Key Drivers of Vietnam's Economic Growth in Second Half of 2024

Vietnam's economy has demonstrated strong recovery in the second quarter, and if this positive trajectory continues, the GDP growth for 2024 is projected to reach 6-6.5%. This expected growth is supported by increasing public spending and advancements in the tourism sector, aligning with the growth target set by the Vietnamese Government.

This statement was made by Mr. Pyon Young Hwan, Director of Global Trading Center at Shinhan Bank Vietnam, about the economic outlook and financial market of Vietnam in the second half of 2024.

At the start of 2024, Shinhan Bank's economic experts predicted that Vietnam's GDP growth would exceed 5% for the year. However, with the strong economic recovery observed in the first half of 2024, will Shinhan Bank revise its forecast to reflect this more optimistic outlook?

The initial growth forecast of 5% was based on the challenges faced by the Vietnamese economy, including the protracted recovery process due to sustained high interest rates globally and the sluggish recovery of the Chinese economy and other international markets. However, the forecast for the second half of the year anticipates factors that are expected to support strong growth in Vietnam.

The global economy was expected to recover well on subdued inflation and robust consumption growth. As a result, import and export - one of the key factors of economic growth in the second half of 2024 - will continue to grow on the continued growth momentum from the first half of 2024.

In the second quarter, GDP surged by 6.9%, accompanied by a rise in employment as export-driven manufacturing industries experienced a resurgence. Additionally, in July 2024, the government's decision to raise the base salary for civil servants is expected to further boost domestic consumption.

A key driver of Vietnam's economic development is the presence of Foreign Direct Investment (FDI) firms, which play a significant role in the country's export sector. Enhanced diplomatic relations with developed economies are expected to further stimulate foreign investment flows into Vietnam.

The disbursement rate of public investment funds has steadily improved due to the Government's measures. The timely completion of spending procedures for major road construction projects is expected to boost economic growth and create employment opportunities.

Thus, Vietnam is well-positioned with favorable internal and external factors. Provided there are no significant external shocks in the latter half of the year and the current positive trends persist, the growth target set by the Government is entirely attainable.

Vietnam's economy grew by 6.42% in the second quarter, and if this trend continues, GDP growth for 2024 is projected to reach 6-6.5%

What do you think about the current competitiveness of foreign banks in Vietnam compared to domestic rivals?

The first objective of foreign banks in Vietnam is to support companies from their home countries operating in the Vietnamese market. The Vietnamese government has established a flexible investment environment, which has enhanced confidence and comfort for foreign enterprises. As a result, foreign companies, including Shinhan Bank Vietnam, can operate with assurance and continue to thrive in this market.

Nevertheless, there has been a notable decline in the number of Korean investors in Vietnam in recent years. For foreign banks, this trend presents both opportunities and challenges. If compatriot companies increase their investments in Vietnam, it would be a significant advantage for these banks. Conversely, a decrease in the number of foreign companies or a reduction in their investment levels would pose substantial challenges to their operations.

Notably, many Vietnamese banks are also currently expanding their business operations, applying good strategies and building many competitive services and products to attract FDI companies because their potential customers in the past, property firms, are struggling with difficulties. As a result, they will have to find other customers, including FDI firms.

Many major Vietnamese banks have established FDI divisions, offering preferential interest rates and superior services to FDI companies, particularly those from Singapore, Korea, Japan, and others. As a result, there is intense competition between foreign and domestic banks to attract and retain FDI clients.

Consequently, many foreign banks in Vietnam have had to adapt their business strategies. For instance, Shinhan Bank Vietnam will broaden its focus beyond Korean companies to include firms from Japan, China, Taiwan, and others. Additionally, the bank will develop tailored products and services to effectively engage with Vietnamese companies.

The USD/VND exchange rate was quite volatile in the first half of 2024. What is your forecast for Vietnam's monetary policy and interest rates in the second half?

Since the beginning of the year, the USD/VND exchange rate has risen due to external factors including the interest rate differential with the US, the slow recovery of the Chinese economy, and geopolitical conflicts. This rate has reached a record high, reflecting long-term USD strength. However, with the Federal Reserve signaling a potential rate cut, the USD has weakened, leading to a significant decline in the USD/VND exchange rate.

Regarding interest rates, the State Bank of Vietnam (SBV) has reduced policy rates by a cumulative 150 basis points over four successive adjustments in the past year to stimulate the economy and support households and businesses. The current refinancing rate stands at 4.5%. Following reductions in lending and deposit rates, commercial banks are now focusing on raising deposit interest rates to attract customers and boost deposit balances.

Regarding the SBV's monetary policy, recent significant pressures on prices and exchange rates may lead the central bank to exercise greater caution in implementing further rate cuts. Consequently, it is likely that the SBV will maintain the current operating interest rates to support the economy. In the medium to long term, as major developed countries begin to lower their interest rates, the SBV will have greater flexibility to reduce rates, thereby bolstering economic growth.

The USD/VND exchange rate is anticipated to face short-term depreciation pressures due to external factors such as the Middle East conflict, rising interest rate differentials with the US, and a sluggish recovery in China. However, improvements in the manufacturing and export sectors, along with the SBV's interventions through gold and forex reserve sales, will help moderate the rise in the USD/VND exchange rate. Overall, the Vietnamese dong is expected to weaken slightly but should recover once the Fed adjusts its monetary policy and factors like public investment spending and strong FDI inflows take effect.

Thank you very much!

By Anh Mai, Vietnam Business Forum