by higher US tariffs or trade measures increases.

This could impact Vietnam’s export outlook and deter foreign direct investments into the country. Additionally, slowing demand from Europe and China, stemming from US trade conflicts, adds further uncertainty to Vietnam’s export outlook.

Amid external uncertainties, domestic drivers must serve as the primary engine of growth in 2025.

The government should accelerate capital investments to boost short-term growth, while enhancing the country’s long-term growth potential.

The country’s available fiscal space provides an opportunity for targeted support, particularly for micro, small- and medium-sized enterprises and low-income households, helping them better navigate external challenges.

Moreover, government spending on human capital development should be increased by allocating additional funds to research and tertiary education. This would help align the quality and supply of the workforce with the evolving business needs.

Regarding macroeconomic policy, as Vietnam’s economy has gained momentum since the second half of last year, the government should adopt a cautious approach to bolstering growth. While expansionary fiscal and monetary policies could accelerate growth and help achieve the ambitious 8-per cent target, they also carry the risk of unintended consequences, such as high inflation, overheating financial markets, and a widening current account deficit.

An estimated $160 billion will be needed for economic growth this year. How will this impact the inflation target of 4.15 per cent?

Vietnam’s consumer price inflation is expected to stay comfortably below the government’s target ceiling. Headline inflation is projected to ease to 3.5 per cent in 2025, down slightly from 3.6 per cent in 2024, remaining well below the State Bank of Vietnam’s target ceiling of 4.5 per cent.

As a small, open economy, Vietnam’s inflation will largely be driven by external factors, with falling global oil prices helping to offset upward pressures from domestic demand and the currency depreciation.

A sum of $160 billion is unlikely to significantly contribute to inflationary pressures in the near term. The actual amount of additional money injected into the economy will be smaller, as a significant portion of the stimulus is in forms of tax and rent deferrals.

Only the government’s capital investment spending directly adds to the money supply, and much of it is disbursed gradually over several years, with very limited direct impacts on household consumption and consumer price index.

Furthermore, the inflationary impact of tax and land rent deferrals will depend on household spending behaviour. If economic uncertainty and employment prospects lead to more cautious spending, inflationary pressures could ease even further as consumer spending slows.

On the fiscal front, the stimulus plan is not expected to significantly impact the government’s fiscal space this year. The fiscal deficit is projected to widen to 2.5 per cent of GDP in 2025, up from an estimated 2 per cent in 2024. Despite this, public debt is expected to stay below 35 per cent of GDP.

What is your expectation on Vietnam’s trade landscape this year, given US new tariff policies being applied?

Vietnam’s persistent trade surplus with the US – the fourth largest after China, the EU, and Mexico in 2024 – could trigger trade talks with the US administration. Vietnam’s average tariffs on US products are estimated to be higher than US duties imposed on Vietnamese goods, increasing the risk of new trade measures.

New US tariffs, imposed on Vietnam or other major trading partners such as China or the EU, could dent Vietnam’s export performance in the short term. This impact would likely occur through slower growth in direct demand for Vietnam’s exports and through the country’s integration into global value chains.

However, the impact on Vietnam’s economy will depend on which sectors are targeted. If the US focuses its tariffs on specific sectors like steel, automotive, or electronics, with the goal of reviving its domestic industries, the Vietnamese workforce and the country’s growth outlook would be insulated from the effects of protectionist measures.

Although electronic products account for around 30 per cent of Vietnam’s exports to the US, the industry is capital-intensive and less reliant on labour.

In contrast, a significant portion of Vietnam’s workforce and local firms operate in sectors such as textiles, garments, footwear, wood and furniture, and consumer products, which also make up a substantial share of the country’s exports. These sectors have not, so far, been the primary focus of major US restrictions.

What should enterprises in Vietnam do to shun these risks?

While US trade protectionism presents challenges, it also serves as a catalyst for Vietnam to diversify its export markets. The US remains the top export destination with a share of around 30 per cent of its total exports, followed by China and the EU. Leveraging a myriad of free trade deals can help Vietnam expand its global reach and reduce reliance on a few key markets.

On the currency front, the risk of Vietnam being labelled as a currency manipulator persists. In 2021, following an investigation, the US Trade Representative concluded that Vietnam had been undervaluing its currency, contributing to trade imbalances with the US and other countries.

Since then, Vietnam’s central bank has gradually relaxed its control over the exchange rate by widening the trading band.

However, the VND has remained more stable than regional peers. Going forward, allowing greater exchange rate flexibility could help cushion the Vietnamese economy against external shocks and ease pressure on the central bank’s international reserves.

Policies to support growth should focus on expanding public investments, mitigating financial sector risks, building energy resilience, and engaging in structural reforms. Firstly, while the economy is projected to register robust growth in 2025-2026, existing infrastructure gaps call for greater investments. Existing fiscal space and optimised public investment management could provide resources essential for these projects to secure sustainable growth dynamics for the medium to long term, particularly in the energy, logistics and transport sectors. Secondly, building on recent reforms, further steps to mitigate financial sector risks and vulnerabilities remain crucial. The authorities could encourage banks to improve capital adequacy ratios and strengthen the institutional framework and State Bank of Vietnam mandate for prudential supervision (including to detect and address issues arising from affiliation of banks with business groups) and early interventions (early identification of problems and crisis prevention). Thirdly, building energy resilience can mitigate supply risks that could constrain growth. Operationalising targets set out in the National Energy Efficiency Plan would improve industry productivity and reduce energy intensity. Avoiding delays in the development of planned generation capacity and licensing will be key for ensuring energy security. Improving pricing and procurement framework would also ensure that the planned increase of renewable generation capacity are met. Finally, structural reforms are crucial to sustain long-term growth, including strengthening the regulatory environment in critical backbone services, greening the economy, building human capital and deepening trade integration and integration of the domestic private ecosystem into global value chains. Source: World Bank