Economic Environment

Gross Domestic Product (GDP) Growth

Economy and society development in the recent years took place in the context of global market turmoil, the world economy still faces a big risk with unpredictable factors and slow down caused by increasing protectionism and then lasting trade war. In such a context, Vietnam registered quite a high growth, with 5.25%-7.02% varied between 2010-2019 and a slowdown in 2020 (because of the affection by the COVID-19 pandemic) with 2.91%, and is expected to recover strongly at 6.5% for 2021. With this growth rate, Vietnam is considered one of the highest growing countries in the region and in the world, thanks to internal resources and, making good use of the opportunities and ability to diversify and adapt flexible practice although our economy is heavily affected by the COVID-19 pandemic. Vietnam’s medium- and long-term economic prospects are very positively forecasted, enhancing by its participation in new bilateral and multilateral trade agreements, and benefiting from the current shift in supply chains to lower cost countries.

Besides the results achieved, Vietnam is still facing many difficulties and challenges. Specifically:

  • The global long-lasting COVID-19 pandemic will be the greatest risk; global trade tensions, leading to increased trade protectionism and financial risks that could be exacerbated by a prolonged pandemic. Domestic consumption continued to be at a low level because household and business incomes decreased, unemployment increased and more businesses stopped their operations. Investment prospects are uneven, private investment remains weak and trade-related foreign investment continues to decline.
  • In 2021, the world economy will continue to face 4 main risks and challenges: (i) epidemic situation is complicated, unpredictable, always has potential risks of outbreak the next wave; (ii) Trade and technology tensions between the US and China and among other major countries; (iii) Geopolitical risks in countries and regions; (iv) Global financial instability risk. Vietnam is also not out of this general impact because our economy is now deeply integrated and has a large openness.
  • The problem of the current economy lies in the lack of demand for loans in the context of economic instability, not interest rates, so it is difficult to cut interest rates to support the economy. Furthermore, trying to squeeze credit into the economy is likely to cause overinvestment which leads to systemic risk.
  • The heavy reliance on import and export makes our economy vulnerable to external shocks. Facing this fact requires Vietnam to further diversify its trading partners, thereby mitigating the shocks of a particular trading partner.
Year 2016 2017 2018 2019 2020 2021 (Est.)
GDP Growth 6.21% 6.81% 7.08% 7.02% 2.91% 6.5%

Sectorial Growth

The structure of the Vietnam’s economy, which is basically made up of three sectors: agriculture, industry and construction, and services, has been undergoing a considerable transformation over the last few years, with the agriculture sector declining its contribution while the industrial and service sectors increasing their shares.

Year 2015 2016 2017 2018 2019 2020
Agriculture, Forestry & Fishery 2.41% 1.36% 2.9% 3.9% 2.01% 2.68%
Industry & Construction 9.64% 7.57% 8% 8.65% 8.9% 3.98%
Services 6.33% 6.98% 7.4% 7.61% 7.3% 2.6%

Foreign Direct Investment (FDI) Flow

Up to 20 March 2021, as many as 33,294 foreign-invested projects from 139 countries and territories with a total registered capital of about US$393.3 billion, had been licensed in Vietnam, in which around US$236.96 billion, equal to 60.25%, has been disbursed. In the first quarter of 2021, there were 234 new foreign-invested projects with a total capital registered of about US$7.2 billion were issued with Investment Registration Certificates (“IRCs”), or increasing by 30.6% compared to the same period of 2020. In addition, there are 161 projects adjusting their investment capital with a total increased capital registered of US$2.1 billion, increasing by 97.4% compared to the same period in 2020; 734 capital contributions and equity acquisitions by foreign investors with the total value of US$ 0.908 billion, decreasing by 58.5% compared to the same period of 2020. For the whole of new & additional funds and capital contribution & equity acquisition, in the first quarter of 2021, investors have registered to invest US$10.13 billion in Vietnam, increasing by 18.5% compared to the same period in 2020. Total capital disbursed in the first quarter of 2021 has reached about US$ 4.1 billion, increasing by 6.5% compared to the same period of 2020. This steadily confirms active signs of Vietnam’s FDI inbound stream even heavily affected by the global long lasting COVID-19 pandemic and consequential international economic crisis and domestic economic downturn.

