It was two years ago this month that real estate tycoon Truong My Lan was arrested for a fraud that would see her sentenced to death. This was about the same time that it was becoming clear China’s biggest property developer, Evergrande, was teetering on the edge of insolvency. Combined these revelations sent Vietnam’s real estate industry into a spin and the economy more broadly by extension.
Fast forward two years, and the situation, at least on the surface, looks to be markedly different, with Vietnam’s General Office of Statistics reporting GDP growth of 7.4 percent for the third quarter of the year, much higher than had been forecast. As a result, Vietnam’s domestic media has been filled with commentary espousing the country’s shrew economic prowess.
This, however, has served to mask a number of underlying challenges facing the economy that probably should not be overlooked.
For one, the aforementioned real estate challenges have still not been properly addressed with a good deal of real estate developers still in distress. For example, last month, an initial profit of US$142.2 million for the first half of the year, for Novaland, Vietnam’s second-biggest property developer, turned into a loss on audit of US$296.6 million. Furthermore, Hoa Binh Construction was delisted from the Ho Chi Minh City Stock Exchange and FLC Group not only missed its second-quarter financial statements but is also still missing financial statements from 2021, 2022, and 2023.
This is in line with debt in the real estate sector growing to at least US$9.7 billion, at the end of the first half of 2024, a 10 percent increase over the start of the year and a 52 percent increase over the end of 2022. A decent chunk of this debt looks to be held by Vietnam’s banks as well, which have seen their bad debts growing at pace with one analysis finding US$1.86 billion in bad debts among 29 of Vietnam’s biggest banks, an increase of 20.8 percent over the end of last year.
What’s more, banks are still being pushed to lend in order to meet a credit growth target of 15 percent (how this number was reached is not entirely clear) set back in January. This may also be adding to pressure on the local currency which has been fighting a strong US dollar for the better part of the year.
That said, this has largely been kept under control by the State Bank using its foreign exchange reserves, however, this has left the country in the unenviable position in that what’s left of its US dollar reserves are only enough to cover about two and half months worth of imports as opposed to the recommended three. Notably, the State Bank did move to replenish its US dollar reserves in September, buying up about US$250 million dollars worth, although this is somewhat piecemeal–it has about US$84 billion, according to IMF estimates, but should have about US$95 billion based on September import data, leaving a gap of about US$11 billion.
But it’s not just US dollar reserves that the State Bank has been dipping into, it’s also been selling gold from its stash to try to keep the local gold price stable. This, however, hasn’t stymied demand with the regulated local price of gold bars still well above the world gold price and the unregulated price of gold rings reaching all-time highs.
What’s particularly pertinent about this development is that all of that capital tied up in gold and hidden at home is capital not fed to Vietnam’s consumer market machine making the country even more dependent on external markets for growth.
Indeed, increased trade over the last year has been highlighted as one of the key drivers of Vietnam’s growing GDP–total trade up about 16.5 percent year on year. A closer look, however, reveals a few interesting points.
Vietnam’s trade balance has increased this year but its surplus has not. In fact, it’s actually down a little over US$4 billion year-on-year.
Arguably this could be that Vietnamese are simply consuming more imports, however, retail sales are mostly flat averaging growth of just 0.08 percent between January and the end of August, according to Ministry of Industry and Trade data.
In this context, what seems more likely, is that this indicates little value is being added to the goods Vietnam is importing before they are being re-exported and this could speak to the quality of the increased foreign direct investment Vietnam is taking in.
And on that point, it’s worth noting that the bulk of the foreign direct investment Vietnam received in the third quarter of the year did not come from developed countries with a strong focus on worker well-being and environmental protection. Instead, it mostly came from China which accounted for US$2.79 billion worth of FDI into Vietnam between July and September.
In second place, with US$1.77 billion, was Singapore, which does have a better track record on ESG issues, however, it’s worth noting it’s quite common for companies from China and even Vietnam to establish offices in the island state to avoid complex bureaucratic procedures for just about everything at home. Ergo, it seems likely that at least some of this FDI may be from China and even Vietnam itself.
On that note, there was also a jump in FDI from the Cayman Islands, British Virgin Islands, and Samoa, all well-known tax havens, which delivered a combined US$1.6 billion in FDI in Q3 or around 19 percent of their collective annual GDP of around US$8.6 billion–it’s likely these investments too are made on behalf of third countries.
What’s more, the bulk of foreign direct investments made in Q3 were in manufacturing and processing which accounted for US$4.95 billion or around 51.56 percent of the US$9.6 billion of capital registered.
Combined this would support the thesis that Chinese firms are shipping goods to Vietnam, labelling them as made in Vietnam, and then shipping them on to the US to avoid antidumping duties.
The point being that it’s not clear that this is good quality foreign direct investment–the kind that provides skills training and good wages (which received a slight bump in Q3 but only after taking a dip of about the same amount in Q2) that provides long-term, sustainable growth.
That is to say that Vietnam’s short-term GDP growth may be coming at a cost to its long-term prosperity and therefore elevating these figures without some realistic context may not be prudent.
That said, Vietnam’s economy, along with its business environment, is very dynamic and can turn on a dime, and with this in mind, foreign firms looking to keep ahead of any changes should make sure to subscribe to the-shiv.