Vietnam economic performance will be poor in 2023

Vietnam’s economy lacks strong momentum. On September 29, Vietnam announced that its real gross domestic product (GDP) growth rate from July to September 2023 was 5.33% year-on-year. Although Vietnam’s economy is slowly recovering from the COVID-19 epidemic, its main manufacturing industry has performed poorly and exports have continued to grow negative. In order to achieve the annual growth target of 6.5% to 7.0%, the current situation is grim.

As one of the alternatives to China, the “world’s factory”, foreign-funded companies such as Japan and South Korea have been building factories in Vietnam. However, coupled with political problems such as corruption, companies may be cautious about additional investment in the future.

“A recovery is unlikely to occur within 2023,” said a steel industry source. About 80% of Vietnam’s steel demand is used in construction, but critical construction demand is still declining. ​

Taiwan’s shoe company “Bao Yuan Vietnam” has laid off more than 9,000 people since entering 2023. The operator of a sewing factory said that “by the end of the year, the number of clothing companies closing will increase.” The production frontline made this sound that lacked a real sense of economic recovery.

Before the COVID-19 epidemic, Vietnam’s economy maintained a growth rate of 6% to 7%. After experiencing strict lockdown measures, Vietnam’s economy recovered for a time, but the slowdown became apparent again starting in the second half of 2022. The growth rate from January to June 2023 is only 3.7%. Domestic property market conditions have deteriorated, coupled with slowing global demand, and exports have also declined.

The growth rate from July to September has increased year-on-year for two consecutive quarters, showing signs of recovery. The services sector consisting of retail and tourism has become a driving force. During the same period, more than 3 million foreign tourists visited Vietnam, approximately 2.5 times that of the same period last year.

However, manufacturing industries such as mining and construction, which account for nearly 40% of GDP, are still in a sluggish state. Exports are also sluggish, with exports from January to June falling by about 10% year-on-year. Growth was still negative from July to September, and the real recovery of personal computers and clothing, which have large export volumes, is still far away.

The World Bank predicted in August that Vietnam’s GDP would grow by 4.7% in 2023. It is expected to improve slowly, but it is believed that it will have to wait until 2025 to reach the 6.0% level equivalent to before the epidemic. The Vietnamese government has proposed an average growth rate target of 6.5% to 7.0% from 2021 to 2025, but this target is becoming just talk on paper.

Taking advantage of Vietnam’s accession to the World Trade Organization (WTO) in 2007, its imports and exports have surged. At that time, labor costs in China continued to rise, and foreign-funded companies seeking cheap labor also accelerated their entry into Vietnam. In particular, South Korea’s Samsung Electronics built a mobile phone factory in Vietnam in 2009. Half of Samsung’s smartphones are now made in Vietnam.

Vietnam purchases raw materials from China, the largest source of imports, and sells finished products to the United States, the largest export destination. The triangular trade spanning the two major countries has become the source of Vietnam’s high growth rate. As its dependence on trade increases, Vietnam becomes more directly affected by the world economy.

To get back on the growth track, it needs to attract new investment. The government is pinning its hopes on semiconductors and artificial intelligence (AI).

On September 19, “Please build a factory in Vietnam”, Vietnamese Prime Minister Pham Minh Zheng met with Nvidia CEO (CEO) Jensen Huang at the destination of his visit to the United States, and strongly requested investment in Vietnam. Meetings were also held with American Microsoft founder Bill Gates and senior managers of the American Space Exploration Technology Company (SpaceX).

From the perspective of economic security, Europe and the United States are building supply chains that are not dependent on China. Vietnam has become the host country, seeking to reap the benefits of being a fisherman. In fact, investment in the northern region of Vietnam is increasing with the aim of relocating production and diversifying bases from China.

Vietnam still faces problems in expanding foreign investment. One is the rise in labor costs.

In the summer of 2023, Luxshare Precision Industry (Luxshare) is recruiting workers in northern Vietnam. The condition is that the maximum monthly salary is 12 million Vietnamese dong (approximately RMB 3,600), which is much higher than the statistical average salary (7.1 million dong). More and more voices suspect that “the government makes the statistics appear lower in order to attract foreign companies.”

In addition, the power struggle within the Vietnamese government has also made foreign investment cautious. In 2022, senior officials were arrested one after another, and the second-ranked President Nguyen Xuan Phuc was also de facto dismissed. Delays in administrative procedures and frequent requests for bribes from civil servants call for political and administrative rectification.