OECD Economic Surveys: Viet Nam 2023

Executive summary

Challenges remain despite the well-managed COVID crisis

Viet Nam has been quick to recover from the downturns caused by the pandemic, owing to an agile policy response. The COVID-19 pandemic interrupted three decades of sustained high economic growth. Nevertheless, swift and tailored sanitary measures meant Viet Nam did not experience large-scale outbreaks until mid-2021. Thereafter, the vaccination campaign was fast. Economic growth outperformed most other Southeast Asian economies through the pandemic, providing a solid basis for further economic progress. Viet Nam is a socialist-oriented market economy. The Socio-Economic Development Strategy 2021-2030 pledges to continue bold economic reforms to attain upper middle-income country status.

Nevertheless, external conditions threaten the recovery. Active participation in global trade has been a source of Viet Nam’s prosperity (Figure 1), but it means that it is exposed to abrupt changes in external conditions. Geopolitical uncertainties are weighing on Viet Nam’s short-term economic prospects.

Figure 1. Trade integration is strong

Source: OECD, Economic Outlook database; CEIC.

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Growth is projected to be solid, but there are substantial downside risks (Table 1). Domestic demand is projected to further recover as sanitary restrictions are removed. Real GDP is anticipated to grow by 6.5% in 2023 and maintain the speed at 6.6% in 2024. Supply chain disruptions may continue to weigh on global trade. Downside risks include unexpectedly high inflation and a rapid tightening of monetary policy in Viet Nam in response to inflationary pressures or downward pressure on the exchange rate. On the upside, foreign investors could increasingly appreciate the stable investment climate of Viet Nam amid heightened global uncertainty.

Table 1. The recovery is expected to continue

	2021	2022	2023	2024
Real GDP	2.6	8.0	6.5	6.6
Private consumption	1.9	7.8	6.3	6.4
Exports	7.4	8.4	5.4	6.9
Imports	15.8	2.2	4.3	5.9
Inflation (CPI)	1.8	3.2	4.3	3.7
Government fiscal balance*	-3.4	-4.3	-3.6	-2.9
Government gross debt*	38.7	38.8	38.7	38.2
Current account balance*	-2.1	-0.9	0.4	1.2

Note: * denotes a percentage of GDP. Actual fiscal data are calculated by the OECD and different from the figures published by the government.

Source: MoF; GSO; SBV; and OECD calculations.

The policy priority is to tame inflation, while being supportive of the recovery

Inflation has picked up due to rising energy and commodity prices. Monetary policy normalisation in advanced economies has widened the gap in interest rates, further stoking inflation in Viet Nam by adding downward pressure to the exchange rate. This is eroding the purchasing power of households, providing a headwind to the nascent recovery of private consumption and increasing poverty risks for vulnerable households.

Monetary policy will need to be tightened earlier if inflation accelerates more rapidly than anticipated. Notwithstanding the highly uncertain inflation outlook, maintaining price stability should be the primary focus. Delaying unwinding highly accommodative policy would risk cementing higher inflation expectations.

Fiscal space could be used to provide additional support to mitigate the impact of rising costs of living on vulnerable groups. The value-added tax and the tax on fossil fuels have already been cut temporarily. Additional but more targeted support may be needed if downside risks materialise. Public investment included in the latest stimulus package of early 2022 should be implemented as planned. Simplifying public investment procedures and regulations would accelerate disbursement.

Enhancing social protection is urgent to prepare for population ageing

As Viet Nam’s society is rapidly ageing, strengthening social protection is increasingly crucial. By 2050, the old-age dependency rate will increase from the current 11% to 33%, to be one of the highest in Southeast Asia. Public support to the elderly should thus be further strengthened.

Figure 2. Public pension coverage is low

Note: Excluding the government sector.

Source: GSO, Economic Census, Enterprise Survey, Labour Force Survey and Statistical Yearbook, various years; and ILO, ILOStat database.

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Social security should play a more important role. A comprehensive social security system has been evolving. Health insurance now covers almost 90% of the population. During the pandemic, unemployment insurance acted as an automatic stabiliser. Nevertheless, the public pension covers only one third of the labour force (Figure 2), with patterns of under-coverage strongly associated with employment status. Tackling informality is crucial to address weak compliance among small businesses in making social insurance contributions. In addition, the sustainability of the public pension needs to be strengthened. Hence, restricting early withdrawal is of the utmost importance. Old-age social safety nets for self-employed workers, who account for half of total employment but are not covered by the compulsory public pension, should also be enhanced by expanding the current tax-funded social pension.

