Is Vietnam running out of steam as an EU investment hub?

Nothing appeared to be able to stop Vietnam’s economic growth, which averaged almost 6 per cent annually between 2010 and 2022. The country had one of Asia’s highest growth rates during the Covid-19 pandemic in 2020.

But the economy is now wheezing. Exports in the first five months of the year were down 11.6 per cent, compared to the same period in 2022, while exports to EU markets fell by 6.5 per cent, according to government data released in June.

Over the same period, industrial output fell 2 per cent. Foreign sales of smartphones, Vietnam’s biggest export earner, dropped by 16 per cent. First quarter growth stood at just 3.3 per cent.

Forecaster Oxford Economics recently cut its growth projections for Vietnam from 4.2 to 3 per cent for the year. Vietnam’s government expects growth of 6.5 per cent — but it was already lower than the 8 per cent achieved last year.

Domestic consumption is also down. The property market, bloated on credit, is looking unsteady, despite Vietnam’s central bank lowering interest rates.

Power blackouts in the north of the country have even affected multinational manufacturers, including Samsung, the South Korean tech giant whose local subsidiary is by far the largest company in Vietnam.

Business groups told DW that a reliable energy supply is a must, and whether Hanoi can ensure that will define whether Vietnam retains a reputation as Asia’s investment hub.

“Vietnam is in a tough position and our members are definitely taking big hits, and this is leading to some tough business decisions,” said Guido van Rooy, executive director of the Dutch Business Association in Vietnam. The Netherlands is the biggest investor in Vietnam among the EU members.

Gabor Fluit, chairman of European Chamber of Commerce (EuroCham) in Vietnam, took a more ominous tone.

“Vietnam stands at a crossroads, and the future of its economy is not yet certain,” he told DW. “The current situation could be a temporary setback or a sign of deeper issues. What happens in the coming months and years will determine the direction Vietnam takes.”

Economic downturns in Vietnam’s export partners, such as in Europe, the US and China, are dragging down industrial output. EU-Vietnam trade rose by 5.1 per cent last year, up to around €69.7 billion ($76.3 billion), while Vietnamese exports to EU markets rose by more than a tenth. The export of goods and services now account for more than 90 per cent of Vietnam’s economy, up from around two-thirds a decade ago, according to World Bank data.

Inflation, now around 2.4 per cent, is weakening domestic consumption and falling interest rates.

More systemic problems are also at play. Critical infrastructure, especially energy production and transport, is now showing signs of years of underinvestment.

At the same time, the ruling Communist Party’s “blazing furnace” anti-corruption campaign is beginning to show how it has dented economic activity.

The graft campaign has taken many scalps, including that of Nguyen Xuan Phuc, who officially resigned as state president earlier this year for the “wrongdoings and violations” of subordinates.

But businesses are being stymied by over-regulation, analysts say, while local governments are wary of being accused of mismanagement of state funds by their superiors, so they are tightening purse strings and nitpicking over new business licenses.

Marco Förster, head of ASEAN advisory at Dezan Shira & Associates, a consultancy firm, said it’s important to remember economies are “cyclical.”

“It’s not unusual to see periods of slower growth,” he said. “Despite the current difficulties, Vietnam is predicted to experience rapid economic growth in the medium term due to its emerging position as a leading manufacturing hub in Southeast Asia, its well-educated population, and increased capital investment,” Förster added.

Bank HSBC last week forecasted that Vietnams economy will rebound in the last quarter of the year, and it could end 2023 with 5 per cent growth.

Vietnam still has a young, increasingly educated and competitive workforce – the major pull for foreign investors, according to US credit ratings agency S&P Global Ratings.

“The stable outlook reflects our expectation that Vietnam’s economy will recover over the next 24 months as global demand picks up and the country gradually addresses its domestic challenges,” it noted in a report published last week.

In May, Prime Minister Pham Minh Chinh announced the go-ahead for a major power development plan to help Vietnam transition away from coal.

The long term outlook of Vietnam “remains very high potential, and that is why in the foreseeable future, I don’t think any business will give up and will keep looking for solutions to mitigate the challenges in the short-term,” said van Rooy of the Dutch Business Association in Vietnam.

A senior foreign diplomat who didn’t want to be named told DW that Vietnam’s economic blip has been a wakeup call for the ruling Communist Party and a sign that the country needs to move quicker on economic reform.

The diplomat said perhaps some members of the Politburo, the Vietnamese Communist Party’s highest body, had grown so assured of economic growth that they thought they could intervene in business affairs and neglect the market’s volatility.

That could be an insinuation about the Communist Party’s anti-corruption campaign, which has purged many higher-ranking party members who were seen to be on its reform wing and trusted by the business community.

Some European investorsthink that, because of the economic dip, the Vietnamese government will now have to offer more incentives to businesses. Van Rooy speculated that it might lower the VAT rate or reform laws on purchasing land, a major bugbear for foreign investors.

“Addressing the ongoing power shortages faced by EuroCham members across the country is also a non-negotiable issue,” said trade body president Fluit. “Manufacturers surely cannot meet demand without a reliable energy supply. If Vietnam fails to provide this, foreign investors are likely to look elsewhere,” he added.

“Therefore, it is absolutely necessary for the government to find bold policy solutions while also considering the broader international economic landscape,” he said. The Vietnamese government’s response will shape the country’s economy for years to come. “The European business community eagerly awaits their next steps,” Fluit said.