For Vietnam to become Asia's fastest-growing economy, a lot must go its way. That includes more infrastructure spending, cheaper and more accessible funding, and de-escalating trade tensions, according to a recent joint S&P Global Ratings and FiinRatings conference in Hanoi.

We expect Vietnam's economic growth to be among the fastest in the world in 2025. But global trade tensions will make it hard to reach the country's 8% real GDP growth target, in our view. Vietnam also requires significant additional domestic and foreign capital for infrastructure development. And banking reforms are crucial to mitigate credit risks.

We highlight some of the key talking points from the panelists that cover the most common investor questions.

Vietnam's Economy

How could trade tensions affect near-term growth?

Louis Kuijs, Asia-Pacific Chief Economist:  External headwinds are intensifying. The good news is the U.S. administration has yet to impose blanket tariffs on Vietnam's exports. And the country's exporters will see their competitiveness in the U.S. market improve somewhat due to the tariffs on China and, perhaps, other economies.

The bad news is that the tariffs on China will cause the country to grow more slowly, thus weakening demand for Vietnam's exports. In addition, Chinese manufacturers are likely to push harder in regional markets as exporting to the U.S. becomes less attractive to them.

Moreover, the U.S. administration's "Fair and Reciprocal Plan" could lead to direct U.S. levies on Vietnam's exports. That is because of the country's large bilateral goods trade surplus with the U.S. and its presence on the U.S. Treasury's so-called monitoring list regarding exchange rate policy.

Exports to the U.S. contribute 12% to Vietnam's economy (in value added terms)--the highest among Asian economies. Consequently, any U.S. tariffs would have a relatively large impact on growth (see chart 1).

Chart 1

If trade tensions intensify, which sectors will be most affected?

Vietnam's corporate sector is among the most exposed in Asia. For Vietnamese companies, we distinguish between the direct exposure of export to the U.S., and the indirect impact that intensifying trade tensions could have on the economy of regional neighbors.

The sectors most affected directly:

• Textile and apparels (about 35% of total exports to the U.S.);
• Electronics manufacturing (about 35%); and
• Miscellaneous capital goods (about 10%).

Sectors most affected indirectly:

• Electronics, textile and foodstuffs, which Vietnamese companies export to the main regional trading partners (China, Japan, and South Korea);
• Automobile, discretionary consumer products and real estate, if slower growth also hits consumer confidence; and
• Metals, textile and apparel, the most exposed sectors to dumping risk.

Higher U.S. tariffs on China could incentivize trade through Vietnam. Vietnam is, however, currently more of an assembly hub, with a high proportion of subcomponents from abroad, especially from China. Any local content requirement rule for exports to the U.S. could mute any comparative advantage Vietnam has over its neighbors.

Is Vietnam likely to meet its 8% growth target in 2025? How does its growth outlook compare with that of its peers?

It won't be easy. U.S. tariff action is likely to weigh on Vietnam's growth in 2025. The spillover effect from tariffs on investment and the resulting uncertainty will compound the hit. More generally, Vietnam's trade dependency exposes it to the headwinds of globalization. At 79%, its export-to-GDP ratio is among the highest globally.

The authorities' ambitious infrastructure development plan will support growth. Also, the real estate sector seems to be recovering and domestic consumption is robust. Still, the government's campaign to cut the public sector will affect confidence and income growth.

In all, we expect 6.5%-7% GDP growth in 2025 and roughly the same in the two years thereafter. While that is lower than the government's target, in our view Vietnam could be racing India for the title of fastest-growing Asian economy.

What are Vietnam's medium- to long-term challenges? How is it positioned to overcome them?

Vietnam's development and growth in the past 20 years has been impressive. However, this does not ensure steady growth (see chart 2). In our view, the country's key long-term challenge lies in its ability to move up the value chain, toward the production of higher value-added manufacturing and services. Achieving this will require domestic firms and employees to increasingly master technology, and that will involve reforms.

The country will need to increase the involvement of domestic firms in global value chains, open up domestic services industries to competition, and upskill the workforce. Such achievements require comprehensive reforms across the economy. Vietnam's robust track record and reputation as a manufacturing hub suggest it is well-positioned to move up the value chain and grow in coming decades.

