Why Vietnam's Foreign Reserves Is Dropping

Summary

Vietnam's foreign reserves, which grew substantially from $1.32 billion in 1995 to $109 billion in 2021, have dropped by 25% in less than two years, raising concerns about its economy. Despite strong exports and a surplus in the current account, factors such as significant foreign direct investment, debt repayments, and capital outflows have contributed to the decline. The situation is compounded by a negative balance in net errors and omissions. Vietnam's reserves, covering only three months of imports, highlight potential vulnerabilities to external shocks, although the economy's ultimate stability depends on several complex factors.

Takeaways

• 😀 Vietnam's foreign reserves dropped by 25% from $110 billion in January 2022 to $82.3 billion in late 2023.
• 📉 Despite a strong economic performance in previous years, Vietnam’s foreign reserves are now declining, raising concerns about economic stability.
• 💰 Foreign reserves are an important indicator of a country’s economic health and ability to withstand external shocks.
• 📊 Vietnam's Balance of Payments (BoP) plays a crucial role in determining its foreign reserves; a surplus boosts reserves, while a deficit reduces them.
• 📈 Vietnam's current account has been in surplus since 2011, primarily due to strong exports and remittances, which have helped support the economy.
• 🌏 Vietnam's exports in 2022 exceeded $384 billion, and the country received over $14 billion in remittances in 2023, making them key contributors to the surplus.
• 💸 Net primary income, however, has been in deficit, mainly due to foreign investors repatriating profits, such as Samsung, which has invested over $20 billion in the country.
• 🏦 The financial account has shown significant deficits in 2021 and 2022, especially due to capital outflows driven by rising interest rates in developed economies.
• ❓ Net errors and omissions in the BoP, which account for unrecorded capital outflows or discrepancies, have added significant pressure on Vietnam’s reserves, reaching over $50 billion in 2022 and 2023.
• 📉 Vietnam’s reserves are lower than regional peers when compared to external debt and imports, with reserves covering only 3 months' worth of imports, the IMF’s minimum recommended threshold.
• ⚠️ Despite strong export performance and remittances, the decline in reserves signals potential vulnerabilities in Vietnam's economy, especially in managing external debt and economic shocks.

Q & A

Why have Vietnam's foreign reserves been declining recently?

Vietnam's foreign reserves have declined due to several factors, including a net financial account deficit, outflows of portfolio investments caused by global financial tightening, rising external debt, and unaccounted capital outflows reflected in net errors and omissions.

What has been the trend of Vietnam's foreign reserves from 1995 to 2021?

Vietnam's foreign reserves have steadily increased from $1.32 billion in 1995 to $109 billion in 2021, representing an 82-fold increase over 26 years.

What factors contribute to a country's foreign reserves?

Foreign reserves are primarily accumulated through trade, foreign direct investment (FDI), remittances, tourism revenues, and effective fiscal and monetary policies, with the Balance of Payments (BoP) being one of the biggest factors.

What is the Balance of Payments (BoP) and why is it important for foreign reserves?

The BoP records all economic transactions between a country and the rest of the world. A BoP surplus means more foreign currency is entering than leaving, contributing to the accumulation of foreign reserves. Conversely, a BoP deficit results in a depletion of reserves.

How has Vietnam's current account balance been performing in recent years?

Vietnam has consistently recorded a surplus in its current account since 2011, with a current account surplus of over $25.09 billion in 2023. This surplus is mainly driven by exports and net secondary income from remittances.

Why is Vietnam's primary income account in deficit?

Vietnam’s primary income account is in deficit due to the repatriation of profits, dividends, and interest by foreign investors, especially from large multinational corporations like Samsung, which are heavily invested in Vietnam.

What is the role of foreign direct investment (FDI) in Vietnam's economy?

FDI plays a crucial role in Vietnam’s economy by contributing to exports, job creation, and the inflow of foreign currency. However, it also contributes to the primary income deficit as foreign investors repatriate their earnings.

How do portfolio investments impact Vietnam’s financial account?

In recent years, portfolio investments in Vietnam have seen significant outflows, especially due to global financial tightening and rising interest rates in developed economies. This has contributed to a net deficit in Vietnam’s financial account in 2021 and 2022.

What are net errors and omissions in Vietnam's Balance of Payments, and why are they important?

Net errors and omissions represent unrecorded or misreported transactions in Vietnam's BoP. Negative errors and omissions indicate untracked capital outflows, which can reduce the foreign exchange available to the country and impact its foreign reserves.

What are the potential dangers of Vietnam's declining foreign reserves?

The decline in foreign reserves poses risks to Vietnam's ability to manage external debt, maintain currency stability, and cope with external economic shocks. Vietnam’s low reserves relative to external debt and imports make the economy vulnerable to sudden capital outflows or disruptions in trade.