Political upheaval in Vietnam is holding its economy back

Officials have become extremely cautious about signing off on public investment decisions – and foreign investors are taking note.

Vietnam in many ways seems the belle of the ball in Southeast Asia. Economically it has been amongst the top beneficiaries as multinational firms and supply chains look to diversify out of China. And that’s because in part geo-strategically it also seems well positioned: what other country could host the leaders of the United States, China and Russia within the space of a year?

But look beyond the headlines, and the picture is less rosy. 2023 was a tough year for the Vietnamese economy, with growth at just 5%. There has been some pickup this year, with the economy expected to expand by 6%. That would be pretty good for most countries but is subpar by Vietnam’s standards, with growth averaging over 7% in the pre-Covid years and hopes of reaching high income status by 2045.

Political upheaval, a contentious anti-corruption campaign, and stalled decision making are undermining the recovery and risk limiting Vietnam’s ability to benefit from shifting global supply chains.

Although beginning in 2016, the “blazing furnace” anti-corruption campaign took on real heat in 2023. In a span of a year, there were 839 new corruption cases with 2,276 public servants charged across all levels of government – triple the amount from the previous year. Resignations came from all ranks, including a former state president and his two deputy prime ministers.

The private sector was not spared either. Executives of the country’s largest companies in various sectors such as real estate and healthcare have been arrested. The courts are already reaching verdicts. Earlier this year, former real estate mogul Truong My Lan was sentenced to death for embezzling US$12 billion – almost 3% of the country’s 2022 GDP.

Unsurprisingly, total investment last year contracted. Tighter financial regulations in the real estate sector stalled new bond issuance, which makes up about a third of Vietnam’s corporate bond issuance. Private domestic investment fell, particularly as the real estate sector was hit with tighter financial regulations while increased public investment and stable FDI growth was not enough to offset this decline.

Fiscal and monetary authorities responded with expansionary measures. There was some additional disbursement of planned spending in the Socio-economic Recovery plan, although the disbursement rate remained low at 63.4% of the approved budget. On the monetary side, the State Bank of Vietnam lowered the key policy rate four times.

This year Vietnam’s economy is in recovery mode. The economy grew by 5.7% in the first quarter, up from 3.4% for the same period last year. Easing inflation globally also means Vietnamese exports are doing better.

Downside risks, however, loom large.

Slow job creation and stagnant household incomes mean domestic consumption remains weak. Turmoil in the financial and real estate sectors casts a long shadow over the future of private investment. Rising global protectionism and the spectre of a return to Trumpian American tariff wars also pose clear risks for Vietnam’s heavily export-led economy.

Yet the political upheaval of the anti-corruption campaign seems to be the most pressing constraint. High-profile resignations in the Politburo and the Central Committee are spreading fear through lower-ranking public servants. Administrative processes are lagging as officials are disinclined to sign approvals. The halt in government services can be felt across many sectors, from small business permits to major renewable energy project approvals. In addition to bureaucratic inertia, mass resignations are reducing execution capabilities, especially in local governments.

All major international financial institutions – the International Monetary Fund, Asian Development Bank and World Bank – identify accelerating public investment as the key to faster economic recovery in the short to medium run. But with Vietnamese officials extremely cautious to sign off on public investment decisions, disbursement of planned spending remains low. Only 22.3% of the planned spending had been disbursed as of May this year.

This is becoming a bottleneck for attracting foreign investors. Multinational companies are increasingly looking for clean and reliable sources of energy, both of which are hot issues in Vietnam. The sector saw high-profile resignations including a deputy prime minister and a minster for trade and industry following corruption allegations. Vietnam has the highest solar and wind generation in ASEAN, but infrastructure development has not kept pace. Many energy infrastructure projects are behind schedule because of long administrative processes. Last year, the North experienced blackouts due to insufficient supply while solar projects in Central and South Vietnam were asked to curtail production due to grid overload.

Multinationals are already reacting; last year Intel decided not to expand operations in Vietnam, citing reliable electricity supply as a concern. More will follow suit, or worse, move on if policy paralysis continues to impede the complementary public investments required. If that happens, Vietnam could miss its moment.

By Ahmed Albayrak & Roland Rajah – The Interpreter / Lowy Institute – July 8, 2024