Public investment may contribute 2 per cent to GDP growth

Public investment may contribute 2 per cent to GDP growth

A 40 per cent increase in public investment could add 2 per cent to GDP growth in 2025; however, implementation may be difficult due to remaining bottlenecks.

In his latest report released on February 25, Michael Kokalari, chief economist of VinaCapital said that Vietnam’s government increased its 2025 infrastructure spending target from 6 to 7 per cent GDP last week and simultaneously lifted its GDP growth target for 2025 from 7 to 8 per cent.

“The infrastructure investment in Vietnam by nearly 40 per cent this year, to $36 billion (up from the $31 billion originally approved late last year), should help offset the hit to the country’s GDP growth we expect from slower export growth to the US, following a 23 per cent surge in Vietnam’s exports to the US last year,” Kokalari added.

Michael Kokalari, chief economist of VinaCapital

He further added that the increased 1 per cent GDP of planned spending on infrastructure projects should help the country achieve the government’s new, 1 per cent higher 2025 GDP growth target and will also support the country’s long-term growth prospects and appeal to foreign investors.

Kokalari's report emphasised that the government has initiated and approved investment policies for many large-scale infrastructure projects.

Several large projects were initiated/approved over the last two months, including a $67 billion high-speed rail line that would span the length of the country and the $8 billion Lao Cai–Hanoi–Haiphong railway project.

Meanwhile, the first section of Ho Chi Minh City’s long awaited metro line opened in December 2024, which was believed to support enthusiasm and momentum for accelerated infrastructure development going forward.

In addition, three major laws on public investment, amended bidding and amended regulations on public-private partnership, together with the laws on Electricity and Road, came into effect last month that are directly aimed at accelerating project approvals, streamlining investment disbursements, and driving greater private sector participation in infrastructure projects.

Further to disbursement capacity, Kokalari assessed that Vietnam's fiscal space is still large with the Vietnam’s government debt is well below 40 per cent of GDP, and it is estimated that the government has over $40 billion of undisbursed funds previously earmarked for infrastructure spending.

“The primary bottleneck to increasing infrastructure spending (or to achieving annual spending targets) have been bureaucratic issues impeding the project approvals and other processes entailed in large-scale project development,” he added.

According to the country's existing power development plan, Vietnam will need about $135 billion to double its electricity generation capacity in the period 2021-2030, with an expected annual electricity consumption growth of about 9 per cent. Kokalari emphasised that the majority of electricity supply will come from LNG, renewable energy, and coal, with changes in the energy mix to ensure sustainability and meet growing demand.

Regarding transport infrastructure, VinaCapital's report points out that heavy investment in railways and metro will help improve goods transport capacity and labor movement.

The Lao Cai - Hanoi - Haiphong railway project is considered an important step forward in trade connection with China and Europe. The government has also approved a seaport development plan, including the Can Gio Port, to support the goal of increasing seaport capacity to 50 per cent by 2030.

Despite having strong fiscal space, VinaCapital's chief economist believes that the biggest challenge in promoting public investment disbursement is still legal barriers and administrative procedures.

“Simplifying the investment process and mobilising the private sector is expected to create momentum for sustainable infrastructure development,” he cited.

“If the government completes its public investment disbursement target in 2025, a 40 per cent increase in spending will contribute about 2 per cent to GDP growth, helping Vietnam reach its growth target of 8 per cent next year,” he confirmed.

VIR