Fiscal revenues need to be increased to fund growing spending. Besides population ageing, government expenditure will also continue to increase due to other spending needs, notably, investment in transport, digital and green infrastructure. This requires a concrete medium-term fiscal plan. Deductions and exemptions in the corporate and personal income tax should be reduced and the reduced VAT rate should be applied more narrowly. In addition, the tax on non-agricultural land should be replaced with a recurrent tax levied on both buildings and land.

The business climate needs to be further improved

Boosting labour productivity is crucial to achieve sustained high economic growth. Between 1990 and 2019, the economy maintained remarkably high average annual growth of 7%, supported by rapid capital accumulation and ample labour supply from rural areas. This growth pattern will become more difficult to sustain as the transition from an agrarian to an industrial economy is fully realised and as the labour force grows more slowly. Growth should thus be driven by advanced technologies and improved economic efficiency. To achieve this, it is crucial to restore market dynamism through further simplifying administrative procedures.

Ensuring a level playing field is key to creating a better business climate. Owing to extensive reform efforts over past decades, Viet Nam is one of the most open markets in Southeast Asia and has attracted a large amount of foreign investment. Restrictions on competition are lower than in other emerging market economies, but there is scope for improvement (Figure 3). In particular, state involvement is still strong in some sectors, where state-owned enterprises (SOEs) are dominant, notably in energy, transport and telecommunications. In addition to reducing entry barriers, renewed efforts to improve SOE governance is urgently needed. Moreover, the competition authority should be given more power to level the playing field for all market participants, including SOEs. Continued efforts to tackle corruption are also crucial to improve the overall business climate further.

Figure 3. Barriers to competition could be lowered

Note: Best/worst represents the OECD best/worst performing country.

Source: OECD, Product Market Regulation database and OECD-WBG, Product Market Regulation database.

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The digital transformation needs to be accelerated on all fronts

Viet Nam is among the leaders of digitalisation in Southeast Asia. Uptake of digital tools has grown fast, and adoption of digital technologies, such as e-commerce, telemedicine and telework accelerated during the pandemic. Viet Nam is a hotbed of digital start-ups, home to three digital unicorn companies (private start-ups with value over USD 1 billion). Nonetheless, there is room for further improvement.

Digital infrastructure is more developed than in other Southeast Asian countries, but is still not sufficient. Investment in high quality infrastructure, such as fibre optics, will help boost uptake and the dissemination of advanced digital technologies. In particular, greater liberalisation in the telecommunications market is crucial to stimulate investment.

Viet Nam needs to enhance the enabling environment to accelerate digitalisation. Like in many other countries, the digital transformation has been changing all facets of the economy. The government was quick to deliver digital services, such as customs, and digital and cashless payments have become more common. To further promote digitalisation, more resources should be allocated to the technical and vocational education and training and on-the-job training to nurture digital skills and talents. Various regulations, including those for cross-border data flows should also be eased, while strengthening privacy protection and cybersecurity. These reforms are also crucial to deepen production sophistication which can enhance Viet Nam’s integration to the global economy.

Achieving net zero emissions calls for bolder policy action

The authorities have committed to net zero emissions by 2050. However, past high economic growth was underpinned by increasing energy consumption, mostly coming from fossil fuels. The share of hydroelectric power is now declining, making coal the major source of electricity. As a result, carbon emissions are increasing fast. Reducing the high emission intensity of production is crucial to simultaneously achieve both net zero emissions and high economic growth (Figure 4).

Figure 4. Emission intensity is high

Source: OECD, Green Growth Indicators database.

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A comprehensive programme is required to transition to a low carbon economy. To guide all economic sectors to a low carbon path, a clear and predictable long-term climate strategy should be prepared. This strategy should include an energy sector reform which is crucial to upscale investment in renewable energy. All fossil fuels are now subject to the environmental protection tax, but it is difficult to reflect the social costs of carbon fully. This should be improved to influence consumption patterns of households and businesses more explicitly. A planned set up of a carbon market should be accelerated to encourage investment into renewable energy in the power sector. Adopting a green taxonomy could also help financial resources shift to low-carbon investment.

