Vietnam's Year in Review and Outlook for 2023

By Mike Tatarski

Photo by Tron Le on Unsplash

As we head into 2023, it is worth reflecting on the substantial impact that international geopolitics is having on Vietnam and how the country has been demonstrating resilience, especially through its manufacturing and tech sectors.

How Vietnam fought back against 2022’s economic trends

While 2022 marked Vietnam’s return to ‘normal’ following two years of pandemic-related restrictions, a series of global developments, including the ongoing war in Ukraine, central bank rate cuts in the United States and other major economies, and China’s zero-Covid pursuit, are placing increased pressure on Vietnam’s economy, a reality that is likely to continue well into 2023.

One of the biggest stories going into this year is falling consumer demand in major export markets like North America and the European Union, where countries face high inflation and substantial recessions risks.

This pain is being felt here in Vietnam’s US$300 billion export market during what is normally the busiest time of the year.

Over 41,000 workers in the manufacturing sector have lost their job since the middle of 2022, while over 400,000 more face reduced hours or temporary work suspensions. Some factories are giving workers a two-month Tet break since there aren’t enough orders to continue normal operations.

The General Statistics Office said that total exports in November 2022 fell 8.4% year-on-year, a worrying trend, while imports also fell by 7.3%, showing that manufacturers have less demand for imported inputs.

But Vietnam has shown plenty of fortitude despite these challenges.

GDP growth for 2022 was 8.02%, a huge improvement over 2021’s lockdown-induced 2.6% growth rate. In fact, Vietnam was among the few countries to maintain overall economic growth throughout the worst of the pandemic.

On that note, the National Assembly recently set a growth target of 6.5% for 2023, while the central government created a range of new economic restructuring targets.

By 2030, according to these goals, Vietnam’s per capita GDP will be US$7,500 (up from the current US$3,700), less than 20% of the workforce will be in agriculture (the current figure is 37%), and up to 40% of the workforce will be trained in advanced skills. The target is also to maintain 7% annual GDP growth through the rest of this decade.

This signals a renewed push by leaders to advance Vietnam’s economic status after missing their goal of becoming an industrialized country by 2020.

And amid the economic concerns discussed above, Vietnam remains a rising star, one The Economist recently called ‘a winner from the era of deglobalization.’ There are several reasons for this.

While China’s insistence on zero-Covid, which appears to be coming to a surprisingly abrupt end, will still cause problems for the global supply chain that Vietnam is a key part of, manufacturers are even more likely to look at the Southeast Asian country as an alternative.

Vietnam has already benefited greatly from the production shift away from China, with headline-grabbing moves by Apple, Google, Dell, and Microsoft building on momentum created since 2017 - and largely following trails blazed by tech giants from South Korea, Japan, Taiwan, and China itself.

This shift in capital is also driving the development of Vietnam’s fast-growing digital economy.

This sector is forecast to expand by 8.9% per year through 2026, among the fastest rates in the world. The government has set a goal of the digital economy accounting for 20% of GDP by 2025. This would mean a value of US$52 billion that year, ranking Vietnam as the third-largest digital economy in Southeast Asia.

While it’s not clear how long the current economic downturn will last, Vietnam’s manufacturing sector - especially when it comes to high-tech products - should be able to rebound very quickly and continue expanding once demand returns. It faces little competition from regional neighbors, most of whom are either too expensive or too undeveloped to attract significant manufacturing investment.

The China relationship

China, of course, has an impact on Vietnam beyond this manufacturing shift. Despite the ongoing tensions over the South China Sea (an issue that has been less prominent recently), the political relationship between the two remains very strong.

This was highlighted by the recent visit to Beijing by CPV General Secretary Nguyen Phu Trong, along with several ministers and other high-ranking Vietnamese leaders. Trong met with Xi Jinping, fresh off his unchallenged campaign for an unprecedented third term as leader of the Chinese Communist Party, and received a prominent award from the Chinese government.

Such a high-level reaffirmation of party-to-party ties illustrated the fine geopolitical line that Vietnam’s government continues to walk as it navigates the deepening great power rivalry between China and the United States.

It is clear that Vietnam aims to maintain close ties with both China and the US, a reality that ensures stability for now but would prove challenging if a conflict ever breaks out between the two.

One final aspect of this relationship is China’s now-former role as Vietnam’s largest source of inbound tourists. Thanks to zero-Covid, China has not been a tourism market, while over 5.8 million Chinese visited Vietnam in 2019, by far the largest tourism group.

As a result of this loss and the broader global economic situation, Vietnam’s international tourism sector has struggled mightily and is on pace to badly miss its target of 5 million foreign arrivals: as of the end of November, just 2.6 million foreign arrivals had been recorded for the year.

Russia’s war

The other huge overarching geopolitical story of the year, Russia’s invasion of Ukraine, is having its own impact on Vietnam.

For example, while inflation has been kept under relative control, Vietnamese consumers have not escaped the increases in commodity and energy prices that have hit the rest of the world. Gas prices, for example, reached record highs over the summer, while high fertilizer prices spurred by the war have hurt Vietnamese farmers.

On a positive note, trade between Vietnam and Russia has remained steady in 2022 though it makes up a small fraction of the former’s overall trade.

2023 Outlook

Vietnam has its own domestic concerns to worry about as we move into the new year, including a deeply troubled real estate industry. This has resulted in layoffs at major developers and played a significant role in giving the VN Index the dubious distinction of being the world’s worst-performing major stock market in 2022, wiping out nearly all of the growth it saw in 2021.

While the market has improved recently and will be strong in the long run, more turbulence can be expected in the coming months as the real estate sector may not recover until 2024 as it undergoes a painful correction following years of speculation and over-leveraged expansion.

Perhaps the biggest domestic story going well into this year is a high-level anti-corruption campaign that, while much-needed, is contributing to slow decision-making on key issues across sectors, including healthcare, immigration, and infrastructure.

These are arguably more pressing concerns than any of the above issues. Continued poor infrastructure development, for example, could hinder inbound foreign investment through congested ports, roads, and airports. Government officials at the highest levels have made addressing project delays a top priority, and 2023 will be a vital year to see if progress can be made.

Overall, however, Vietnam retains strong fundamentals beyond these immediate international flashpoints.

On the business side, M&A activities are picking up steam now that the worst of the pandemic is firmly in the rear-view mirror. Nine deals worth more than US$100 million (and two topping US$1 billion) took place over the last year, involving both foreign and domestic buyers.

This is expected to continue even against global headwinds thanks to Vietnam’s solid socioeconomic backbone, importance as a manufacturing hub, improving regulatory landscape, and increased familiarity with M&A.

These fundamentals are built on the fact that Vietnam’s GDP compound annual growth rate (CAGR) was the highest in Southeast Asia over the last 30 years - growing 6.7 times, beating even fast-growing non-regional countries like India and Bangladesh.

This is in line with other strong digital- and tech-related indicators, such as the rapid expected rollout of 5G connectivity now that the three largest mobile carriers are offering it. This year, Vietnam is expected to have almost 2.5 million 5G users, ensuring that the country will be able to embrace this tech as it expands.

There is no doubt, then, that economic growth will continue, with digitization and tech playing increasingly important roles in this expansion. Vietnam has also avoided the high inflation rates seen elsewhere, putting less pressure on its people. This is not to say that 2023 will be an easy year, but Vietnam is comparatively well-placed to weather the ongoing international economic and political storm.  

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