Vietnam

Overall, indicators show that Vietnam's short-term financing risk is medium, with monitoring needed when it comes to elevated credit growth, the banking sector, foreign exchange reserves and external debt.

Real domestic credit growth remains elevated. We estimate it showed a downtrend at the beginning of 2023, dropping from nearly +14% y/y in January 2022 to +6.6% y/y in January 2023. However, it has then remained at a relatively elevated level and visibly accelerated in late 2024 (+13% y/y in September 2024), in part on the back of low inflation and easy monetary conditions – the State Bank of Vietnam cut the benchmark refinancing rate from 6% to 4.5% in 2023. On the one hand, these policy moves helped alleviating a credit crunch in the property sector, where many firms were facing repayment and refinancing difficulties, leading to an increasing risk of bad debts in the banking sector. On the other hand, continuously rising credit will raise private sector debt-sustainability risks if the economy slows down more than expected.

Foreign exchange (FX) reserves in Vietnam peaked in early 2022 and declined quickly through the year, before roughly stabilizing. The ratio of money supply M2 to FX reserves increased from 529% at the end of 2021 to nearly 820% in August 2024 (a ratio below 400% is considered adequate). Likewise, the number of months of imports that is covered by FX reserves decreased from 3.9 at the end of 2021 to 2.5 in August 2024 (at least four months is usually deemed appropriate). A heavily managed exchange rate regime so far sustained the risk of a large depreciation of the VND. However, if external demand conditions were to deteriorate significantly and FX reserves to fall further, the central bank may at some point no longer be able to defend the VND. External debt of around 35% of GDP is relatively elevated for an emerging country, but it remains at a decent level when compared to exports.