Against the backdrop of the global economic slowdown induced by uncertainties, the Vietnamese economy is facing multiple structural problems hindering development.

Global uncertainties The global economy enters the new year 2024 with multiple hardships and challenges that will prompt economic growth to slow down compared to previous decades. Four years since the Covid-19 outbreak, the global economy has not yet been back on growth track. The global GDP in 2023 was some 3.4 percentage points lower than the projection given before the pandemic, equivalent to a loss of around US$3,700 billion. Such losses are not evenly spread. The U.S. is the only economy that has returned to its pre-pandemic growth path, while Europe had a growth rate 2.2 points lower than the pre-pandemic level, and China grew by some 4.2 points only. It is noteworthy that 73 low-income countries saw their GDP shrink by 6.5% due to the pandemic, as per estimates by the World Bank and the International Monetary Fund. Such losses are unrecoverable, meaning those countries trail farther behind in their development. The strategic and geopolitical tensions between the U.S. and China has divided the global economy into two blocs. The global supply chains for many strategic commodities have become fragmented. An IMF study shows that in the past few years, the exchange of commodities and capital goods, and financial transactions such as FDI, portfolio investments and lending have seen intra-bloc growth rates stronger than the global rates. Economic and financial fragmentations have blunted economic effectiveness and driven up business costs, prompting economic slowdown and inflationary pressure. In addition, higher frequencies of natural calamities and extreme weather patterns due to climate change have also badly affected the economy in terms of losses of properties and crops, and higher insurance and business costs. The aforesaid factors have led to a sharp reduction of the global economic growth rate, from an average of 5% in the 1950-1960 to only 2.5% in the period between 2020 and 2024. The global slowdown will certainly affect the growth potential in each country. Global trade has also slowed as well. Between the 1980s and the global financial crisis in 2008, global trade expanded by some 6-7% annually, or twice the economic growth rate. This has been the key momentum behind economic growth. Global trade has since then plummeted, inching up by only 0.8% in 2023 before likely bouncing back to 3% in 2024. The slowing global trade will adversely affect economies with high exposure like Vietnam’s (a very high ratio of foreign trade volume to GDP, at nearly 200%). Prospects for different regions In the period 2019-2023, many economies have seen wild fluctuation due to the pandemic. The annual economic growth in the U.S. averaged out at 1.9% in these years, skirting the potential growth rate, making it the sole economy worldwide to have caught up with the potential growth seen before the pandemic. The key reason is that the U.S. Government in 2020-21 launched a colossal stimulus package worth up to US$5,000 billion. The U.S. Federal Reserve also boosted its money supply with a similar amount to underpin the economy. In 2024, however, these two stimulant forces will be reserved, namely a reduction in budgetary overspending and monetary tightening by the U.S. Federal Reserve via rate hikes in the past two years. In addition, households stateside have used up all financial support (at US$2,000 billion to cope with the pandemic) and resorted to normalcy. Therefore, the GDP growth in the U.S. is projected to slow a bit to 1.5% in 2024. In the eurozone, meanwhile, stagnation will continue, with the GDP growth rate estimated at 0.7% in 2023 and bouncing back slightly to 1% in 2024. Germany faced a double recession, in early and late 2023, and its economy is reportedly headed for a 0.5% contraction in 2024. The stagnant global trade also adversely affects Europe, which relies heavily on external trade. China’s annual growth rate averaged out at only 4.5% in 2019-2023, far lower than the average of 7.5% in the pre-pandemic decade, but still matching the potential growth for this period. The potential growth rate in China has slumped due to population aging, resulting in a fall of 0.5% annually in the number of people entering the working age before expanding to 0.8% in the coming years. The productivity growth index has also slowed to below 5% annually. Japan comes with a surprise, as its GDP grows 2% owing to tourism and robust exports, the latter being induced by an 11.5% depreciation of the Japanese yen versus the U.S. dollar. However, Japan’s GDP growth rate is poised to return to 1%, especially when the Bank of Japan terminates its negative-interest rate policy as inflation has exceeded 2%. India, however, steals the spotlight, with its GDP expanding by 6.5% in 2023 and 2024, largely owing to drastic economic reforms in the past decade. However, the Indian growth’s impact on the global economy is limited due to its low external trade volume. Emerging markets will also slow down, growing at 3-4% annually, equal to only half the growth rate seen in the 1990s and 2000s. These economies have suffered three consecutive shocks, namely the pandemic, the Russia-Ukraine war, and the steep rate hikes by the Fed and the European Central Bank. For low-income countries, high indebtedness, at US$3,500 