In 2023, Vietnamese businesses had double trouble – a decline in orders and a surge in costs. Despite maintaining the highest level of optimism in the region, the domestic business community has shifted to defensive strategy, with inflation being their biggest concern.

Impact of inflation Lim Dyi Chang, head of Commercial Banking at UOB Vietnam, highlighted this issue during a press conference on the release of UOB’s 2024 Business Outlook Study on July 16. The report said the bank surveyed over 4,000 businesses across seven key markets in ASEAN and China, including 525 firms in Vietnam. The survey, conducted in December 2023 and January 2024, found that 88% of Vietnamese businesses remain optimistic about the current business environment, one of the highest levels of optimism in the region. However, these businesses also expressed the greatest concern about inflation compared to other markets. “This indicates that inflation has deeply penetrated daily business operations. Vietnamese businesses are highly optimistic, yet they are bracing for future challenges,” Lim said. The report found that nine out of 10 Vietnamese businesses were affected by high inflation in 2023. Specifically, 58% cited increased operating costs as the main culprit, followed by 57% citing the cost of raw materials. This led to a decrease in profit for 45% of businesses. The real estate, restaurant, and customer service sectors (64% for operating costs) and technical manufacturing (75% for raw material prices) were hit the hardest. While rising interest rates were noted by many businesses, they were not the primary concern in 2023. Instead, inflation (39%), commodity price volatility (34%), post-slowdown recovery (34%), and increased operating costs (31%) topped the list of worries, with interest rates (24%) following. High inflation caused increased supply chain costs for around half of Vietnamese businesses last year, posing a major challenge in managing supply chains alongside raw material procurement issues. In response to these challenges, businesses have adopted cautious plans that combine short-term cost reduction measures with long-term strategies, such as diversifying their supply chains and forging new business partnerships within the next one to three years. Despite a seven-percentage-point drop in optimism compared to the survey conducted in the previous year, Vietnamese businesses still maintain a high level of confidence. This contrasts sharply with the decline in optimism in China, where sentiment plummeted from 43% to 27%, largely due to the real estate market downturn. Concerns linger in first half of 2024 The concerns about inflation at the beginning of the year materialized into a challenging business environment in the first half of 2024. Businesses' fears were well-founded as inflation continued rising, nearing the target of 4.5%. Recent data indicated that the consumer price index (CPI) in the second quarter edged up by 4.39% compared to the same period in 2023. On average, the CPI picked up 4.08% in the first six months of this year. According to the General Statistics Office of Vietnam, the main contributors to this rise were food products (with food prices surging by 15.02%), housing, utilities, fuel, construction materials, education, healthcare, and transportation. These sectors are recognized as essential goods and services. During the discussion on the survey report's results, Tran Ngoc Liem, director of the Vietnam Chamber of Commerce and Industry branch in HCMC, stated that Vietnam’s open economy is highly susceptible to inflation from external factors. The strong appreciation of the U.S. dollar throughout 2023 and early 2024 impacted imports. Furthermore, geopolitical tensions have hit domestic business and piled more pressure on inflation, influencing logistics and the availability of raw materials. Concerns about future inflation are also fueled by the recent increase in the minimum wage, which took effect in early July. According to Liem, though the wage hike is expected to influence inflation, regulatory authorities downplay its impact, estimating it will contribute only 77 basis points to inflation while adding 21 basis points to GDP growth. According to the July 2024 inflation expectation survey by the State Bank of Vietnam, conducted among local banks and foreign bank branches in Vietnam, the average inflation rate in all of 2024 is anticipated to be 3.86%, slightly higher than the 3.78% forecasted in the previous month’s survey. The CPI, a key inflation indicator in Vietnam, has accelerated in recent months, driven mainly by rising living costs, food prices, housing, transportation, and healthcare. Most analysts predict that inflation will remain a significant pressure on Vietnam in the latter half of this year. However, a positive aspect is the potential reduction in exchange rate pressures if U.S. dollar interest rates decrease.