Vietnam’s next big challenge is all about money
Central bank reforms that reflect the power of markets are long overdue.
Fresh from a bruising tussle with the White House over tariffs, Vietnam is confronting a different but no less delicate challenge. The country’s Communist leaders want to develop a modern financial system that better reflects market forces — and a central bank that’s fit for the task of managing it.
Pulling this off by next year will be quite a feat; less ambitious overhauls have taken far longer to complete and faced plenty of teething problems. Getting this right is key to the long-term monetary stability of the nation, which clocked impressive growth by hitching itself to supply chains and the voracious appetite of American consumers. It’s also important for statecraft. This is more than just Federal Reserve envy. No less a role model than China recognizes the power that America, and the Fed as custodian of the dollar, can deploy. Beijing has also sought to make the People’s Bank of China a more formidable presence.
As strong as Vietnam’s performance has been, it needs to brace for more difficult times. That’s implicit in Prime Minister Pham Minh Chinh’s call for an overhaul of the way the State Bank of Vietnam steers the economy. He recently ordered the authority to devise a way to retire credit-growth targeting and come up with better methods to patrol the banking sector. Chinh has asked for a review to be completed quickly, and expects the new arrangements to kick in next year. This amounts to a major change in how business is done.
The State Bank, known as SBV, is dangling some carrots. It said last week that reserve requirements will be halved for lenders that take over weaker institutions. As well as cleaning up distressed banks, the move frees up cash that officials hope will be injected into the economy. Balance sheets will be under strain; not all customers will survive the levies imposed by US President Donald Trump.
On the face of it, Vietnam has been a huge success. Gross domestic product expanded by almost 7% in the first quarter, one of the fastest clips in the region. GDP per capita was just $700 in 1986 before the country opened to foreign investment after the end of the Cold War, but had climbed to almost $4,500 in 2023, according to the World Bank. Hanoi has set a goal of becoming a high-income nation by mid-century. The government announced on Tuesday it will bolster spending on public works and urban development, and the stock market is attracting upbeat appraisals.
These achievements, though impressive, mask vulnerabilities. The premier’s forecast for growth this year of more than 8% is optimistic. While the tariffs agreed with Trump are lower than the sky-high level the White House initially imposed, they will take some getting used to. The bullish sentiment gripping Vietnam’s equities could evaporate quickly, as it has in past cycles. The currency, the dong, recently fell to a record low against the greenback. This is a timely update to the financial system and monetary policy.
Reliance on credit quotas is a legacy of central planning and state direction of the economy. Official interest rates, as a consequence, don’t reflect underlying conditions or the SBV’s true intentions, according to Oxford Economics. “They are weak signals for markets,” Adam Ahmad Samdin, an economist at the firm, wrote in a note. Credit goals are fine when you want to rein in the economy, but aren’t much use if demand for loans isn’t there.
Once you go down this reform path, a number of things are up for grabs. How much independence will the new SBV have? What about a formal inflation target that provides the anchor for rate setting? The currency story becomes interesting, too. The dong has been allowed to fluctuate, but only within certain ranges. That band has been gradually widened. I doubt it will fully float; one-party states tend to be averse to this. More flexibility, with the risks that entails, is probably inevitable.
Vietnam is gearing for a global economy that offers less benign conditions for a low-cost manufacturer to take off. Rapid industrialization and welcoming corporations looking to hedge their bets on China might have been the easy part. A state-of-the-art central bank is something no serious country can do without.
By Daniel Moss – Bloomberg Agency – August 21, 2025