Foreign investors have invested in 19/21 sectors in the national system of economic sectors. By sectors, the Processing and Manufacturing sector absorbs the largest quantity of foreign capital into Vietnam, with registered capital of about US$230 billion presenting 58.5% of total investment capital and 15,247 projects. The Property & Construction sector stands behind with the registered capital of over US$71.45 billion presenting 15.5% of total investment capital and 2,700 projects; the Electricity, Gas & Water Production and Distribution with the registered capital of around US$33.6 billion presenting 8.5% of total investment capital and 160 projects; the Accommodation & Food services with the registered capital of around US$12.52 billion and 890 projects; and the Wholesale, Retail and Automobile & Motorcycles repair sector with the registered capital of above US$8.53 billion and 5,225 projects.

By localities, all 63 cities and provinces of Vietnam have been fully covered by foreign investment. Nation-wide, foreign investment most focuses on the South, especially Ho Chi Minh City, Hanoi, Binh Duong, Ba Ria-Vung Tau and Dong Nai. Among the principal cities and provinces, HCMC attracting 9,951 projects valued at about US$48.63 billion, Hanoi invested with 6,450 projects valued at US$36.31 billion, and Binh Duong registering 3,954 projects valued at US$35.83 billion are the most attractive ones, which accounted for about 12.4%, 9.23% and 9.1% of the total registered capital in Vietnam. Ba Ria – Vung Tau receiving 498 projects valued at around US$32.77 and Dong Nai receiving 1,753 projects valued at about US$31.89 billion stand behind, with the registered capital accounted for above 8.33% and 8.1% of the total registered capital respectively.

By nationality, 139 different countries and territories have so far invested in Vietnam. The Republic of Korea now is the biggest foreign investor with 9,019 projects and registered capital of over US$71.5 billion presenting 18.1% of total registered capital, followed by Japan investing in 4,666 projects with registered capital of US$62.5 billion presenting 15.9% of total registered capital, Singapore investing in 2,660 projects with registered capital of above US$61.26 billion, Taiwan investing in 2,802 projects with registered capital of abound US$33.78 billion, Hong Kong investing in 1,956 projects with registered capital of over US$26.24 billion, etc. These top five economies have invested in 22,606 projects (about 67.9% of the total licensed projects) with total registered capital of over US$255.3 billion (over 64.91% of the total registered capital). Other countries and territories like British Virgin Islands, China, Malaysia, Thailand and the Netherlands, which have given impetus to get a steady foothold in Vietnam, and are now among the top ten. The “top ten” investors account over 84.91% of the total licensed projects and over 84.69% of the total registered capital in Vietnam.

