While disagreements are common between elected leaders and central bankers, they’re unusual in one-party, Communist-run nations. When they do happen, it’s usually the sign of a power struggle.
That appears to be the case now in Vietnam, which is suffering from an economic slump that will likely see it miss its full-year 6.5% gross domestic product growth target. Although anything close to that would be the envy of many emerging markets, a failure to hit the goal could be career damaging for Prime Minister Pham Minh Chinh, according to people familiar with the situation.
Chinh, 64, ordered government agencies this month to speed up public investment in a bid to accelerate growth to 9% in the second half of the year. He’s been urging the State Bank of Vietnam to ease access to loans and lower policy interest rates for a fifth time this year. The latter demand prompted a deputy governor to retort that rate cuts aren’t a “magic wand” – rare pushback in a nation where the central bank chief is effectively a cabinet member who reports to the prime minister.
That resistance is of particular concern for Chinh, who saw two of his deputies ousted earlier this year in a corruption purge that also took down former President Nguyen Xuan Phuc, once seen as a potential successor to take the Communist Party’s top job from General Secretary Nguyen Phu Trong, who’s now 79.
Two years ago, Trong became Vietnam’s longest-serving leader since the war era after securing a third term. Following the president’s ouster in January, one of the general secretary’s closest allies — Vo Van Thuong, the youngest member of the Politburo at age 52 — took that job, making him a strong contender to become Vietnam’s top official when the next party congress is held in 2026.
Power Play
“They have to build a consensus on the successor, and perhaps they have to remove anyone who may oppose the choice made by Mr. Trong,” said Le Hong Hiep, a former foreign ministry official who is now a senior fellow at the Vietnam Studies Program of ISEAS-Yusof Ishak Institute in Singapore. Some officials, he added, may want Chinh gone “because if he’s still in power he may be an obstacle.”
All of that is adding pressure on Chinh, whose job is among the four most powerful in Vietnam. And hitting the GDP growth target is seen as a key metric for his success, the people familiar with the situation said.
Vietnamese officials didn’t respond to repeated requests for comment.
Chinh’s urgency stems, in part, from a twice-a-decade confidence vote on the party leadership scheduled for October. Although the premier is expected to prevail in the vote by Communist Party lawmakers, a poor showing could severely weaken his authority.
Once a picture of vibrant and enduring economic growth, export-dependent Vietnam is now experiencing turbulence as global demand wanes. Exports fell for a fifth consecutive month in July, the longest slump in 14 years. Pou Chen Corp., the world’s biggest maker of athletic shoes, has cut more than 8,000 jobs in Vietnam this year as orders fell, according to a media report.
Slow Growth
There’s a “high chance” Vietnam will miss its 2023 GDP target, said Darren Aw, senior country risk analyst at Fitch Group’s BMI Research. “The economy would need to rebound very sharply in the second half, which we think is unlikely to happen.”
Vietnam’s GDP rose 3.72% in the first half, the slowest pace of growth over that time period in at least a decade, excluding the pandemic years of 2020 and 2021. Instead of cutting the full-year target, Chinh has put pressure on the government and central bank to meet that goal.
In Vietnam, the State Bank reports to the prime minister and has to get the premier’s approval for decisions ranging from adjustments to key policy rates to lending regulations. While the central bank has resisted cutting interest rates further, it has taken other actions, including pressuring lenders to slash deposit rates to accommodate Chinh.
While the July data was encouraging and growth may quicken to 7% in the second half of this year, the premier’s target for the June-December period was “still somewhat of a stretch” against a backdrop of weak demand and subdued credit growth, said Mohamed Faiz Nagutha, an economist at BofA Securities.
Bright Spots
“No matter what kind of stimulus you have today, it takes time for it to impact the real economy,” Nagutha said.
The domestic political tension is overshadowing bright spots for Vietnam. The benchmark stock index has gained about 19% this year after underperforming relative to peers in 2022. Inflation of 2.1% in July is slower than many other nations.
Vietnam is also turning into a gaming powerhouse to cash in on a market estimated to exceed $300 billion next year. And the country continues to benefit from efforts by many companies in the West — including key suppliers to Apple Inc. — to reduce their reliance on China. President Joe Biden said he plans to visit soon.
But the economy faces critical risks, from uncertainty in the property sector to potential delays in policy implementation following the corruption crackdown. A depreciating currency could also forestall further interest rate cuts, complicating the premier’s growth push.
To stimulate and broaden trade, officials have been stepping up the charm offensive abroad. President Thuong recently visited Austria, Italy and the Vatican, while Chinese President Xi Jinping expressed a readiness to boost imports after meeting Chinh in June. Vietnam is seeking to boost partnerships with Australia and the US after having already agreed to do so with South Korea last year. On Monday, Vietnam upgraded a bilateral economic pact with Singapore for the first time since it was signed nearly two decades.
Yet for a country touted as a potential winner from US-China economic tensions, foreign investment has been fairly muted so far this year, according to BMI. The total dollar value of registered capital from foreign companies in the first half of 2023 was down 4% from a year earlier and 14% compared to the same period in 2021, according to government data.
Vietnam also risks losing its edge among foreign investors already in the country as bottlenecks including strict visa rules and power shortages roil industrial parks in the northern provinces. European business confidence toward the Vietnamese market dropped 4.5% last quarter, according to a survey published by the chamber in July.
“The Vietnamese government should not make the mistake and take for granted that investors already in Vietnam will just stay in Vietnam,” European Chamber of Commerce in Vietnam chairman Gabor Fluit said. “They need to keep working on improving the business environment to give a clear signal to the investors already here.”’
None of that is good news for the prime minister.
“He’s under pressure to get the economy rolling again,” said Hiep from the ISEAS-Yusof Ishak Institute. “This is a kind of an effort to save his political career through economic means.”
--With assistance from Nguyen Dieu Tu Uyen and Nguyen Xuan Quynh.
(Updates with economic cooperation pact with Singapore in 19th paragraph.)
Author: John Boudreau and Philip J. Heijmans
