Taking Stock: Vietnam Economic Update, March 2023

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Part I. Recent Economic Developments and Prospects 

Vietnam's economy experienced a strong rebound in 2022, with growth reaching 8.0 percent, exceeding its average rates of 7.1 percent from 2016 to 2019. This growth was partly due to a low base effect, driven by a rebound in domestic private consumption following COVID-19 and solid performance in export-oriented manufacturing. However, the public sector's contribution to growth was limited due to weak execution of public investment programs. While employment recovered to pre-COVID-19 levels in 2022, weaker global demand led to slowing orders and exports in Q4-2022, and to renewed labor market pressures. Consumer Price Index (CPI) inflation averaged 3.1 percent. Vietnam’s financial sector experienced increased pressure in 2022 while fiscal balances are estimated to register a surplus.

Reflecting domestic and external headwinds, GDP growth is expected to slow to 6.3 percent in 2023. The services-sector growth will moderate as low base-effects from post-COVID-19 fade. The main driver of growth will be domestic demand, which may be affected by higher estimated inflation (4.5 percent average) in 2023. Given softer external demand, contribution of net exports will weigh on growth. The economy is expected to benefit from the partial implementation of the capital investment of the 2022-2023 Economic Support Program.  An agile monetary policy—closely coordinated with fiscal policy objectives—would help keep domestic inflation under control.

Risks to the outlook are broadly balanced. On the downside, weaker than expected growth in Vietnam’s major export markets – the US, China, and the eurozone- could affect export prospects. Potentially higher inflation could affect domestic demand. Further tightening of global financial conditions could affect Vietnam’s financial sector, which suffers from weaknesses in the balance sheets in the corporate, banking and household sectors, affecting domestic investor and consumer sentiment, and from incomplete reforms. Implementation challenges could also hamper the execution of the planned public investment program. On the upside, improved growth prospects in China, the US, or EU and stronger than expected global demand could lift exports and hence growth above the baseline projection. 

Part II. Harnessing the potential of the services sector for growth

The services sector has become the largest sector of Vietnam's economy, growing from 40.7 percent of GDP in 2010 to 44.6 percent of GDP in 2019. The sector's share of employment has increased from 29.6 percent in 2010 and 35.3 percent in 2019. As the second-largest source of jobs, the sector has absorbed a significant portion of labor leaving the agriculture sector.

However, Vietnam's services sector's productivity and employment performance lags behind its peers. Despite increasing by 34.3 percent between 2011-2019, Vietnam's services sector labor productivity (measured by value-added per worker) remains well below that of many regional and aspirational peers.  For example, Vietnam’s services sector labor productivity (measured by value added per worker) was US$5,000 (constant dollar) per worker in 2019, it is still well below comparators, including Malaysia (US$20,900), the Philippines (US$9,300), and Indonesia (US$7,300). 

Looking ahead, if properly leveraged, services can play a crucial role in supporting Vietnam's sustained productivity growth and achieving its goal of becoming a high-income economy by 2045. All high-income economies have a large services sector that provides the largest sources of employment and value addition.  The small scale of firms, restrictions to services trade, low technological adoption and few inter-sectoral linkages affect the productivity of the services sector.

Policy reforms are necessary to unlock the sector's potential to contribute to Vietnam's sustained economic growth. Priority actions and questions for further investigation include:

• Reduce restrictions to services trade and the entry for foreign investment, undertake business environment reforms to enhance competition and access to finance for domestic firms
• Focus reforms in services subsectors that can promote further growth of other sectors of the economy, particularly manufacturing
• How to encourage firm level incremental innovation of products and processes and adoption of existing technologies, including digital technologies?
• How can policy makers support an upgrade of managerial skills and practices?