Vietnam is on the fast track. Its economy jumped 7.1% last year in a broad-based recovery from a recent property crash. S&P Global Ratings thinks this is testament to the country's dynamism and potential to continue taking market share in global supply chains.

Still, many obstacles stand in the way of Vietnam's growth story, including the overall challenge of moving up the value chain. There are also specific ones such as whether the country would be able to add enough reliable power supply to stay on the current trajectory.

The Drivers: Significant FDI Draw And An Attractive Labor Force

We still estimate Vietnam's growth potential to be at 6%-7% annually for the next decade and perhaps even beyond.

The epicenter of this momentum is the rapidly expanding export-oriented manufacturing base, which anchors Vietnam's trade balance and attraction to foreign direct investment (FDI). Thanks in part to diversification of supply chains outside of China, Vietnam and its corporate partners (including major global multinationals) are making swift investments in capital stock. FDI reached US$38 billion, or 8% of GDP, in 2024; it has averaged 10% of GDP since 2010.

A key enabler of this growth driver is the Vietnamese labor force. The availability of surplus labor in rural (and other lower income areas and sectors) can be tapped for jobs for urban or industrial areas. This serves as the bedrock for labor intensive and low-cost manufacturing. The workforce has shown itself to be trainable and high in quality, contributing to foreign investor confidence in the ability of the economy to absorb further investment.

New wealth and the resulting impetus to domestic demand is an additional benefit of rising urban employment and rapid growth. In 2024, real private consumption grew 6.7%, up sharply from 3.4% in 2023, at the height of the property sector downturn.

Can The Infrastructure Roll Out In Time To Catch These Opportunities?

So what might hold back Vietnam's growth path? The country faces a challenge of bridging existing infrastructure gaps while enabling new infrastructure to support growth. Curtailment of power supply is a challenge for some provinces.

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Vietnam estimates it needs to double power capacity levels by 2030 and expand it by 6x by 2050 (from 2022 levels). Concurrently, the country is also trying to set energy-transition goals. Authorities estimate total capital expenditure requirements of approximately US$535 billion through 2050 to meet these targets.

In our view, the government retains sufficient fiscal space to boost infrastructure development over the coming years. Its gross public and publicly guaranteed debt stock is just 34% of GDP, well below statutory limit of 60%. Furthermore, a relatively low cost of capital in Vietnam helps to keep the government's interest bill modest, at about 5.5% of its total revenues.

Still, it's not realistic to expect the government to absorb the entirety of this cost into its expenditure program and balance sheet, even taking into consideration Vietnam's very fast GDP growth.

Private capital could be cautious of funding certain energy investments without demanding high risk premiums relative to other emerging markets in the region, thus potentially raising the bill for Vietnam's expansion. Particularly, the commercial viability of such undertakings will require both discipline and tight oversight.

In our view, private capital will be more open to supporting power sector investments if power purchase agreements (PPAs) are strengthened and the grid becomes more reliable. One positive is payments from the Vietnam Electricity Corp. have been timely. The country's solar and wind tariffs are already lower than those for coal- and gas-fired power, even in the absence of carbon taxes, setting the stage for energy transition. However, solar and onshore wind projects take six to 18 months for commissioning, while transmission projects take between 2.5 years and four years. Unless transmission is planned and executed ahead, new generation capacity will also face curtailment risk.

Meanwhile, the short-term patch is more hydro and coal. The latter has risk overhangs in an era of global energy transition to cleaner fuels (see "Indonesia And Vietnam's Energy Transition Investments Could Pressure Utilities," published on RatingsDirect on Dec. 12, 2023).

It Won't Be Fast Or Easy

Vietnam's energy race is just one example of a roadblock that the country's growth narrative could encounter. Misallocation of capital, weak governance, and tough funding conditions are other potential roadblocks. Nor is Vietnam necessarily immune to geopolitics. The country's trade surplus with the U.S. was US$104 billion last year, the second largest after China's at US$360 billion.

Indeed, in our view, Vietnam is one of the countries that may face more trade scrutiny under the U.S. administration's new Fair and Reciprocal Plan, which targets bilateral trade surpluses, tariff differentials and other "imbalances." Our screening exercise shows that Vietnam meets some of the criteria the plan describes as "unfair practices," and that the country would be one of the more vulnerable to higher U.S. tariffs or similar retaliation (see "Asia-Pacific Economies Likely To Be Hit By U.S. Trade Tariffs," Feb. 24, 2025).

Ultimately, the growth path depends on whether Vietnam can make the most of its opportunity. If it improves the skill set of its growing pool of workers and moves up the value chain in its manufacturing base, that could parlay its demographic dividend and relocation bonanza into higher value-add. Collectively, this generates sustainable economic strengthening and wealth creation for the Vietnamese population.

Related Research

• Asia-Pacific Economies Likely To Be Hit By U.S. Trade Tariffs, Feb. 24, 2025
• Indonesia And Vietnam's Energy Transition Investments Could Pressure Utilities, Dec. 12, 2023