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In 2021, Vietnam successfully managed the increase in the inflation rate, which drove the economy to grow substantially compared to previous Covid-19 years. This year, as the Covid-19 is not yet under control in various places around the world, along with the escalation tension between Russia-Ukraine conflict, the inflation rate is going to spike. Currently, the high inflation rate in many countries has signaled a gloomy outlook of the globe economy. Vietnam is going to experience a rising inflation rate. This in turn has put great pressure on Vietnam economy.
The positive picture in the economic growth of Vietnam in the beginning months of 2022

The economic growth of Vietnam in the first quarter of 2022 seems bright. GDP has recorded a 5,03% increase in the first 3 months of this year, much higher than the same period last year.
In terms of investment, the total investment capital in the first quarter of 2022 increased by 8.9%, in which the investment in state and non-state sectors rose by over 9%. This figure has reflected a healthy and stable macroeconomic performance. Additionally, realized FDI in the first 4 months is expected to reach more than 5.92 billion USD, standing at the highest in the past 5 years. Thus, the increasing number of FDI into Vietnam has confirmed the confidence of foreign investors in this country.
Meanwhile, international trade has shown a promising future. The total export and import turnover in the beginning of this year was secured at 242,19 billion USD, of which 22 products achieved export turnover of over 1 billion USD. The trade balance of goods is estimated to have a trade surplus of 2,53 billion USD.
Potential challenges for Vietnam economy in the beginning of 2022
Under the context of a new normal, the world economy is bouncing back. The demand for raw materials, fuel and materials for manufacturing is burgeoning. Yet, the disruption of the global supply chain caused by Covid-19 has been even exacerbated by the Russia-Ukraine crisis, furthering the inflation rate to escalate in various countries in the world.
In Vietnam, the inflation is still under fine management. The average CPI growth rate in the first 4 months of 2022 was at 2.1% over the same period last year. Similarly, petrol price jumped by 48.84% compared to 2021, while domestic gas price fluctuated according to world petrol price and gas price, averaging 24.6% increase in every 4 months. In contrast, the average price of foodstuffs in the beginning of 2022 decreased by 0.94% as Vietnam is proactive in food supply, fully meeting the consumption demand.
Contrary to the high inflation trend of many major economies in the world, Vietnam successfully controlled inflation in the first quarter of this year. The reason lies in the aggressive directions from the Government. In particular, ministries, branches and localities synchronize price stabilization solutions, thereby limiting negative impacts on socio-economic development.

In addition, the Government issued supporting policies in a timely manner, significantly reducing pressure on the price level. Notably, VAT reduction from 10% to 8% on some groups of goods and services from February 1, 2022., the reduction of 37 fees and charges in the first 6 months of 2022, or 50% reduction of environmental protection tax on gasoline from April 1, 2022.
The pressure of high rate inflation on Vietnam economy in 2022
Though the inflation is under control, the pressure of a rocketing inflation rate is present in 2022 and 2023. Economic experts have blamed the cost-push phenomenon for placing such pressure on the Vietnam economy in the upcoming time. Further, Mr Nguyen Bich Lam – former director of the General Statistics Office – has also identified 3 major reasons causing strain on inflation.
Supply chain disruption
Firstly, supply chain inflation is the main factor creating the biggest pressure on Vietnam inflation. With large openness, production in Vietnam depends heavily on imported raw materials, costing 37% of total raw materials spending of the whole economy. This figure amounted to 50,98% in the processing and manufacturing industry.
Moreover, the disruption of the global supply chain due to Covid-19 and the Russia-Ukraine conflict, along with the US and Western sanctions against Russia have presented the most obvious and severe risks to many countries. In addition, China is adopting a zero Covid policy, further disrupting the commercial activities between Vietnam and China. As a result, the situation caused a dire shortage in global supply, being the culprit of increasing world goods prices. Therefore, Vietnam will suffer from a perceived inflation in the near future, thereby worsening the economic growth.
Escalation of world gas and oil prices