Chart 2

Vietnam Sovereign

How could sweeping government restructuring reforms affect the ratings on Vietnam?

Andrew Wood, primary analyst, Vietnam sovereign ratings:   Successful execution and implementation of the reforms will determine the effect, if any, on the sovereign ratings (BB+/Stable/B). The restructuring drive aims to improve government efficiency, by focusing responsibilities at core ministries. The government's reforms are set to cut at least 20% of public sector employment in the process, according to media reports.

If successful, the major reforms could support Vietnam's high growth ambitions by enhancing policy execution and streamlining bureaucracy. These initiatives complement other recent policy improvements that we believe are constructive for Vietnam's policy landscape, including the updated land law in 2024, and resolution 50 in 2019.

There may be some teething issues in the early stages of the reform process as ministries are restructured, combined, or closed.

Upon completion, the reforms could lead to better allocation of fiscal resources, especially where current expenditure is re-directed to more productive categories.

Leaner bureaucracy may also enhance policy drafting and execution by the government and broader public sector, boosting investment and supporting private sector participation in the Vietnam economy. These developments could set a more sustainable base for Vietnam's long-term economic growth prospects.

How do the ratings factor in Vietnam's fiscal dynamics?

We think Vietnam's ambitious economic growth targets could suggest a more supportive fiscal program, in addition to the government's ongoing reforms to improve the business environment. This is further underscored by the external trade risks looming on the horizon, which could take the wind out of the sails of export-led growth, at least for a period of time.

In recent years, Vietnam's debt accumulation has been slower than its fiscal deficit targets due to strong revenue collection and controlled spending.

With a modest net debt stock of just 28% of GDP, and an interest burden of about 5.5% of revenues, the government is likely to find space for more accommodative fiscal policy, in our opinion. Gross public and publicly guaranteed debt, at about 33% of GDP, is also far below the government's statutory ceiling of 60% of GDP.

By our forecasts, the government's debt accumulation will accelerate in 2025-2027 in line with the higher growth target. This will coincide with the government restructuring campaign.

Compared with regional peers, Vietnam's government debt dynamics will remain favorable, even as the pace of its debt accumulation accelerates (see chart 3). The government benefits from a low cost of capital relative to the level of development of its economy, in part because of requirements for major financial institutions to hold government debt, and their willingness to do so. This will keep Vietnam's interest costs in check even if it does adopt a brawnier fiscal stance.

Chart 3

What developments could put upward pressure on the long-term sovereign rating, which is one notch below investment grade?

Considerable improvements to its institutional settings, and augmented policy predictability and transparency, including in external data provision and reliability. Such changes in the policy environment could further bolster investor confidence in Vietnam's economic and financial stability.

We may also raise the ratings if Vietnam becomes a net external creditor, which could potentially be driven by higher current account surpluses than we expect and a concomitant rise in external assets.

A sustained decline in the accumulation of net general government debt to less than 3% of GDP a year, combined with a fall in the government's interest burden to below 5% of revenues, could also put upward pressure on the ratings.

Vietnam's Corporate Sector

How does leverage at Vietnamese companies compare with other Southeast Asian countries?

Xavier Jean, sector lead, Southeast Asian corporates:  Not too badly. We see no widespread corporate leverage build-up taking place in 2025, with Vietnam's corporate sector maintaining moderate leverage levels compared with regional peers (see chart 4). The macroeconomic setting is supportive, with sustained domestic consumption and accelerating government spending. Green shoots are appearing in the real estate sector, supporting corporate revenue and profit growth.

Chart 4

The main obstacle for corporate leverage in 2025 is a sharp escalation in trade tensions. This could further erode operating performance at export-oriented manufacturers, with spill over on consumption, consumer sentiment, and real estate.

Pockets of leverage and potential financial stress are likely to persist in the real estate, construction, and some export-oriented manufacturing sectors, which have among the highest leverage ratios (see chart 5).

