Vietnam - Economic Update

World Bank's "Taking Stock" Report, August 2021

In August, the World Bank published the latest in its series of reports on the Vietnamese economy under the title “Taking Stock”.

In it, the Bank has reduced its forecast for real GDP growth in the current financial year from 6.8% to 4.8%. This reflects the effects of a domestic outbreak of COVID-19 which has spread to most provinces since the end of April.

The government has now adjusted its response to the pandemic, and has committed itself to the purchase of 150mn doses of vaccine and to vaccinating 70% of the population. As of late July, 105mn doses had been secured, including 60mn doses of the Astra Zeneca vaccine. Vietnam is also accelerating the development of its own vaccines. Nonetheless, given its relatively low vaccination rate, Vietnam may be less able than other countries to open up its economy in the short term.

On a longer-term perspective, the Bank has noted that the rise in the digital economy has become much more broad-based as a result of the pandemic. It estimates that up to 60 per cent of local businesses have now established or increased their online presence, and that the government has digitised more than 2,000 public services and procedures.

The acceleration in Vietnam’s digital economy is seen as a positive development, offering more information, speed, transparency and ease of service delivery to the population, including to the most isolated groups. This should reduce transaction costs for business and open new markets for development and diversification.

In a separate annexe to its report, however, the Bank recommends that the authorities take account of the risks associated with the loss of low-skilled jobs to digitisation, and concerns on data privacy and security. It suggests that Vietnam will need to respond to the demand for more qualified workers and upgrade its innovation capacity to facilitate the emergence of productive firms.

Growth
After achieving one of the fastest rates of growth in 2020, at 2.9%, real GDP grew by a solid 5.6% YoY in H1 2021. However, from the second quarter, the economy has been impacted by Vietnam’s most severe outbreak of COVID-19 since the beginning of the pandemic. From May, the effect of targeted lockdowns have been felt in manufacturing and service activity and, since July, mobility restrictions have increased as cases rose. According to John Hopkins University, daily cases per million of population rose from under 3 at the end of May, to 80 by the end of July and 135 by the end of August. As yet, there is no convincing evidence to suggest a decline in cases, although there are tentative signs to suggest they may have stabilised.

Contrary to previous episodes, the latest outbreak has spread all over the country, including in both HCMC and Hanoi and in several industrial parks. By the end of July most of the country was in lockdown. Evidently, Vietnam’s relatively low vaccination rate has had an impact.

Since April, the effect of an increase in social distancing measures and mobility restrictions has become evident. Retail sales in July fell by 19.8% YoY and growth in industrial production slowed to 2.2% YoY from 4.9% in the previous month.

Vietnam – Retail Sales (%, Not Seasonally Adjusted)

Overall in July, manufacturing registered growth of 2.9% YoY. Apparel registered growth of 5.8% YoY, but the output of electronics, computers and optical products contracted by 4.7% YoY. Agriculture has proven to be relatively resilient, growing by 3.9% YoY in H1, but services have been weak, as a result of the closing of schools, and with the closing of borders contributing to a deep recession in tourism and transport. In June, the Purchasing Managers Index fell to its lowest level since May 2020.

Vietnam – Purchasing Managers’ Index (50+ = Expansion, SA)

There is evidence to suggest these developments are now being felt in the labour market, with underemployment and unemployment rising somewhat. The Bank estimates that, as of March, 30% of households were earning less than twelve months earlier and it expects the picture to have deteriorated since.

Vietnam – Unemployment and Underemployment Rates

(Relative to same quarter in 2019 (pps, NSA)

Balance of Payments
In the first four months of the year, international reserves rose by $6bn as a result of positive current and financial balances. According to the Bank’s estimates, the real effective exchange rate remained stable in H1, after a depreciation of a little over 7% between May 2020 and January 2021.

