Vietnamese economy in 2024: Stable exchange rates, more interest rate cuts needed

International financial organizations predict Vietnam's GDP growth in 2024 to be between 5.5 and 6.7%. GDP growth in 2024 and 2025 is estimated to be around 6.0% and 6.5%, respectively.

Inflation lower than forecasted

The CPI at the end of 2023 grew by 3.58% over the end of 2022. In 2023, the CPI climbed by an average of 3.25% over the same time in 2022. The prices of construction materials, food, university fees, tourism services, and residential power were the primary drivers of inflation in 2023. In contrast, the key variables that helped to reduce the CPI in 2023 were lower prices for fuel, gas, and postal telecommunications services.

Risk factors that could raise inflation in 2024-2025 include the adjustment of state-managed goods and services prices to market prices, an increase in electricity prices, high interest rates, and the acceleration of public investment disbursement, which could increase the total money supply (M2).

On the other hand, several factors contribute to inflation stabilization: generally stable energy prices; weak demand recovery in international markets; a preference for stable exchange rates; and the government's determination and consistency in managing and controlling inflation, exchange rates, and macroeconomic stability.

Based on the research, inflation is expected to average 3.6% ± 0.5 bps in 2024 and 3.3% ± 0.5 bps in 2025.

Consumption Recovery Trend

In 2023, overall retail sales of products and consumer service revenues grew over the same period last year. This economic feature illustrates that demand for basic and consumer products in the home market is still recovering after the epidemic. In 2023, total retail sales of goods and consumer service revenues at current prices are expected to reach 6,231.8 trillion VND, a 9.6% increase over the same period last year (an increase of 20.0% in the same period in 2022), excluding the 7.1% price factor increase.

Mr. Phung Xuan Minh believed that the favorable recovery trend in overall retail sales of products and consumer service revenues would continue in 2024. The primary drivers will be the full recovery of the tourist and aviation industries, domestic consumer demand, and the government's successful demand-stimulation programs in 2024.

Improvement in Import and Export

In 2023, the overall import and export turnover of products was anticipated to be 683 billion USD, a 6.6% decline from the previous year. The major cause of this loss was the adverse influence of the global economic situation, which included a large drop in global consumer demand and rising inflation globally.

International financial organizations predict that worldwide consumer demand will increase in 2024 as inflationary pressures fall significantly. This will have a favorable influence on Vietnam's prospective and established export markets.

Vietnam now has comprehensive strategic ties with many significant economies, markets, and potential markets, as well as participation in several bilateral and multilateral accords throughout the world. At the same time, the number of agricultural goods authorized to enter major markets such as the United States, Japan, and China continues to rise. Saigon Ratings predicts that Vietnam's overall import and export turnover will rise by 5% to 10% in 2024 compared to 2023.

Strong Shifts in Public Investment and FDI

Public investment disbursements increased significantly in 2023 when compared to the previous year. According to the Ministry of Finance (MOF), the expected public investment capital payment from the start of the year to December 31, 2023 is 579,848.8 billion VND, representing 73.5% of the plan (or 81.87% of the Prime Minister's plan). Specifically, the Economic Recovery and Development Program distributed 72,686 billion VND (56.1% of the Prime Minister's target).

Public investment disbursement is expected to increase significantly in 2024 compared to 2023, as the government continues to prioritize public investment in order to develop and gradually complete a modern and synchronous national transportation infrastructure system, which includes roads, airways, railways, and seaports.

New FDI registrations in 2023 totaled 20.19 billion USD, a 62.2% increase over the same time, demonstrating that Vietnam remains a prospective market with a strong competitive position and the capacity to attract and appeal to international investors. Implemented FDI in 2023 is expected to be 23.18 billion USD, a 3.5% increase over the previous year. This is also the greatest level of foreign direct investment that Vietnam has received in the last five years.

"FDI will continue to rise in 2024 compared to 2023, and it will be a key driver of economic development throughout the year. This projection is based on the recently expressed confidence and expectations of international investors in Vietnam. However, the process of trying to attract FDI flows, particularly new generation FDI from Vietnam, in the next few years would be fraught with obstacles, challenges, and tough rivalry from other Southeast Asian and Asian countries,"  Mr. Phung Xuan Minh said.

Stable Foreign Exchange Rates

Despite minor changes, the State Bank of Vietnam maintained considerable control and stability over the currency rate in 2023. This was made possible by a huge increase in Vietnam's foreign currency revenues, which were driven by strong trade surpluses and the recovery of revenue from overseas visitors and remittances. Furthermore, speculative USD hoarding in the market has decreased as the Fed has reduced the pace of interest rate raises since the beginning of the year, indicating that the Fed's interest rate hike cycle is nearing an end.

Mr. Phung Xuan Minh believes that major swings in the currency rate in 2024 are unlikely, and that the exchange rate will likely remain steady at roughly 24,000VND. However, medium- and long-term exchange rate patterns remain uncertain, with many variables beyond the control of the government and SBV (the US economy recovers quicker than expected, and imports surge as the domestic economy recovers quickly).

Reduction in Loan Interest Rates

Deposit Interest Rates: Thanks to the Government's and SBV's strong actions, deposit interest rates will be much lower in 2023. At the end of 2022, commercial banks had raised deposits for 12-month terms at interest rates of up to over 10% per year, but by the end of 2023, it had dropped to 5%, with some banks only raising at 4.8%.

Loan Interest Rates: Credit institutions have cut typical loan interest rates from 2% to 2.5% per year from the beginning of 2023. However, in practice, this has not matched the expectations of companies. For new loans, most banks use two interest rates: preferential and post-preferential, with a common adjustment range of 2% to 3.8%.

Mr. Phung Xuan Minh assessed that in 2024, banks would have enough time to raise enough at low-interest rates and reduce new loan interest rates to correspondingly low levels. However, loan interest rates cannot decrease sharply due to the increasing trend of bad debts and the increase in the provisioning costs of credit institutions.

Challenges in Credit Growth and Bad Debts

In 2023, the credit growth of the whole economy reached about 13.5%, lower than the target of 14%-15%. This is still a significant effort by the Government and SBV in 2023. The main reasons for not achieving the credit growth target include: (i) domestic businesses lacking orders, leading to a decrease in borrowing demand; (ii) policy interest rates, deposit interest rates have decreased, but loan interest rates have not decreased correspondingly; (iii) the difficult market has significantly reduced the credit demand for the real estate industry; and (iv) credit institutions are cautious in increasing outstanding loans due to the continuing trend of increasing bad debts.

The main reasons leading to the trend of increasing bad debts in 2023 include: The domestic economy has just gone through the COVID-19 pandemic and has continued to suffer additional negative impacts from the global economy and the difficulties and challenges of the domestic economy, which have weakened the resilience of businesses.

In early 2024, SBV established a loan growth objective of 15% for the entire year, higher than in 2022 and 2023, and a comparatively high aim for the previous five years. We believe that this aim is extremely tough and demanding for the following fundamental reasons: (i) The risk of high inflation may persist in 2024; (ii) the credit/GDP ratio is already high, and credit outstanding has exceeded the level of deposit mobilization; (iii) the capital absorption capacity of the economy in general, and the real estate industry in particular, may not increase abruptly in the short term; (iv) the borrowing demand of export and import businesses is unlikely to increase abruptly; and (v) bad debts may continue to rise in 2024.