Official Development Aid (ODA) and Preferential Loan Commitments

Vietnam first received US$1.8 billion of ODA from international donors in 1993. The figure has been increased year by year and during the period from 1993 to June 2019, the total value of ODA commitments to Vietnam amounted to US$89.5 billion, total capital of signed ODA commitments and preferential loans reaching above US$86.66 billion in which about US$7.67 billion is non-refundable, US$3.5 billion/ year on average, has been provided by the community of 51 global donors (28 bilateral donors and 23 multilateral donors); of which, about 80% of Vietnam’s ODA was mobilized from 6 banks, including: the World Bank (WB), Asian Development Bank (ADB), Japan International Cooperation Agency (JICA), Export-Import Bank of Korea (KEXIM), French Development Agency (AFD) and German Reconstruction Bank (KfW). ODA in Vietnam is implemented in 3 main forms, consisted of: non-refundable aid, accounting for about 10-12%; preferential loans accounting for about 80% with low interest rates, withdrawal period from 10-40 years and grace period of 5-10 years (non-refundable element is at least 25%); and mixed ODA accounting for about 8-10%, of which a part is non-refundable aid and a part is preferential loan. Thanks to the positive economic development and the political stability, the ODA commitments by the international donor community to Vietnam although still being quite high follow the trend of being decreased from year to year and predicted to be terminated in next 5 years. Particularly, US$6.144 billion was agreed for 2009, US$8.063 billion for 2010, US$7.88 billion for 2011, almost US$7.4 billion for 2012, over US$7 billion for 2013, about US$5.6 billion for 2014, more than US$3.9 billion for 2015, around US$5.6 billion for 2016, above US$3.46 billion for 2017, around US$1.6 billion for 2018, above US$2.15 billion in 2019, and about US$0.55 billion in the first 6 months of 2020 due to many countries stop or reduce provision of ODA to Vietnam when Vietnam became a lower middle-income country since 2010 and ODA inflows into Vietnam become less preferential when the country “graduated” from the official aid of the International Development Association – IDA (2017) and from the Asian Development Fund – ADF (2019) in going line with the country’s policy on mobilization of ODA and preferential loans focusing on the quality and efficiency of ODA capital and preferential loans to ensure public debt sustainability. Facing that fact, Vietnam has set up a national plan to prioritize the areas in need of ODAs. Vietnam proposed US$ 39.5 billion in aid for the 2016-2020 period, of which US$ 21 billion to central ministries and agencies and US$ 18.5 billion to localities to implement a total of 1,203 projects. If this proposal is met, public debt from ODAs and preferential loans by the end of 2020 is expected to reach about US$ 55 billion, accounting for about 26% of public debt balance and 15% of GDP. In practice, thanks to Vietnam’s capacity and experience on receiving funds, capital from this source was being disbursed progressively better from US$3 billion in 2009, US$3.5 billion in 2010, about US$3.7 billion in 2011, US$4.2 billion in 2012, US$5.1 billion in 2013, around US$5.7 in 2014, US$4.6 billion in 2015, around US$3.7 billion in 2016, around US$3.7 billion in 2017, around US$3 billion in 2018, over US$1.65 in 2019, and around US$0.92 billion in the first 6 months of 2020, US$1.4 billion/ year on average, increasing the total ODAs which have been disbursed so far to about US$65 billion presenting about 75% of total capital of signed ODA commitments and preferential loans. In the 1st quarter of 2021, disbursement of projects using ODAs and preferential loans from foreign donors is low mainly due to the impact of the COVID-19 pandemic, leading to disbursement delay because there is no volume, or the volume is also slow to be confirmed (because management personnel cannot come to Vietnam) as explained by the MoF.

Regional and Global Integration

Regionally, in the position of an official member country of ASEAN since 1995, Vietnam is a party to several intra-ASEAN free trade agreements concluded and signed with the end goal of creating a single market and production base, characterized by free flow of goods, services, and investment, as well as freer flow of capital and labour. These include the following, among others:

  • ASEAN Trade in Goods Agreement (“ATIGA”), which aims to achieve free flow of goods in the region resulting to less trade barriers and deeper economic linkages among Member States, lower business costs, increased trade, and a larger market and economies of scale for businesses;
  • ASEAN Framework Agreement on Services (“AFAS”), which is to work towards free flow of trade in services within the region.  It aimed to substantially eliminate restrictions to trade in services among ASEAN countries in order to improve the efficiency and competitiveness of ASEAN services suppliers. AFAS has been replaced by the ASEAN Trade in Services Agreement (ATISA) signed by ASEAN economic ministers on 23 April with more new content towards opening up, more liberalization of services and took effect on 20 October 2019. It is hoped that ATISA will lay a new foundation for promoting trade in services in the region and improving the competitiveness of service exporting enterprises in ASEAN;
  • ASEAN Comprehensive Investment Agreement (“ACIA”), which is ASEAN’s main economic instrument to realise a free and open investment regime. The ACIA, as one of the economic instruments for realising regional economic integration, aims to create a liberal, facilitative, transparent and competitive investment environment in ASEAN;
  • ASEAN Agreement on the Movement of Natural Persons (“AAMNP”), which streamlines and makes transparent the procedures for immigration applications for the temporary entry or entry of stay of natural persons.  It covers business visitors, intra-corporate transferees, contractual service suppliers, and other categories of natural persons as may be specified by ASEAN Member States;
  • Mutual Recognition Arrangements (MRAs), which are framework arrangements established in support of liberalising and facilitating trade in services.

