Vietnam: Turning the corner

Vietnam: Turning the corner

Vietnam: Turning the corner

Asia Pacific Economic Outlook, April 2014

Last year marked a significant improvement in Vietnam’s trade balance as well as its consumer price index; the latter’s improvement is considered to be the biggest achievement of 2013 by investors.

Street-in-VietnamThe year 2013 turned out to be positive for the economy. GDP registered a growth of 5.4 percent year over year. Although the growth was lower than the government’s target growth of 5.5 percent, it was an improvement over the 5.3 percent growth of 2012. GDP grew at a sustained pace in all four quarters of 2013, indicating signs of stability following a bout of economic volatility during 2011–12. The growth was fueled by a strong rise in final consumption, which grew 5.4 percent year over year and contributed 3.7 percentage points to the overall growth.

Last year marked a significant improvement in the trade balance as well as the consumer price index; the latter’s improvement is considered to be the biggest achievement of 2013 by investors. Improved global demand and successful trade negotiations helped export-oriented firms attain robust growth. The trade account, which recorded a surplus in 2012 (last seen in 2001), improved further due to a rise in the export of mobile phones and other consumer electronics (figure 1). For the first time in more than a decade, net exports contributed positively to growth, by one percentage point in 2013.

Figure 1. Improved trade balance

Last year, the economy achieved a great deal in containing rising prices to a decade low. Average consumer prices fell to 6.6 percent in 2013, from 9.1 percent in 2012 and 18.7 percent in 2011 (figure 2). The price indices of the food and education sectors, which had experienced high volatility and contributed significantly to the overall price rise during 2011–12, came down and remained stable for all of 2013. However, the government’s adjustment of the health fee in early 2013 led to prices rising in medicine and health care services last year.

Figure 2. Success in curbing consumer price inflation

Successful policies

Proactive fiscal and monetary policies have played an important role in improving the economic outlook over the past two years. The government has undertaken several programs for economic restructuring, which involve privatizing state-owned enterprises, relaxing regulations to encourage private businesses, and encouraging foreign participation. In response to the government’s plan to restructure the financial sector that began in 2012, credit institutions have witnessed high level of consolidations through mergers and acquisitions. In addition, the government completed the equitization of the four state-owned commercial banks. All these government initiatives have improved the investment climate and business sentiments—as evidenced by foreign direct investment reaching an estimated $11.5 billion, an increase of 10 percent year over year. This year the government plans to comprehensively restructure financial institutions and improve business conditions to ease capital access by investors and businesses, which includes diverting credit from state-owned enterprises to private firms and divesting noncore assets of these enterprises.

The monetary policies have successfully contained inflation, lowering it from two digits to a single digit over two years. In addition, the policies have helped to stabilize domestic currency as well as improve foreign currency reserves by shoring up demand for local currency through unconventional policy measures. The Vietnamese currency is expected to remain stable this year as inflation stabilizes and the demand for exports improves.

Monetary policy in Vietnam is oriented toward growth. Last year, interest rates were cut twice, in March and May, to boost credit growth despite high inflation. Consequently, the average lending rates dropped substantially in 2013, boosting consumption demand. Additionally, lower rates allowed domestic businesses to strengthen their production and trading and to maintain their inventories. The State Bank of Vietnam (SBV) has not reduced rates in recent months, but if inflation continues to remain low, monetary policy may ease further to improve credit growth and bank lending.

Policy consequences

That said, the government’s pro-growth policies have fast deteriorated the fiscal deficit, which has widened from 2.3 percent of GDP in 2011 to over 5 percent over 2012–13. The policy stance is unlikely to change in the near future as the government appears willing to step up expenditures to boost growth and ensure macroeconomic stability. This may deteriorate the fiscal balance further.

Although monetary policies have improved lending in recent years, the banking sector has witnessed a rise in the nonperforming loan (NPL) ratio. In a recent report on the prospects of the banking sector in 2014, Moody’s announced the ratio of “problematic” assets to be at least 15 percent of total outstanding loans, instead of the 4.7 percent announced by the SBV in October 2013.1 Shortly thereafter, the SBV challenged Moody’s report in a press release, reaffirming that the NPL ratio has come down in December 2013 to 3.6 percent of the total outstanding loan (due to a purchase of NPLs worth $1.9 billion at the end of 2013). It emphasized that information released by state authorities is more reliable.2 Nevertheless, a rapid rise in the value of bad debts in recent years is a pressing policy challenge for the banking sector. The government has taken measures to manage debt by creating the Vietnamese Asset Management Company to buy up and rehabilitate doubtful loans. However, the lack of transparency continues to obscure the correct estimate of the bad-debt ratio.

The economy will likely continue to benefit from the relocation of low-cost export manufacturing from China.

Advantages can drive growth

The economy continues to face substantial risks to growth and inflation due to structural bottlenecks, rising fiscal imbalance, and current inertia within the ruling party. However, Vietnam remains an attractive investment destination for global manufacturers and investors because of its low-cost labor pool as well as its large and growing domestic market. The economy will likely continue to benefit from the relocation of low-cost export manufacturing from China. Growth in foreign investment, which has rapidly increased in recent years, is expected to accelerate, especially in the electronics sector. Furthermore, much of the foreign investment is likely to be focused on the export-oriented manufacturing sector, which in turn will likely help improve the trade balance further.


View all endnotes
  1. State Bank of Vietnam, “Press release on SBV standpoint on NPL ratio of Vietnam’s banking sector,” February 24, 2014,
  2. Ibid.


Dr. Rumki Majumdar

Dr. Rumki Majumdar is a macroeconomist and a manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, April 2014: Vietnam
Cover Image by Jessica McCourt (Cover), Stephanie Dalton Cowan (Vietnam)