Targeted policy support is crucial in order to navigate economic uncertainty

While the typhoon has hindered economic recovery, fallouts are expected to be short-lived.

This year, Vietnam’s economy has continued to build momentum, with GDP growth reaching 6.72 per cent on-year in the first three quarters of 2024, a marked improvement from the 4.4 per cent growth seen in the same period in 2023.

Wanwisa May Vorranikulkij, senior economist ASEAN +3 Macroeconomic Research Office

The recovery in export demand and robust inflows of foreign direct investment in this country have been key growth drivers, though domestic spending remains cautious as households continue to tighten their belts. Micro, small, and medium-sized enterprises (MSMEs) focused on the domestic market continue to lag behind export-oriented firms.

Despite the disruption in September from Typhoon Yagi in the north of the country, Vietnam’s near-term economic outlook remains positive, supported by resilient export orders and a rise in tourist arrivals.

However, risks to the growth outlook remain. The export sector faces uncertainty due to potential changes in US trade policy following the upcoming US presidential election.

Domestically, the recovery of demand and the performance of MSMEs will depend on how quickly the export recovery positively impacts the broader economy. Additionally, potential consumer price inflation driven by the typhoon may dampen domestic consumption.

The financial sector also faces rising credit risks due to the uneven pace of recovery across sectors, the impact of typhoon-related damages, and challenges in the housing market.

In the longer-term, Vietnam’s growth potential is constrained by infrastructure deficiencies and a shortage of skilled labour. The underdevelopment of supporting industries and MSMEs has also hampered efforts to move up the global value chain.

New challenges, such as cyber threats, extreme weather, and a rapidly ageing population, are emerging threats to Vietnam’s long-term macro-financial stability.

In response to short-term risks, the authorities should adjust macroeconomic policies to bolster domestic economic activity and support vulnerable sectors.

Vietnam’s fiscal capacity enables the government to provide targeted support to the economy’s vulnerable segments, while accelerating public investment disbursement. With inflation controlled, monetary policy can remain accommodative to support a broader recovery.

Since the new real estate laws took effect in August, the housing market in some areas has shown signs of recovery. However, unresolved legal issues continue to limit broader market activity.

The real estate market’s recovery depends largely on the timely implementation of these laws and their regulations.

Real estate developers face substantial bond repayment obligations through 2025. To stimulate market activity, subordinate regulations should be introduced promptly.

Additionally, measures such as a capital gains tax or stamp duty on secondary property purchases could help curb speculative demand.

To mitigate risks from the real estate sector, macro-prudential measures such as loan-to-value ratios, debt service-to-income ratios, and credit concentration limits should be implemented.

Vietnam’s banking sector faces ongoing challenges, including rising non-performing loans and exposure to real estate, which accounts for 21 per cent of total bank lending.

Alongside new credit institution laws, banks should continue building capital buffers, strengthening corporate governance, and enhancing risk management. The bad debt recovery process should be streamlined to help banks reduce non-performing assets, while the banking resolution framework should be reinforced.

In the long term, the government should prioritise inclusive and sustainable development. Upgrading infrastructure, upskilling the workforce, and encouraging product quality improvements are critical steps.

With the increasing frequency of extreme climate events, stronger coordination among public agencies is essential to boost the efficiency of climate change mitigation and adaptation efforts.

Ensuring the financial sustainability and transparency of the social insurance fund is also crucial as Vietnam prepares for the challenges posed by an ageing population.

Vietnam’s economy has shown solid improvement in 2024, yet the recovery remains uneven and faces multiple challenges. Targeted policy support will be essential to guide the economy through the uncertainties ahead.