Main findings and key recommendations

 

Main findings	Key recommendations
Improving macroeconomic policy and fiscal sustainability
Despite rapid reopening of the economy, external uncertainties are weighing on growth prospects. Furthermore, the risk of COVID-19 outbreaks, potentially stemming from the emergence of a new variant, remains.	Consider providing targeted financial support to households strongly affected by high energy and food prices. Accelerate disbursement of public investment, including by simplifying public investment procedures and regulations.
Inflation has picked up and is expected to remain high due to rising energy and commodity prices and supply chain disruptions. At the same time, policy rate hikes in advanced economies are putting downward pressure on the exchange rate which could also push up domestic inflation.	Raise policy rates earlier if there are signs that inflation is rising more rapidly and persistently than expected.
Government spending is expected to increase, especially for investments to facilitate the digital transformation and the green transition. A rapidly ageing population will also require more public spending on social benefits, including healthcare.	Prepare a concrete medium-term fiscal consolidation plan to further enhance revenue, improve spending efficiency and increase the transparency of debt management based on plausible economic projections.
The tax system has great complexity due to a number of exemptions, deductions, reduced rates and other special treatments, weakening the tax base, inducing low compliance and increasing collection costs.	Expand the tax base by reducing exemptions and deductions in the corporate income tax and the personal income tax and narrowing the application of the reduced VAT rate.
Fiscal revenues from property taxes are small compared with other Southeast Asian countries, while revenues from sales of land use rights have increased from the recent buoyant property market.	Replace the land tax on non-agricultural land with a recurrent tax on immovable property levied on both buildings and land. Value immovable property more frequently based on the market value of the property.
Strengthening the functioning of social security
Social insurance can be withdrawn as a lump sum even before reaching pensionable age. A significant number of young individuals apply for early withdrawals, which threatens the sustainability of the public pension system.	Restrict the lump sum withdrawal scheme for those who have not reached pensionable age, eventually phasing it out.
A number of household businesses are staying small as administrative and financial costs for them to grow are high, resulting in high rates of informality.	Simplify and reduce various administrative and financial burdens for household businesses to encourage them to formalise and grow.
Enhancing product market competition and boosting productivity
Viet Nam has made remarkable progress in improving the business climate with the aim of boosting productivity. Total factor productivity has rebounded during the 2010s. Nonetheless, large differences still prevail between provinces, and some procedures remain cumbersome.	Continue to simplify business regulations, including through stronger use of digital technologies in areas such as tax payments and insolvency procedures.
Despite the transfer of SOE ownership to the Commission for the Management of State Capital at Enterprises, reductions in government holdings of SOE equities have been slower than planned and ministries and government agencies are still perceived as having an active influence on the management of these firms.	Clarify the functions of the state as owner of companies and regulator of the same companies in order to ensure effective separation.
The establishment of a single National Competition Commission (NCC) envisaged by the 2018 Law on Competition has not yet been realised and the incumbent Competition and Consumer Agency (CCA) lacks independence and a sufficient budget.	Give the competition authority the power to take action against state-owned enterprises at central and local levels that abuse their market power, to advocate for competition and to perform market studies.
Considerable progress has been made in combating corruption in the public sector, setting up comprehensive legal frameworks and enhancing international commitment. However, despite declines in measures of perceived corruption, many stakeholders, including the international business community, consider that fighting corruption remains a priority.	Continue to make strong commitments to enhancing anti-corruption efforts, allocating more government resources and increasing awareness among people and businesses, including public sector workers of local governments
Boosting the digital economy
In the telecommunications sector, foreign investors still face some restrictions. Consequently, key telecommunication markets are dominated by three state-owned enterprises, holding back potential economy-wide productivity gains.	Open telecommunications markets to foreign investors, especially by accelerating the adoption and implementation of a new Law on Telecommunications to reduce barriers to foreign entry and easing the foreign ownership restrictions.
Both basic and advanced digital skills are lacking, and few students opt for academic courses in science and computing areas.	Enhance digital skills by providing more training opportunities for basic skills and allocating more resources to the technical and vocational education and training system and on-the-job IT training of advanced skills.
Achieving net zero emissions by 2050
Viet Nam’s greenhouse gas emissions have increased faster than GDP, and the country is one of the largest emitters relative to GDP. The current emissions targets of the authorities include reaching net zero emissions by 2050.	Adopt a clear and predictable climate strategy, with consistent long-term goals, especially in relation to greenhouse gas emissions and energy sector reform.
Coal-fired power plants have become the main source of electricity but the government plans to shift away from coal gradually with no new investment after 2030.	Halt investment in new coal-fired power plants as planned, and strengthen investment incentives for renewable energy sources, especially onshore and offshore wind energy.
An environmental tax partially reflects the social cost of carbon for gasoline prices, but other fossil fuels face a lower tax burden than gasoline, relative to their respective carbon content. A market for trading emission allowances and carbon credits is planned but the implementation horizon is long.	Accelerate the implementation of the carbon market, starting with an emission trading system in high emission sectors, including the power sector, and eventually expand its coverage, in order to ensure that energy prices can duly reflect cost and increasingly include the negative externalities from greenhouse gas emissions.