Strong export-led growth but weak domestic demand

Economic activity accelerated sharply in 2024 thanks to rapid recovery in exports and improvement in industrial production. Exports benefited from the recovery of the global technology cycle and a favourable base effect after falling the previous year (-4.6% year-on-year in 2023). Growth should be solid by 2025, with export-oriented industries continuing to be the main driving force. External demand, particularly for electronic products, should continue to fuel industrial production, but domestic demand could be relatively weak.

Although fiscal support benefited domestic consumption in 2024 (thanks in particular to the extension of the 2% reduction in value-added tax and wage increases), the spending remained sluggish. Slack demand translated into a slowdown in retail sales growth, which remained below pre-Covid levels. Accelerating inflation eroded household purchasing power and turbulence in the housing market had a negative wealth effect. This has prompted households to modify their consumption behavior by cutting back on purchases of discretionary goods. The trend could extend into 2025 if more generous household support policies are not implemented. Conversely, shipments of electronics, telephones and computers have enabled exports to grow rapidly, thereby fueling manufacturing activity. At the same time, imports have risen significantly, reflecting an increase in inputs to serve domestic production. However, typhoon Yagi, which struck in September 2024, caused extensive damage and temporarily halted manufacturing activity, particularly in the north of the country. The typhoon is said to have affected several localities representing almost half of the country's GDP. The damage caused is estimated at almost VND 50,000 billion (USD 2 billion) and will require extensive reconstruction work. In 2025, the positive trend in exports is set to continue, although uncertainties about the global economic outlook could weigh on Vietnamese exports. Against a backdrop of value chain restructuring, Vietnam is benefiting from significant inflows of foreign direct investment (FDI). FDI is essential for Vietnam as foreign-owned companies account for around 70% of exports. The country remains an attractive destination as an alternative production center to China, but certain risks could change this. For example, the intensification of the “Blazing Furnace” anti-corruption campaign has slowed down bureaucratic decision-making. Also, Donald Trump’s victory in the US presidential elections could prompt the US to increase trade restrictions on Vietnam given its growing trade surplus with the US. The services sector improved in 2024 and should continue to grow in 2025, thanks in particular to the recovery of the tourism sector (6.8% of GDP and 8.9% of employment in 2019), which reached pre-pandemic levels in 2024.

After lowering its key rates several times in 2023 to support economic activity, the State Bank of Vietnam (SBV) maintained the status quo from October 2024, with the benchmark interest rate remaining at 4.5%. The central bank did, however, implement supportive policies, notably by extending the deadline for adopting regulatory forbearance for distressed customers to the end of 2024. Following the destruction wielded by Super Typhoon Yagi, SBV expressed the possibility of further rate cuts to support the economy. However, the high level of non-performing loans (6.9% of total loans in July 2024) limits the scope for further significant monetary easing.

Worrying drop in international reserves

Fiscal policy was accommodative in 2024 and should continue in the same vein during the year ahead. Budget revenues have risen considerably thanks to accelerating economic growth. During the first half of 2024, capital expenditure declined, mainly due to limited disbursements for public investments, which can be explained by the anti-corruption campaign that led to administrative gridlock. In the second half of 2024 and into 2025, the public deficit is expected to widen slightly from a low base as expansionary fiscal policy is set to continue through stimulus measures and efforts to accelerate public investment disbursements. Public debt will remain moderate. Moreover, it consists exclusively of medium- and long-term maturities; external debt will have represented only 11% of GDP in 2023. The risks associated with public debt relate to contingent liabilities, notably the inefficient but large-sized public enterprise sector, and the fragile banking system (largely state-owned), which is poorly capitalised.

Although still positive, the current account balance declined in the first half of 2024 due to a reduction in the trade surplus against a backdrop of rapidly rising imports. The goods trade surplus (9.7% of GDP) and a sustained flow of secondary income (2.9%) kept the current account in positive territory. However, deficits in primary income (-5.5%) and services (-2.4%) remained high. By 2025, the trade surplus should help maintain the current account surplus, but the sharp rise in imports should reduce this surplus. As a result, foreign exchange reserves, which covered only 2.5 months of imports in July 2024, could shrink further.

To Lam likely to maintain Vietnam's “bamboo diplomacy”

Nguyen Phu Trong, General Secretary of the ruling Vietnamese Communist Party, died on 19 July, 2024. He had been party leader since 2011 and had launched an unprecedented anti-corruption campaign that led to the impeachment of two consecutive state presidents, Nguyen Xuan Phuc in 2023 and Vo Van Thuong in 2024. To Lam, the former President, took over as Secretary General after Nguyen Phu Trong's death. In October 2024, Parliament voted to appoint General Luong Cuong (who comes from a military background) as President to replace To Lam, who will focus solely on his role as Communist Party leader. To Lam seems to be more economically-oriented and business-friendly than his predecessor, who seemed very attached to Marxist ideology. However, some believe that the recent dismissals of senior politicians are linked to internal power struggles using the fight against corruption as a pretext in a political calculation by To Lam aimed at staying in power after the Communist Party's national congress in 2026. Accordingly, To Lam could potentially make consolidating his power a priority rather than making economically rational decisions.

Vietnam transformed its ties with the US after signing a comprehensive strategic partnership in September 2023. A few months later, it agreed to work more closely with Japan on security matters. Furthermore, in August 2024, the Philippines and Vietnam agreed to advance military and defence relations and reinforce collaboration on maritime security. The decision was taken against a backdrop of concern over China's maritime military build-up – Hanoi has a territorial dispute with Beijing over the South China Sea – and Sino-American rivalry for diplomatic influence in the Indo-Pacific region. However, Hanoi is not neglecting its ties with its Communist neighbour China. At a meeting in Beijing in August 2024, To Lam visited Chinese President Xi Jinping, signalling warmer feeling between the two Communist countries. Later, in September 2024, To Lam visited Joe Biden in the US as well as representatives of several American businesses. Hence, Vietnam is likely to maintain a “bamboo diplomacy” of balanced relations with the major powers, including China and the US. However, the US elections represent a serious risk. Donald Trump’s presidency could see the US could implement trade tariffs on Vietnam, due in particular to accusations of currency manipulation and allowing Chinese producers use Vietnam as a conduit to circumvent US tariffs on China. Accordingly, should such tariffs be imposed, not only could the balance of trade fall, but Chinese manufacturers could also be discouraged from investing in Vietnam.