Vietnam’s path from a command to market-oriented economy has largely been along the same path as that of China. Where China’s ‘opening-up and reform’ kicked-off in the 1970s Vietnam’s ‘renovation’ reforms kicked-off in 1986. Where China joined the World Trade Organisation in 2001 Vietnam followed suit, signing on in 2007. And when China’s housing market buckled during the pandemic, Vietnam’s did too not long thereafter.
It’s with this in mind, that when reports of a private consumption problem in China surfaced, it made sense to wonder if Vietnam might be facing those same problems too. And indeed, whereas it’s fairly easy to assume that Vietnam’s booming economy might correlate to booming consumer consumption, the numbers paint a somewhat different picture.
Retail spending in November this year compared to November last year, for example, showed an increase in retail sales of just 1.68 percent, according to data from Vietnam’s General Office of Statistics. A year to date comparison was slightly more positive at 2.74 percent, however, this still feels low for an economy expected to grow around 7 percent this year. Moreover, this is in an economy in which average wages have increased 7.04 percent since the third quarter of 2023 and in which a 6 percent minimum wage increase kicked-in in July.
That is to say, consumers are making more money but this has resulted in only a limited increase in retail spending.
There look to be a number of reasons for this.
Firstly, prices of essential goods have been on the rise and these are taking up a bigger piece of consumers’ budgets. The retail electricity price, for example, increased by 4.8 percent in October and housing rental costs have also been rising an average of .53 percent a month since September, in line with higher housing costs overall linked to the broader downturn in the housing market.
Furthermore, safe-haven investment options have become more attractive over the last year or so too. Gold prices, for example, skyrocketed back in January (up to 20 percent higher than the world gold price at times); US dollars have been strong across the board; and savings interest rates have been climbing.
Moreover, consumer confidence has taken a beating and could even be getting worse. A June 2024 consumer sentiment survey conducted by IFM Research found that 56 percent of respondents rated the economy this year the same or worse than last year which was up from 44 percent in January.
Indeed, spending on non-essential goods just does not seem to be considered prudent at this particular juncture.
That said, stagnant retail sales is not necessarily a problem in and of itself.
Vietnam has managed to maintain strong economic growth on the back of a huge manufacturing-to-export base for some time now. That said, there are very real threats to this cornerstone of the economy coming down the pipeline. In particular, the change of administration in the US with President-elect Trump threatening hefty import tariffs on goods entering the United States.
Furthermore, inflation is falling and falling quickly–in July, Vietnam’s CPI was sitting at 4.27 percent, however, this had fallen to just 2.77 percent in November. This is in part due to prices in several key sectors actually deflating over the last 12 months, specifically: transport, post and telecommunications, and education–keeping inflation under control can be challenging but tackling deflation can be much worse.
That said, steps have been taken to try to stimulate consumer spending.
A 2 percent cut to Vietnam’s Value-Added Tax introduced post-pandemic has been extended to the middle of June next year, for one.
The bigger strategy, however, looks to be to pump more credit into the market by pressuring Vietnamese banks to lend more.
A similar strategy last year was relatively effective in the short term with about US$28.6 billion pumped into the economy in the last two months of the year with retail sales rising 2.55 percent in December as a result. In January, however, they went on to fall 7.37 percent, all the more significant in that the month before the Lunar New Year holiday (which fell in the second week of February this year) is when retail sales usually peak.
With this in mind, this strategy looks to be treating the symptom rather than the disease and this has its limits. Consumers can only borrow so much safely and bad debts are already up this year. Moreover, there is a risk that consumers could borrow to invest in assets like gold or US dollars or even crypto rather than spend on consumer goods. That’s not to mention that those debts and the interest payments they attract will also need to be serviced again taking a bite out of consumers’ hip pockets.
The point here is that these solutions don’t look to be addressing the crux of the issue and as such can only really create temporary results.
All of that is to say, that entering the Vietnam market right now for consumer goods should be considered carefully, particularly for non-essential goods. Moreover, whereas taking a broad view of Vietnam’s economy can reveal a myriad of opportunities, it always pays to dig a little deeper before making any major investment decisions.