Globally, thanks to the excellent preparations, Vietnam officially became the 150th member of the WTO from November 2007, and at the same time, achieved the Permanent Normal Trade Relations (PNTR) with the US in the same year. In addition to an ASEAN – China Free Trade Agreement as of 2004 and a Framework Agreement on Comprehensive Economic Cooperation among the ASEAN countries and the Republic of Korea of 2005 supplemented by a separate one between Vietnam and the Republic of Korea taking effect in 2015, the coming into full effect of a Comprehensive Economic Partnership Agreement between ASEAN countries and Japan as well as the signing of another separated one between Vietnam and Japan in 2008 and the coming into force of an ASEAN – India FTA and an ASEAN-Australia-New Zealand FTA in 2010, added by a FTA between Vietnam and Chile becoming effective since 2014.

The negotiations for a FTA between Vietnam and 28 Member States of the EU were initiated in June 2012 and basically ended in December 2015 to create conditions for Vietnam’s products to penetrate more easily into five of the largest economy in the world, with much lower tax rates. The FTA with the EU, together with the Trans-Pacific Partnership Agreement (“TPP”) renamed later as CPTPP, are the two new-generation FTAs, i.e. ​​with the widest range and highest level of commitments from Vietnam so far. In June 2018, FTA with the EU was divided into two Agreements, one is the EU – Vietnam Free Trade Agreement (“EVFTA”) and the other is the EU – Vietnam Investment Protection Agreement (“EVIPA”). Upon completion of legal review process, the two Agreements were signed on 30 June 2019, and EVFTA officially took effect on 1 August 2020 while the EVIPA will come into effect after being ratified by the EU member states.

Additionally, on 29 December 2020, the UK – Vietnam Free Trade Agreement (“UKVFTA”) was officially signed in London and came into force on 31 December 2020. The UKVFTA was negotiated based on the principle of inheriting the commitments made in the EVFTA with necessary amendments to ensure compliance with the bilateral trade framework between Vietnam and the UK.

The coming into effect of a FTA between Vietnam and Eurasian Economic Union (EAEU), including Russia, Belarus, Armenia, Kazakhstan and Kyrgyzstan, in 2016 connects the former ally with ex-URSS space. Concurrently, on 4 February 2016, 12 countries contracting the TPP, including Vietnam, attended the signing ceremony for authentication of TPP wordings in Auckland, New Zealand. With the authorization of the PM, the Minister of Industry and Trade VU Huy Hoang Vietnam on behalf of the GoV signed authenticity of wordings of TPP and 35 bilateral agreements in domains related to financial services, textiles and garment, agriculture, intellectual property, etc. that Vietnam has agreed with the TPP countries. These bilateral agreements were expected to take effect at the same time with TPP in 2018. However, in January 2017, the US’s retreat from the TPP invalidated this Agreement; but 11 remaining member states of TPP decided to continue performance of such Agreement in appropriate form without the US in May 2017, issued their joint declaration to change the name of this Agreement to Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) and to amend some contents of TPP under the CPTPP in November 2017, and officially signed the CPTPP in Santiago City, Chile on 8 March 2018, which was effective for Vietnam since 14 January 2019.

Furthermore, on 12 November 2017, ASEAN and Hong Kong (China) officially signed a Free Trade Agreement (“AHKFTA”) and a Bilateral Investment Agreement (“AHKIA”). AHKFTA officially came into effect with Hong Kong and 5 ASEAN member countries (including Laos, Myanmar, Singapore, Thailand and Vietnam) from 11 June 2019, similar to AHKIA from 17 June 2019.

Recently, the Regional Comprehensive Economic Partnership (“RCEP”) Agreement among ASEAN and the six partners who have signed FTAs with ASEAN, including China, the Republic of Korea, Japan, India (just withdrew from this agreement), Australia and New Zealand negotiated from May 2013 was executed by 15 countries on 15 November 2020; this shall establish the largest free trade area in the world.

Besides, several FTAs are being prepared, e.g. the negotiations on a FTA between Vietnam and European Free Trade Area (EFTA) consisted of Switzerland, Norway, Iceland and Liechtenstein initiated in May 2012; the same on a FTA between Vietnam and Israel took place from December 2015.