VINACHEM

As credit dependency reaches 134% of GDP, concerns resurface over policy imbalances and macroeconomic stability.

Vietnam’s credit-to-GDP ratio reached 134% by the end of 2024 - signaling an overreliance on bank credit and highlighting systemic risks for the economy.

2007–2009: A period of instability and stagflation

At a National Assembly session in May 2008, then Minister of Planning and Investment Vo Hong Phuc stunned lawmakers with a forecast that inflation could reach 22% that year.

With inflation having already hit 12% in 2007, Phuc’s warning marked the first major alarm of a looming macroeconomic crisis. He had reason for concern - credit growth in 2007 soared to 53%, and total money supply expanded by 46.7%. These unprecedented figures weren’t even sourced from the State Bank of Vietnam (SBV), which at the time lacked a core banking system, leading to data delays, as economist Le Xuan Nghia later explained.

Buoyed by WTO accession in 2007, Vietnam entered a euphoric phase. Capital flooded the economy, the stock market surged, and both public and private investments exploded. State-owned enterprises expanded into sectors far beyond their core functions - banking, real estate, telecoms, hospitality. Fiscal and monetary policies were excessively loose.

“Even the Prime Minister was alarmed,” Phuc told lawmakers, prompting then National Assembly Chairman Nguyen Phu Trong to wryly retort, “Minister, your job is to ensure the PM isn’t alarmed.”

Credit growth during 2007–2008 reached levels 3–4 times higher than normal. By 2008, inflation spiked to nearly 20% - still shy of Phuc’s projection but severe enough to jolt the nation. In 2009, credit grew another 36%, coupled with an $8 billion stimulus package, including over $1 billion in 0% interest rate subsidies.

The result was a wave of unregulated state-led investments and an infrastructure spending spree. Consequences from this period persist to this day - high inflation, a real estate bubble, and businesses chasing speculative gains instead of productive growth. The consumer price index (CPI) nearly doubled between 2006 and 2012.

Policy turning point

By early 2011, facing mounting pressure, the government convened an unprecedented nationwide meeting. The outcome was Resolution 11, adopted in February 2011, which imposed tight monetary and fiscal controls, slashed public investment, and reduced the budget deficit.

The principle of “macroeconomic stability for development” became a central tenet in subsequent government policies. Since then, successive annual resolutions have emphasized macro stability as a top priority.

These policy shifts yielded significant progress:

Inflation was brought under control: average CPI fell from 18.6% in 2011 to around 4% annually during 2016–2020.

Budget deficit dropped: from 5.4% of GDP (2011–2015) to 3.5% (2016–2019), with a brief spike to 4.99% in 2020.

Public debt was curbed: from 63.7% of GDP in 2016 to 55% in 2019 and 56.8% in 2020, improving national credit ratings.

Macroeconomic stability and low inflation laid the foundation for sustained growth, boosting public and business confidence and enhancing the economy’s resilience.

A governor’s warning

These lessons remain relevant today. As of May 2025, total credit outstanding reached VND 16.49 quadrillion (USD 648 billion), up 5.59% from end-2024 and 18.67% year-over-year.

The credit-to-GDP ratio now stands at 134%, indicating overdependence on bank lending. At last week’s parliamentary session, SBV Governor Nguyen Thi Hong warned that continuing this trend risks systemic instability and undermines sustainable growth.

Meanwhile, fiscal policy remains underwhelming. Public investment disbursement was slow - only 32.7% of the annual budget was spent in the first five months of 2025, with just 25.2% allocated to development.

As Vietnam gears up for major infrastructure projects by 2030 - 2,000 km of highways, high-speed rail, airports, ports, Power Plan VIII, and energy transition - Governor Hong stressed the need for clear funding plans, borrowing capacity, and investment phasing to avoid macroeconomic shocks.

The banking sector remains vital for capital mobilization, supporting investment, consumption, and exports. Credit has grown at an average of 14–15% per year - higher than many regional peers.

However, as seen in 2007–2009, heavy reliance on credit without sound fiscal backing poses risks. Today’s context is further complicated by external pressures, including U.S. tariff moves.

The 2007–2009 crisis underscored the importance of macroeconomic stability - a foundation for development, public trust, and long-term resilience. Sustainable growth must prioritize not just speed, but also quality and enduring balance.  – Source: VNN