Robust fundamentals underpin growth outlook

We will nevertheless continue to estimate real GDP growth at 6.3 per cent in 2024. This is underpinned by an anticipated downturn in industrial activity in the last quarter, as factory operations recover slowly from the substantial damage caused by Typhoon Yagi in September. The storm hit some of Vietnam’s most important industrial clusters, including areas favoured by high-technology investors such as Samsung and Foxconn.

Jubin Alphonse, research analyst, EIU Asia

The typhoon will also slow growth in agriculture and services for the rest of 2024. It damaged fish farms, sank fishing boats, and caused flooding in rice-growing areas. Tourism and logistics will suffer as northern airports face disruption, and popular tourist destinations will be at higher risk of landslides, reducing international arrivals. More storms are expected before the typhoon season ends in November, carrying risks for Vietnam’s tourism season, which peaks in October.

Still, the Vietnamese economy will remain strong overall. Real GDP growth will have accelerated substantially in 2024, from 5.1 per cent in 2023. This is primarily the result of a rebound in manufacturing sector growth in 2024, with improving demand from key export markets having lifted exports following a sharp contraction in 2023. The manufacturing sector recorded 11.4 per cent on-year growth in the third quarter, accelerating sharply from 5.4 per cent in the year-earlier period.

Stabilising external demand, alongside bright prospects for foreign direct investment (FDI), will support manufacturing sector activity, which we expect to grow by 9.6 per cent in 2025, from an estimated 9.2 per cent in 2024.

Despite the sharp decline in output in 2023, Vietnam is home to one of the region’s most competitive manufacturing sectors. Its export-oriented manufacturing industry has driven the country’s rapid economic expansion over the past decade. The particular importance of FDI in boosting domestic production means that we expect the government to continue to prioritise measures to enhance the ease of doing business for foreign investors and manufacturers in country.

Liberal trade policies, lower operational costs for foreign businesses, large public investments in infrastructure and human capital and prolonged political stability have enabled Vietnam to outperform its peers in EIU’s business environment rankings between 2003 and 2023. The country has also benefited greatly from the global China+1 strategy, which involves the diversification of supply chains away from China.

Strengthened relations with the West have helped Vietnam to deepen its ties with major export markets, including the United States and the EU. Economic reforms, such as relaxing foreign ownership restrictions, improving protection of minority shareholders and easing currency exchange and capital repatriation rules, have significantly boosted foreign investor confidence.

Those improvements continue to bear fruit. Newly registered FDI into the country rose to $13.6 billion in January-September, up by 32.5 per cent from the year-earlier period. Foreign-invested firms continue to lead their domestic counterparts in terms of export volumes, accounting for 72 per cent of total exports in January-September 2024.

We anticipate broad improvements in Vietnam’s business environment in 2025 as the government maintains its economic liberalisation agenda, including as part of adherence to the country’s various trade agreements. Vietnam’s growing economy will create opportunities for investors and consumer companies looking to tap into the domestic market – from both a sourcing and a domestic demand perspective – while exporters will benefit from deeper integration into global supply chains.

Our positive outlook for the business environment is not without caveats, however. The government’s dominance in many sectors continues to limit private competition, hindering more aggressive policy reforms that would support an otherwise more open business environment. A growing obstacle is the difficulty of sourcing skilled labour, such as managers, technicians and professionals, especially with good foreign language and technical skills.

This competition for talent has intensified as foreign companies have expanded their footprint in Vietnam, which has also put upward pressure on local wages, lifting the purchasing power of the domestic population but eroding some of the cost-competitiveness of Vietnam’s factories. Hiring foreign nationals is challenging, as companies must prove that the role requires special skills that a local worker cannot provide.

We expect Vietnam’s real GDP growth to accelerate further in 2025, to 6.5 per cent, on the back of sustained growth in the export-oriented manufacturing sector and strong activity in the services sector. An expected rebound in the property sector, driven by amendments to land laws and efforts by the State Bank of Vietnam to promote debt restructuring and refinancing for businesses, will also be a net positive for growth.

The country’s medium-term growth, which will be among the fastest in Asia, will be determined largely by the ongoing relocation of multinational manufacturing operations to Vietnam and the associated inflows of FDI. We believe that Vietnam will outperform many major emerging Asian economies in attracting FDI, despite faster improvements in the business environment elsewhere.

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