Vietnam’s Economic Growth Forecast: Bright Prospects Amid Global Challenges

Paromita Das

GG News Bureau

New Delhi, 19^th October. Vietnam’s economic trajectory continues to impress, with the World Bank forecasting a growth rate of 6.1% by the end of 2024 and an even higher 6.5% for 2025. These updated forecasts surpass earlier estimates, signaling a robust recovery driven by manufacturing exports, increased tourism, and foreign investment. If achieved, this growth would position Vietnam ahead of several emerging Southeast Asian economies like Thailand, Cambodia, Malaysia, Indonesia, and the Philippines.

The country’s remarkable performance stems from its strategic economic policies, foreign direct investment (FDI) influx, and geopolitical positioning, allowing it to take advantage of global shifts such as the US-China rivalry. However, Vietnam still faces significant challenges, including an overreliance on the foreign-investment-driven sector and internal hurdles related to corruption, political repression, and climate-related disruptions.

Key Drivers of Vietnam’s Growth

1. Foreign Direct Investment (FDI) Inflows

FDI plays a crucial role in Vietnam’s economic expansion. Between 2021 and 2023, ASEAN nations, including Vietnam, attracted approximately $236 billion annually in FDI, according to the ASEAN Investment Report 2024. Vietnam, in particular, has emerged as a top destination for investors seeking alternatives to China due to the ongoing geopolitical tensions between Washington and Beijing.

As Western businesses diversify away from China—a strategy often referred to as “China Plus One”—Vietnam has become a key beneficiary. The country’s proximity to China, similar culture, and stable political environment make it a preferred destination for companies that are moving operations out of China but still wish to remain in the region. This shift has been especially evident in sectors like electronics, textiles, and technology manufacturing.

According to Nguyen Khac Giang, a researcher and visiting fellow at the ISEAS Institute, Vietnam’s domestic advantages, including a population of 100 million with a rising middle class, coupled with its geopolitical importance in the China-US power competition, will help sustain its growth momentum.

2. Manufacturing and Trade Ties

Vietnam’s economic growth has been bolstered by its expanding role in global supply chains, particularly in manufacturing. Apple, one of the world’s most valuable companies, has increasingly relied on Vietnam as a key manufacturing hub, investing over $15 billion in the country over the past five years. With its low labor costs and a young, tech-savvy workforce—58% of the population is younger than 35—Vietnam has become an attractive destination for Western companies looking to reduce operational costs.

The United States is Vietnam’s second-largest trade partner and its biggest export market. In September 2023, the two nations strengthened their relationship by signing a “Comprehensive Strategic Partnership for Peace, Cooperation, and Sustainable Development,” further solidifying Vietnam’s status as a critical economic partner for the US. This agreement aims to increase bilateral trade, technological cooperation, and investment flows, all of which are expected to contribute to Vietnam’s robust growth forecast.

3. Tourism Revival

Vietnam’s tourism industry, which had suffered significantly during the COVID-19 pandemic, is now rebounding strongly. With restrictions lifted and international travel resuming, Vietnam is once again becoming a top destination for travelers, especially from Asia and Europe. The resurgence of tourism has provided a significant boost to the country’s service sector, which complements its export-driven manufacturing economy.

4. Strategic Geopolitical Position

Vietnam’s geographic location and diplomatic flexibility have also contributed to its economic success. Hanoi has managed to navigate complex relationships with major global powers, including the US and China. Although China remains Vietnam’s largest trading partner and plays a crucial role in its manufacturing sector, Vietnam has also positioned itself as a favored partner of Western economies, particularly the US, Japan, and the European Union.

This balance is critical in the context of the “China Plus One” strategy, where multinational corporations seek to diversify supply chains to reduce reliance on China. While Vietnam cannot fully replace China in global manufacturing due to its smaller size and capacity, it has become an important regional player that benefits from geopolitical shifts.

Challenges Ahead for Vietnam

Despite its strong growth prospects, Vietnam faces several domestic challenges that could impede its long-term economic trajectory.

1. Overreliance on Foreign Direct Investment

Vietnam’s economy is heavily dependent on foreign capital, particularly in manufacturing, which exposes it to global market fluctuations and geopolitical risks. While FDI has driven much of the country’s recent growth, Vietnam must work to reduce its reliance on foreign capital by strengthening its domestic industries, particularly small and medium-sized enterprises (SMEs). Many local companies have struggled to compete with foreign firms, and their underperformance could hinder Vietnam’s goal of achieving sustainable, inclusive growth.

2. Corruption and Political Challenges

Vietnam’s reputation on issues like corruption, political censorship, and human rights remains a significant concern. According to international organizations, Vietnam scores poorly on transparency and civic freedoms, and these issues could dampen investor confidence, particularly among Western economies that prioritize governance standards. The country’s one-party system, controlled by the Communist Party, has raised concerns about the long-term stability and inclusiveness of its governance model.

3. Environmental and Climate Risks

Vietnam’s economy is highly vulnerable to climate change. Typhoons, flooding, and rising sea levels have disrupted food production and infrastructure, leading to increased prices for essential goods. Recent events, such as Typhoon Yagi, have highlighted the country’s susceptibility to environmental challenges. Vietnam also faces frequent electricity shortages, which hinder industrial production and growth.

To address these challenges, experts like Sebastian Eckardt, a practice manager at the World Bank, emphasize the need for structural reforms. Eckardt has called on the Vietnamese government to deepen reforms, enhance public investment, and manage emerging financial risks to sustain long-term growth.

4. Renewable Energy and Infrastructure Gaps

Vietnam’s rapid economic expansion has strained its energy infrastructure, leading to frequent power outages. The country must increase its investment in renewable energy sources to meet growing demand and reduce its reliance on coal-fired power plants. This shift will not only help stabilize energy supplies but also align Vietnam with global climate goals, making it an attractive destination for environmentally conscious investors.

Conclusion: Vietnam’s Path to Sustainable Growth

Vietnam’s economic outlook is undeniably positive, with growth forecasts for 2024 and 2025 outpacing many of its regional neighbors. Its strategic location, young workforce, and growing middle class have made it a key player in global supply chains, particularly as Western firms seek alternatives to China. The country’s ability to navigate geopolitical tensions and attract foreign investment has been instrumental in its growth.

However, Vietnam must address its internal challenges to sustain this momentum. Structural reforms aimed at reducing corruption, improving governance, and building resilience against climate risks will be critical to ensuring long-term, sustainable growth. Additionally, Vietnam must develop its domestic industries and improve the competitiveness of its SMEs to reduce overreliance on foreign capital.

Vietnam is poised for significant economic success in the coming years, but the country must strike a delicate balance between leveraging its foreign investment advantages and developing its domestic economy. The government’s ability to push through structural reforms, improve governance, and address environmental challenges will be essential to maintaining its growth trajectory.

As Vietnam integrates further into global supply chains and becomes an increasingly important player in the “China Plus One” strategy, it will face greater scrutiny from international investors who prioritize transparency, sustainability, and political stability. By addressing these concerns head-on, Vietnam can solidify its position as one of Southeast Asia’s most dynamic and attractive economies for global investors.