Chart 5

Leverage at larger Vietnamese companies and potential contagion risk remain watchpoints. Debt has climbed more rapidly in this segment than at smaller firms (see chart 6). The trend is not unique to Vietnam: larger domestic conglomerates in Vietnam, Thailand, and the Philippines as well have taken advantage of easier access to debt funding than smaller peers to execute often debt-funded growth strategies.

Chart 6

Large firms often have more financial flexibility, well-diversified funding sources, and a range of monetizable assets to weather potential funding disruptions. However, creditor confidence at one such large domestic firm can rapidly erode at first signs of tightening liquidity or operating wobbles. This, in turn, could influence broader creditor sentiment toward domestic companies given the sheer size of some of these national champions and deep integration within domestic funding sources.

In this respect, the path to profitability of the automotive operations of large conglomerate Vingroup Joint Stock Company is a barometer for corporate health and creditor sentiment in Vietnam, in our view. The group is the largest private borrower in the country, has substantial reported debt (about Vietnamese dong (VND) 230 trillion as of Dec. 31, 2024). Its liabilities were about 700 trillion VND as of Dec. 31, 2024, slightly over 5% of Vietnam's GDP. The company's still loss-making automobile operations and large capital spending will continue to squeeze its liquidity.

What is S&P Global Ratings' outlook on the real estate sector after the sharp slowdown in the past several years?

The residential real estate market is showing some signs of improvement, especially in the large cities of HaNoi and Ho Chi Minh City. There, more limited supply and the launch of higher-end projects have boosted prices. While volumes are still far off the highs of 2018-2019, they have recovered somewhat as consumer confidence returned in 2024 and bank lending to the real estate sector picked up.

But this year, better operating conditions and volumes are unlikely to strengthen balance sheets of developers--among the most leveraged domestic corporations. Over half of the listed real estate firms in Vietnam have a debt-to-EBITDA ratio exceeding 8.0x--much higher than developers in other emerging markets such as Indonesia or the Philippines. We believe it will take at least two to three years of sustained profits to start seeing modest debt reduction.

Nor is financial discipline a given in Vietnam's real estate market, which is characterized by boom and bust periods and rapid shifts in strategies. We expect more conducive demand to lead to increasing working capital requirements as developers resume projects, accelerate construction on new launches, and, in some cases, spending on new land.

Company-level liquidity remains tight based, according to 2024 results. On average, we estimate that listed real estate developers have enough cash to support only about half of their short-term debt. Debt levels ballooned following the downturn and developers turned to short-dated debt. This is common for corporates in emerging markets where a limited savings pool constrains longer-term funding.

Funding availability to the sector is, however, marginally more supportive than during the funding freeze of late 2022 and 2023. Bank loans to the sector have recovered. Issuances in the domestic market fell by about 5% in 2024--though part of the new issuances in 2023 were due to restructuring and inflated 2023 issuance numbers. But average tenors remain short at about three years.

How do you assess liquidity and funding access in the corporate sector? How does it compare with other ASEAN countries?

Short-dated debt is likely to remain a feature for Vietnam Inc. and a constraint for the corporate sector's ability to fund projects with long payback such as infrastructure. Typically, bank loans and bond financing have one to three years tenor.

Short-term financing exposes the corporate sector to rollover risk if the credit conditions tighten. Financial difficulties at real estate developer No Va Land Investment Group Corporation in 2022 froze domestic bond issuances in the real estate and construction sectors for several quarters. The ensuing halt in domestic issuances affected the refinancing ability of other highly leveraged corporate sectors.

Short-dated debt is likely to remain a credit constraint even among larger firms. We estimate that short-term debt accounted for about half of the reported debt in 2024 at Vietnam's 50 largest listed companies by assets (see chart 7). That's about three times higher than the large Malaysian and Thai firms and nearly twice the largest firms in Indonesia.

Chart 7

Reducing reliance on short-term funding is likely to take a few more years. Banks are only likely to extend longer-term loans if they can charge higher rates, accumulate capital, and gain more secure long-term collateral. It will also take time, longer tenors or lower lending rates for the bond market to attract a wider base of private borrowers.

