It is undeniable that Vietnam’s economic growth is increasingly reliant on monetary policy, while the effectiveness and ripple effects of fiscal policy have yet to fully materialize as expected. However, dependence on credit expansion could pose significant risks to the economy.

The link between credit and growth To achieve 1% gross domestic product (GDP) growth, credit must expand by more than 2% on average. For instance, GDP grew by nearly 7% in 2023 while credit growth stood at 14.55%. In 2024, GDP growth reached 7.09%, supported by a 15.08% increase in credit. According to a representative of the State Bank of Vietnam (SBV), the central bank has set a credit growth target of 16% in 2025 to support an 8% GDP growth rate. If economic growth is to reach 10%, credit expansion should be between 18% and 20%. By the end of 2023, total outstanding loans amounted to around VND13.4 quadrillion, rising to VND15.5 quadrillion by the end of 2024. This means that in 2024 alone, an additional VND2.1 quadrillion in credit was injected into the economy. Over the course of the year, total loan disbursements reached VND23 quadrillion, while debt repayments amounted to VND21 quadrillion to sustain GDP growth of 7.09%. These figures highlight the strong correlation between banking system credit activities and economic expansion. An accommodative credit policy enables businesses to secure loans more easily, allowing them to expand production, invest in technology, modernize operations, and improve infrastructure. This, in turn, boosts labor productivity and creates employment opportunities, driving overall economic growth. Similarly, households and individuals benefit from easier access to credit for purchasing goods and services or investing in housing and education. As consumer demand rises, businesses ramp up production to meet market needs, reinforcing a positive economic cycle that further stimulates growth. On the other hand, when economic growth is strong, businesses and individuals would have confidence in future prospects, leading to increased borrowing for investment and consumption. However, the 2:1 ratio between credit growth and GDP growth is not always consistent. For instance, GDP grew by 8.02% in 2022, but credit expansion was just over 14%. In 2021, GDP growth was only 2.58%, yet credit growth exceeded 13.6%. Similarly, GDP increased by 2.91% in 2020, while credit rose by nearly 12.2%. At times, high credit growth does not directly translate into stronger economic expansion. This can happen when banks restructure loans by rolling interest into principal to help businesses navigate economic downturns. Additionally, credit growth tends to be concentrated in the private sector, meaning that if growth in the state-owned or foreign direct investment (FDI) sectors slows, the impact of credit expansion on overall GDP would remain limited. For example, during the 2020-2021 period, the Covid-19 pandemic, social distancing and lockdowns disrupted global trade, negatively affecting FDI firms. At the same time, public investment projects faced delays, leading to sluggish economic growth despite aggressive monetary easing, deep interest rate cuts, and credit stimulus measures. The risk of a property bubble Vietnam’s economic growth is becoming increasingly dependent on monetary policy, while the effectiveness and ripple effects of fiscal policy have yet to fully materialize. Although public investment disbursement has improved compared to previous years, it has still fallen short of annual targets. Many large-scale projects continue to face delays, particularly due to challenges in site clearance. To sustain economic growth, the State Bank of Vietnam (SBV) has implemented an expansionary monetary policy in recent years, raising credit growth quotas for banks and maintaining low interest rates to stimulate borrowing. Notably, Vietnam’s controlled inflation has allowed policymakers to sustain this approach. However, excessive reliance on credit-driven growth presents significant risks. If credit expansion occurs too rapidly or is poorly regulated, it can lead to systemic financial vulnerabilities, including rising bad debt and speculative bubbles in the real estate sector. When these risks materialize, the credit cycle may reverse, triggering an economic slowdown. The sharp rise in bad debt over the past two years reflects these concerns, as many businesses have struggled to recover in the post-Covid-19 period. According to 2024 financial reports, total non-performing loans (NPLs) across 27 banks amounted to VND227 trillion, with bad debt increasing at 24 of those banks. Analysts warn that businesses are feeling the strain after two years of economic turbulence. In January 2025 alone, 58,300 businesses exited the market—1.75 times the number of new business registrations. The surge in firms suspending operations signals growing financial distress, highlighting the urgency of managing credit growth to avoid deeper economic instability. If credit continues to flow into the economy while businesses remain weak, it may provide temporary relief for some enterprises. However, in many cases, struggling businesses may become further entangled in financial difficulties, increasing the risk of bad debt accumulation. When the productive sectors of the economy fail to absorb excess credit, funds often shift toward speculative investment channels such as real estate, potentially fueling new property bubbles. This cycle typically unfolds as follows: when interest rates are low and banks, under pressure to disburse capital, offer easy access to credit, investors take advantage of cheap financing to buy assets such as real estate and stocks in anticipation of quick returns. As credit remains abundant, property prices continue to rise, attracting more speculation and reinforcing expectations of further price increases. This speculative momentum drives even greater borrowing, accelerating market overheating. However, when property prices reach unsustainable levels, detached from fundamental economic factors, the market becomes vulnerable to a sharp correction. If external shocks occur—such as rising interest rates or tightened credit policies—the flow of capital may reverse abruptly. This shift can trigger a sudden drop in property values, leading to a surge in bad debt, particularly among highly leveraged investors who had relied on borrowed funds for speculative trading.