Fitch lowers Vietnam’s 2023 growth forecasts to 4.7%

Current growth rates are lower than projected or prospective, and the economy has the capacity to expand faster. The economy regularly increases at a rate much over 6.0%, with growth averaging 7.0% from 2014 to 2019. 

Growth picked up from 4.1% year on year in the second quarter of 2023 to 5.3% in the third quarter. But this was entirely driven by a rebound in industry growth, from 1.0% to 5.2%. 

Moreover, other indications suggest that industrial activity actually weakened at the end of the third quarter. Particularly, the manufacturing PMI slipped from 50.5 in August to 49.7 in September, bringing it back below the 50-mark separating expansion from contraction. 

Vietnam’s export-oriented industrial sector still faces plenty of headwinds due to global demand being set to remain weak over the coming quarters against the backdrop of persistently high interest rates. 

The health of the US economy is especially important for Vietnam, as it typically accounts for 30% of total goods exports. 

“We forecast the US to enter a recession in the middle of 2024. If we are right, then weak US demand will remain a significant drag on Vietnam’s exports as has been the case over the past year”, according to the data from Fitch. 

In addition, China is Vietnam’s largest trading partner and second-largest export destination, but its economic growth recovery has decreased, providing limited support to Vietnam's exports and is expected to fade. Due to weak demand from the country’s property sector, it will continue to constrain demand from China. 

Vietnam also has its own set of real estate sector challenges, which we think will hold back the domestic economy over the coming year. Recall that last year’s sharp tightening in credit conditions and the government’s anti-corruption campaign led to a severe funding squeeze within Vietnam’s property sector. 

This culminated in several major developers missing bond payments earlier this year. Available data from CBRE suggests that real estate activity has weakened significantly too. 

In Ho Chi Minh City, there were only 15 newly launched landed property projects in H1 2023, substantially lower than what is typically the case at that time of year (around 150–600 units). Perhaps more striking, condominium prices fell by an appreciable 4.8% quarter-on-quarter in the second quarter, the first decline since 2018. 

Banks have significant exposure to the real estate sector through property sector loans, accounting for roughly a fifth of total lending in 2022. It is therefore unsurprising that the non-performing loan ratio has jumped very sharply, from 1.5% throughout much of 2022 to 2.8% at the start of 2023.

Loan growth has slowed significantly too, from last year's peak of 17.0% to 9.1%, most recently in May. Banks will remain risk-averse in their lending decisions over the coming quarters, given that uncertainty around the housing market is likely to last for a while yet. 

This will weigh on Vietnam's highly leveraged economy; the private sector credit-to-GDP ratio is 126%, far higher than most other economies at a similar stage of development.