Vietnam's Infrastructure Sector

What is the scale of the infrastructure investment required?

Abhishek Dangra, Analytical Manager, Southeast Asian corporates:   It's meaningful. The economy is rapidly growing, the share of manufacturing activities is increasing, the population is rising, and infrastructure gaps persist. The parliament recently increased the 2025 infrastructure spending target to about US$36 billion (to 7% of GDP from 6%). This highlights the importance of infrastructure investments for driving growth. Among Southeast Asian countries, Vietnam allocates one of the largest shares of its budget to infrastructure.

Infrastructure investments are essential in continuing to attract foreign direct investment in the region by reducing logistics costs for the growing manufacturing sector. The government plans to spend 80% of the 2025 budget on increasing power generation capacity, and strengthening the energy and transportation network. Vietnam is likely to maintain the scale of infrastructure investments for much of the decade. By 2030, the government plans to double its power generation capacity, road and highway network, and airport passenger capacity, while increasing seaport's capacity by half. Up to 8% of freight traffic moves by road.

The government is also prioritizing power sector investments as it estimates annual power demand will grow at 9% for the foreseeable future. It estimates a total capital expenditure (capex) need of US$135 billion over 2021-2030, and US$400 billion over 2030-2050 to meet its Power Development Plan VIII (PDP8) targets.

What are the key funding challenges?

Vietnam's ability to provide a stable contractual, legal and regulatory regime with strong protections will be key in attracting long-term international lenders and investments to fund its infrastructure.

Most of the infrastructure investments in Vietnam are state-funded or driven by state-owned entities. Recent government crackdowns on corruption and plans to merge and eliminate certain agencies can delay approval and execution.

Geopolitical considerations to reduce reliance and dependence on foreign countries for infrastructure development are reflected in Vietnam's decision to domestically fund even large projects such as a US$67 billion high-speed rail link. Further requirement for technology transfer, domestic content and training to transfer operations may in some cases limit international bids.

Apart from government and government-owned entities, bank funding is the primary source for infrastructure investments as capital markets are still nascent. The State Bank of Vietnam (SBV) has set a 16% credit growth target for domestic banks, which largely meets such mandates.

The power sector illustrates the funding landscape. Vietnam Electricity (EVN) is the key power major responsible for driving the government's power sector agenda. Large capex investments by EVN will require government support as inadequate tariff increases and rising capex continue to squeeze its financial health. The government updated the public private partnership (PPP) framework in 2021 to further attract private sector investments.

Some of the previous power projects in Vietnam enjoyed U.S.-dollar linked revenues and cost pass through. EVN, despite its financial health, was regular in making payments in the past. Such a setup could make funding viable on a project-to-project basis. However, some international banks are more cautious in identifying which projects they consider as viable. Existing weakness in power-purchase agreements (PPAs) for curtailment risk and termination payments can deter some international lenders.

Policy clarity is also key. For instance, after multiple revisions, PDP8 now envisages a massive increase in gas and liquefied natural gas (LNG) capacities, which will require development of new gas fields or LNG terminals. However, the lack of minimum offtake for new gas-fired plants and limited existing gas supply sources limit so-called bankable projects. Media sources suggest Vietnam is looking to tie-up long term gas from the U.S. This could alleviate the problem while also providing some shelter from trade tensons.

Curtailment risk can choke the profitability of solar and offshore wind projects (which also entails high execution risk and long gestation projects), limiting funding availability and increasing the funding cost as lenders price this risk.

Vietnam's Banking System

What steps have banks taken to support high credit demand while managing capital levels?

Ivan Tan, Lead Analyst, Southeast Asian banks:   Vietnam's central bank has encouraged banks to lower lending rates to boost credit growth and support economic expansion. When banks grow quickly, they need substantial capital buffers. One primary source is from retained profits. However, lowering lending rates puts downward pressure on interest margins and profitability, which will limit the ability of Vietnamese banks to shore up capital.

At the same time, we expect bank financing will play an essential role in fueling Vietnam's economic growth targets. The country's domestic capital market is evolving and relatively small. An increase in financing demand, led by infrastructure, manufacturing, construction and real estate, may sustain consistently robust credit growth of 15%-16% annually over the next two years, one of the highest in the region.

