• Vietnam’s economy is projected to expand by close to 6 percent in 2024, up from 5 percent in the previous year, driven by a recovering export sector, robust foreign direct investment, and policy support.  
• Monetary and fiscal policies are expected to remain supportive given sluggish domestic activity, but will also need to manage downside risks, including if inflation pressures were to increase. Policies should also continue to strengthen the health of the financial system.
• A new wave of reforms to boost productivity growth is needed to maintain Vietnam’s high growth over the medium term amidst demographic and climate headwinds. 

An International Monetary Fund (IMF) team, led by Paulo Medas, held the 2024 Article IV consultation with Vietnam from June 12-26. The team exchanged views with Prime Minister Pham Minh Chinh, senior officials of the State Bank of Vietnam (SBV), the Ministry of Finance, the Ministry of Planning and Investment, the Central Economic Commission, the National Assembly, and other government agencies. It also met with representatives from the private sector, think tanks, academia, and other stakeholders.

At the end of the mission, Mr. Medas issued the following statement:

“In a challenging year in 2023, the Vietnamese economy grew 5 percent thanks to determined action by the government. The economy was hit by turbulence in the real estate sector, financial distress, and a significant drop in exports. A recovery began in late 2023, fueled by a rebound in exports, tourism, and appropriately expansionary fiscal and monetary policy support. Inflation picked up in the first quarter of 2024, driven partly by rising food prices, though core inflation remained relatively low and stable. The external current account posted a large surplus in 2023, 5.8 percent of GDP, mainly reflecting a significant contraction in imports.

“Economic growth is projected to recover to close to 6 percent in 2024, supported by continued strong external demand, resilient foreign direct investment, and accommodative policies. Domestic demand growth is expected to remain subdued as corporates navigate through high debt levels while the real estate sector will only fully recover over the medium term. Inflation is expected to hover around the SBV’s target of 4-4.5 percent this year. 

“Downside risks are high. Exports, a key driver for Vietnam’s economy, could weaken if global growth disappoints, global geopolitical tensions persist, or trade disputes intensify. Domestically, persistent weakness in the real estate sector and corporate bond market could weigh more than expected on banks’ ability to expand credit and hurt economic growth and undermine financial stability. Given easy monetary conditions, if exchange rate pressures were to persist for longer it could lead to a larger pass-through to domestic inflation.

“Given the uneven economic recovery, policies remain highly supportive in 2024, but may need to adjust in response to significant risks to the outlook. Inflation remains contained, but SBV should stand ready to tighten monetary policy if upward price pressures were to intensify. Policies should continue to focus on improving financial stability, which would require strengthening asset quality and avoid excessive, low quality, credit growth. Over time, increased exchange rate flexibility in tandem with further modernization of the monetary policy toward inflation targeting would help better manage external shocks while safeguarding foreign exchange reserve buffers.

“Fiscal policy is also supporting economic growth in 2024 given the expected large public wage increase and ongoing efforts to accelerate public investment. Strengthening fiscal management would help tackle the challenges ahead. This includes improving the composition and quality of public spending and services; strengthening fiscal planning to better reflect the medium-to long-term implications of aging and climate; and enhancing safety nets. Revenue mobilization efforts would create resources to bolster social spending, tackle climate change and address large investment needs in infrastructure. 

“The new Law on Credit Institutions is an important step forward and should be followed by further measures to strengthen supervision and governance of financial institutions. Additional efforts to restore the health of the banking system including measures to improve asset quality, phasing out forbearance measures, and raising bank capital would strengthen financial stability. Resolution of failed banks should be accelerated to limit the eventual costs and improve the functioning of the financial and monetary system. A stronger insolvency framework and debt enforcement would help to accelerate corporate restructuring and make the financial system more resilient. The revision of land and other real estate laws is welcome to address legal bottlenecks in the sector. Further efforts to restructure weak developers and to promote a sound corporate bond market are warranted.

“To sustain high economic growth amid less-favorable demographics and climate change challenges, Vietnam needs a new wave of reforms. Increasing productivity, further investing in human and physical capital, and incentivizing private investment in renewable energy is key. Improving the functioning of the capital markets would also help boost productivity. In this regard, developing a market-based sovereign bond market is vital to facilitate broader capital market development and to make monetary policy transmission more effective. 

“Vietnam’s anti-corruption efforts are important for high-quality development and would benefit from stronger preventative anti-corruption institutions, economic governance, and transparency. Efforts to reduce legal uncertainty and allow for swifter decision making by public officials would also foster a more business-friendly environment. In addition, the Anti-Money Laundering / Countering the Financing of Terrorism framework warrants urgent strengthening. Efforts to improve economic data are welcome and combined with greater transparency will help enhance policy decision making and support economic and capital market development.

“The team is grateful to the authorities, as well as other stakeholders, for candid and insightful discussions.”