Secondly, the Covid-19 pandemic and the Russia-Ukraine conflict has pushed up the prices of gas and oil. In the first four months of 2022, the price of Brent oil increased by about 60% over the same period last year. In March 2022, ING Financial Group forecasted the average price of Brent oil in 2022 at 96 USD/barrel. Bloomberg forecasted 92 USD per barrel in 2022 and 86 USD per barrel in 2023.
Thus, the increase in world oil price caused the world to fall deeper into inflation. In May 2022, US inflation increased by 8.6% – the highest level since 1981, while inflation in the EU topped at 7.5%, likely to continue climbing.
For Vietnam, petroleum is a strategic and important commodity, accounting for 3.52% of the total production costs of the entire economy and 1.5% of total household consumption. Therefore, when domestic gasoline prices increase by 10%, inflation will increase by 0.36%. Fluctuations in gasoline prices will have a strong impact on production and consumption prices.
The spiking of aggregate demand due to monetary and fiscal policies
Lastly, aggregate demand spiked in the context of supply chain disruptions. The Vietnamese Government is directing to urgently implement the socio-economic recovery and development program with a scale of 350 trillion VND in the two years 2022 – 2023. In the 350 trillion VND support package, the fiscal policy accounts for 83%, worth 291 trillion VND, while the monetary package only consists of 14%. The remaining 3% belongs to other support packages.
In the monetary package, the government reduced the value-added tax from 10% to 8%, costing 49.4 trillion VND without pumping money into circulation. Additionally, the government did not directly transfer the interest rate compensation package worth 40 trillion VND to businesses, thereby not injecting money into the market. Other packages for job support and Covid-19 support totalling 84.4 trillion VND did not generate money in the market. Therefore, monetary support packages do not put pressure on inflation.
However, the infrastructure development investment package valued at 113,550 billion VND is likely to put strains on inflation. This can be explained by the rising investment causing the increase in demand for raw materials, fuel and construction materials. Especially in the current global context, the disruption in the world supply has caused the prices of commodities to rocket. As a result, disbursing investment capital for infrastructure construction in this situation will create more inflationary pressure on the whole economy.

Risk of stagflation
Besides 3 main factors leading to the pressure on inflation, many economic experts have had a gloomy outlook on the economy. As new forecasts recently updated, the world economy is falling into another “Great Depression” when high inflation, yet economic stagnation both cause stagflation. This presents a not so good scenario for investors to seize an investment opportunity.
The estimation of inflation rate in 2022
2021 is considered to be successful in recovering world economic growth, but inflation in the upcoming time is high.
In a recent statement, the International Monetary Fund (IMF) in Asia-Pacific emphasized that the continent is facing the risk of stagflation. It forecasted a 3.2% inflation in Asia in 2022, much higher than previously estimation, and downgraded Asia’s growth projection to 4.9%.
Additionally, the IMF forecasts Vietnam’s inflation in 2022 will increase by 3.9%, close to the target threshold of 4% set forth by the Vietnamese Government. On the other hand, Standard Chartered Bank predicts that Vietnam’s inflation in 2022 will exceed the target of 4% and may rise to 5.5% in 2023. Meanwhile, Vietnam Investment and Development Bank Securities Company (BSC) estimates if the average oil price in 2022 is at 80 USD/barrel, Vietnam’s inflation in 2022 can reach 4.5%; however, if oil prices peak above 100 USD/barrel, inflation could rise to 5.1%.

This rate can be challenging to the economic growth of Vietnam in 2022, directly affecting the investment flow into the country. Yet, the Vietnamese Government is trying its best to maintain and manage the inflation, ensuring the most favorable investment environment for foreign and domestic investors.
Despite challenges, this is still an ideal time for foreign investors to seek investment opportunities in Vietnam. All foreign investors need is to have an expert by their side, helping them with the process of setting up a new business in this dynamic country. Viettonkin is one of the leading consulting firms with deep insights in the Vietnam market and legal system that can assist investors the best. Our strength in professional human resources and well-informed top-notch experts in diverse industries can support you in every step of the way. Let us be your right hand man!