Banks will need capital to support this growth. But capital buffers at several banks remain thin (see chart 8). Capital levels are likely to remain among the lowest in the region over the next two years, particularly given continued high loans growth.

Chart 8

Several factors suggest building capital buffers is unlikely to be an easy task for the system over the next few years:

• The issuance of subordinated debt could bolster capital levels and support loans growth. However, higher for longer interest rate environment could give pause to banks, as funding costs could be unattractive relative to bank's yields on their loans.
• Several state-owned and joint stock banks have also progressively raised capital by attracting foreign strategic stakeholders including from Japan and South Korea. That said, headroom to increase foreign ownership is modest due to a 30% cap on foreign ownership of banks. Several large, listed banks such as Vietnam Joint Stock Commercial Bank for Industry and Trade, Joint Stock Commercial Bank for Foreign Trade of Vietnam already have foreign ownership above 20%.
• Banks have resorted to capital conservation strategies such as dividend payment via stocks (rather than cash) to meet the country's credit needs. This will be sufficient to maintain capital levels, but not enough to raise it.

How healthy is the banking sector? What are the downside risks?

Robust economic conditions and a supportive monetary policy should continue to help banks maintain asset quality ratios. Recent government measures, including a weak loan restructuring scheme and enhancements to property-related laws, help the underlying sector in our view and mitigate lingering credit risks. We forecast Vietnamese banks' return on assets at 1.0%-1.2%. Net interest margins are likely to decline due to competition for deposits and concessionary lending rates, but their overall impact on profitability should be manageable.

The main structural weakness remains the inherent volatility of this emerging market banking system. The property correction of 2021-2023 occurred as growth was decelerating, which led to asset quality stress, especially at the weaker small and midsize banks. A midsize bank, Saigon Commercial Bank (SCB), had also failed due to mismanagement and regulatory violations. The Vietnam government reacted swiftly and was among the first to ease monetary policy to support growth and contain the fallout from SCB. The authorities stemmed a run on the institution before it could undermine depositor confidence.

Finally, financial profiles differ markedly among banks. In our opinion, the large state-owned banks have superior asset quality and capitalization. Small and midsize banks more often face capital shortfalls and will lag domestic peers on several metrics.

How does S&P Global Ratings assess the development of domestic capital markets after two years of additional regulations?

The State Security Commission's recent moves will help the longer-term development of Vietnam's domestic capital markets. These measures include mandating better governance standards, stipulating more frequent and transparent disclosures, and improving the securities infrastructure to encourage trading rather than a buy-and-hold mentality.

Two major impediments to deeper domestic capital markets are the concentration of domestic issuers and the small pool of investors. Issuances in Vietnam's domestic capital markets remain concentrated among financial institutions (typically over two-thirds of yearly issuances), state-owned firms, and larger private companies. In Southeast Asia, Thailand and Malaysia have had a head start and developed their domestic bond markets over the past three decades. In these markets, there is a plethora of issuances from diverse sectors with varying tenor and sizes.

Second, institutional investors such as banks and insurance companies have a meaningful share in government or quasi government securities. These are low-risk but low-yielding investments and represent an affordable source of funding for government and state-owned firms. We note that banks have an obligation to meet the SBV's credit growth target of 16%. To meet this, they would require customer or institutional funding. In our opinion, investments in government securities would compete with private sector loan demand for bank funding. For banks, it's a balancing act.

The Known Unknowns

Reaching 8% growth and beyond won't be easy for Vietnam. Can it meet its infrastructure and power requirements in time to seize opportunities? Can it upskill its rising population quickly enough? Can borrowers' overall loan quality improve sufficiently? And can recovering domestic demand and increased foreign direct investment offset the challenging trade outlook?

There are many moving parts.

Editor: Lex Hall

Related Research

• Vietnam Banks To Grow Fast While Navigating Capital Constraints, March 5, 2025
• Vietnam: Many Growth Drivers, Some Roadblocks, Feb. 24, 2025