billion, has plunged several economies into a crisis. In certain countries, amounts used for servicing foreign debts have exceeded 10% of their budget revenues, forcing them to scale down expenses for social security, education, and infrastructure, let alone the need to cope with climate change. Challenges for Vietnam 2023 was a tough year for Vietnam, especially in the first half when demands both at home and abroad plunged. However, the economy then recovered, with GDP growing 5.3% in the third quarter owing to the Government’s stimulus measures. FDI rose strongly in the second half. GDP expanded by an estimated 6.72% in the fourth quarter, taking the GDP growth to 5.05% for the entire 2023. To forecast developments in 2024-2025, it is necessary to take into account the economic cycle as well as structural issues that may impede growth. Vietnam’s economic growth averaged 5.2% in the highly volatile period of 2019-2023, lower than the potential growth of 5.5-6% expected for the period. Some international institutions have forecast Vietnam’s annual growth rate at 5.6% for the 2023-2030 period, based on the workforce growing by 1% and productivity rising 4.5-5% annually. There is still much room left for Vietnam’s development as productivity remains far lower than the regional level. This is not easy, however, as productivity tends to grow slower globally. Some say that the growth rate of 5.5-6% for Vietnam is acceptable, as it is – though a tad lower than India’s - better than most other countries worldwide. In my opinion, such expansion is still lamentable. Experiences show that Asian Tigers including China always posted high growth rates in the early stage. In two decades before reaching GDP per capita of US$10,000, Singapore obtained an average growth rate of 9.4% per year, Taiwan 8.8%, South Korea 8.7%, and China 8.7%. Their GDP growth rates after passing that threshold slowed a bit but still exceeded a per capita number of US$13,205 to be recognized by the WB as high-income economies. China is poised to reach this level in the near future. Vietnam, meanwhile, trails far behind. In the 1990-1999 period, Vietnam’s GDP grew by 7.4% a year before slowing to 6.6% in the following decade. Such figures were based on the outdated statistical method, before the new method was adopted in 2010 when GDP was revised up by 25%. If the General Statistics Office updated the GDP figures prior to 2010 to be synchronized with the new data, then the GDP growth rate in the previous decades would be higher, at 9-10% annually. The GDP growth rate for the later years, however, has slumped to 6% on average in 2010-2022. That is to say Vietnam’s economic growth has slowed since 2010 when GDP per capita reached only US$1,684. That growth rate slowed further to only 5.2% a year in 2019-2023 when the latest GDP per capita reached US$4,164, partly due to the pandemic. If that tardiness continues, Vietnam can hardly catch up with other Asian Tigers and will be left farther behind. Recommendations for Vietnam To catch up with other economies, it is vital to raise productivity. Specifically, Vietnam needs to improve institutions of the market economy to avoid being plundered by interest groups; enhance the effectiveness of the State apparatus; upskill the workforce; develop infrastructure, especially for digital and green industries; attract and utilize FDI that is diversifying away from China into Southeast Asia. Another issue that needs to be addressed is the excessive non-financial corporate debt. According to the 2023 White Book released by the General Statistics Office, the total amount of debts owed by non-financial enterprises to GDP had steadily increased and reached 255% in 2021, which was the world’s highest and far higher than the world’s average of 95%. Like in China where this ratio was 167%, this high level may trigger financial and economic instability, and all remedial measures are costly. Vietnam now adopted the measures of lowering interest rates and encouraging banks to boost lending to enterprises. Such measures can work in recovering the real estate sector and the entire economy in the short run. However, they will prompt corporate debts to further swell and may lead to an insolvency crisis in the future if the economic situation turns unfavorable (such as rising interest rates or falling demands). On the other hand, if all bad debts are liquidated and debt-laden enterprises are allowed to go bankrupt, there will be a shock that causes economic slowdown or recession. But in the long run, such a move will improve the balance sheets of enterprises and banks, laying the foundation for stable and sustainable growth. The approach by China could be a good example when this country stepped up liquidating or restructuring debts and allowed real estate enterprises to go bankrupt to an extent that can be absorbed by the society and economy. At the same time, China also sought to support enterprises on a selective basis to ensure a minimum level of growth. As such, the ratio of non-financial corporate debt to GDP in China has fallen from 163% in the third quarter 2020 to 158% in the second quarter 2022, though it reared its head again to 167% in the third quarter 2023 due to Covid-19. In short, it is highly recommended to address non-financial corporate debts, otherwise Vietnam’s economy will be mired in a debt crisis and low growth. (*) Economist in the U.S.