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Vietnam Positive Economic Outlook for 2023 has Geopolitical Risks by Dr. Vijay Sakhuja

Article 003/2023

At the beginning of 2023, by all accounts, a significant number of people across the globe have been immunized against the COVID 19 virus. Also, majority of the countries have weathered the pandemic well and effectively contained re-infections resulting in low numbers of hospitalizations and deaths since the outbreak of the COVID-19 pandemic three years ago. However the International Monetary Fund (IMF) global economic growth assessment is not very encouraging and it is estimated that there will be a fall in global growth from an estimated “3.4 percent in 2022 to 2.9 percent in 2023” which could rise to 3.1 percent in 2024.

This has been attributed to at least four factors i.e. the ongoing Russia Ukraine war which continues to impact global supply chains; associated increase in energy and food prices across the globe; higher inflationary trends across economies; and continuing COVID19 infections in China despite stringent COVID 19 lockdowns. However, late last month, the China had eased restrictions allowing urban Chinese to go back to ancestral family homes to make annual New Year pilgrimage. In case China is able to sustain economic recovery, there are good reasons to believe that global growth in 2023 will be positive with cross-border spillovers to the world and the neighbours such as Vietnam.

Meanwhile according to a recently published global research report “Vietnam – Still enjoying high-growth status” by Standard Chartered Bank, the country’s economic growth is pegged at “7.2% in 2023 and 6.7% in 2024” which comes close on the heels of “solid recovery to 8.0% in 2022”. It has also been noted that among the Southeast Asian countries, “Vietnam is emerging as one of the go-to places where big enterprises choose to build research and development centres”. This is good news for the Vietnamese businesses given that foreign direct investment (FDI) in 2023 will see a significant increase.

The Foreign Investment Agency under the Ministry of Planning and Investment (MPI) announced that in 2022, the country’s FDI totaled US$ 22.4 billion and in 2023 the FDI will be in the order of US$ 36-38 billion USD which fares very well against last year. For instance in January 2023, licenses for 153 new FDI projects worth 1.2 billion USD were granted, which is 48.5% in number and 3.1 times in value. These were led by Singapore (US$ 767.6 million) followed by China with US$ 198.2 million.

Nguyen Chi Dung, the Minister of Planning and Investment has noted that Vietnam’s sustainable development strategy pivots on “developing innovation and financial centers at the regional and international levels” by improving infrastructure and ensuring high quality of human resources to support the incoming FDI. These will enable Vietnam to be a preferred investment destination for investors.

In 2022, as many as 108 countries and territories invested in Vietnam and among these Singapore ranked top in the list (US$ 6.46 billion) and it was followed by China, Republic of Korea, and Japan. This year Taiwan will find itself into the list of countries that find Vietnam a popular destination for investments. This has been attributed to the “improving the business investment environment, creating trust with investors, and effectively exploiting the advantages of free trade agreements”.

While these are all positive indicators, at least four risks have been identified which can potentially dampen Vietnam’s economic growth in 2023 i.e. “Impact from the economic downturn of major markets; Zero COVID-19 policy from China; Exchange rate and Inflation”. The US and the EU, Vietnam’s major trading partners, are likely to experience “slow economic growth” which is a negative factor for Vietnese exports to these destinations. At the domestic level, “rising inflation”, and “low domestic consumption” could distress business expansion plans preclude economic growth.

It is also important to flag at least two geopolitical risks to Vietnam’s economic growth. First is the Russia Ukraine war which will soon enter the second year. Currently there are no signs as yet from either side to work for settlement of disputes that range from sovereignty issues, interference in internal affairs of Russia in occupied territories, and importantly the continued political support by the United States and the EU Member States as well as supply of military to Ukraine. Although Vietnam’s trade with Russia and Ukraine is not very high, last year, Vietnam’s exports to Russia had declined.

Close home, the US China tensions continue and in October 2022, when Vietnamese Communist Party chief Nguyen Phu Trong met Chinese President Xi Jinping. The latter had mentioned that their respective leaders should “never let anyone interfere” ostensibly referring to the United States. Similarly, Vietnam is also worried about its military supply chains from Russia given that nearly 80 per cent of its military hardware is of Russian origin. These can potentially attract US pressure asking Hanoi to diversify military sourcing.

Despite the difficulties and geopolitical risks that Vietnam will face in 2023, Vietnam's economy will still have a bright prospect due to its internal strength, economic and political stability, and experience in adapting and dealing with economic and political crises in the world in recent years.

(Dr Vijay Sakhuja is a security analyst. The views in the article are solely the author’s and does not reflect the views of CAS)
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