Vietnam – Exchange Rate Trend

However, in Q2 the current account is estimated to have fallen to a deficit of $4.6bn, as a result of a sharp rise in merchandise imports and the decline in tourist revenues. (The number of tourists declined by 97.6% YoY in H1.) A sharp rise in service imports partly reflects a surge in insurance costs and higher shipping rates.

Having generated its largest ever surplus in 2020, the trade balance is estimated to have shown a deficit of $1bn in H1, and of $2.4bn in July. This reflects continued strong growth in imports (+33.3% YoY in July) and a decline in export growth (12.5% YoY). The World Bank believes that, in addition to seasonal factors, this phenomenon may be due to other countries re-entering the export market and regaining some of their pre-COVID market share. Specifically also, the April outbreak has resulted in the closure of electronics factories in Bac Giang and Bac Ninh, to restrict the spread of the virus.

Vietnam – Merchandise Trade Balance ($bn, 3mma, NSA)

Against this background, however, FDI inflows – though lower – have remained resilient compared to the rest of the world. In H1 2021, FDI commitments fell by 2.6% YoY to $15.3bn. This suggests continued confidence in Vietnam’s economic potential, although the data is arguably flattered by investments of $7.1bn in two large LNG plants, and the recent COVID-19 outbreak seems to have made foreign investors more cautious between April and June (when FDI commitments fell by 45%).

Vietnam – FDI Commitments and Disbursements ($bn)

Credit and Inflation
The Central Bank has maintained an accommodative policy stance. The refinancing interest rate remains 4% (following earlier reductions equating to 2%) and commercial banks have been directed to assist businesses affected by the pandemic through loan restructuring, interest exemptions/reductions etc. (They are required to set aside additional provisions in these instances within three years.)

Credit growth has accelerated from 10% to 12% in the latter part of 2020, to over 15% YoY in July. Liquidity in the financial system has also risen over the same period, even though it has declined again since May.

Vietnam – Credit and Liquidity (% YoY, EOP, NSA)

Monetary and credit growth have exceeded nominal GDP growth since the beginning of the COVID pandemic.

Nonetheless, inflation has increased only slightly to 2.4% YoY in June. Core inflation, excluding administered prices, rose by 1.1% YoY.

Vietnam – Consumer Price Index (%, YoY, NSA)

Credit to GDP rose from 136% at the end of 2019 to 146% at the end of 2020 and the World Bank is signalling some concern that risks in the financial sector are rising.

They suggest that the economic rationale for certain loans, including those provided to SOEs and national champions, is not as clear as they would wish, and they highlight that the State Bank has not published data on NPLs since September 2020.

It also notes that capital adequacy for the banking sector has fallen from 12% at the end of 2019 to 11.1% in June 2021, and that certain undercapitalised banks are currently unable to meet their Basel II requirements.

Fiscal Policy
Following an accommodative fiscal policy in H2 2020, the authorities switched to a neutral stance in H1 2021.

In terms of fund raising, in H1 the government has taken advantage of ample liquidity and relatively low borrowing costs to draw more on the domestic market, where its borrowings rose by 63% YoY to VND 141.5trn (2.2% GDP).

At the end of June, 10-year bond yields were 2.2%. The authorities have mostly issued 10-year and 15-year paper in order to lengthen the maturity of their portfolio.

Tax revenues rose by 15.7% YoY in H1, whereas planned expenditures of $5.8bn were $1.3bn lower than in the same period in 2020.

However, because of the deterioration in the economic picture since April, the authorities have announced the resumption of some reliefs to support business. These include delayed payments of corporate tax, income tax, value added tax and land rent to the end of the year, to assist financing for working capital. The package is estimated to equate to 1.9% GDP.

The government has also announced an intention to accelerate the disbursement of its investment programme in the second half of the year, although the Bank observes the timing of this will need to be coordinated with relaxations in mobility restrictions if it is to be fully effective.

Vietnam – Government Budget (VND bn, NSA)

The government has also announced a second social support package, worth $1.1bn, for workers and businesses affected by the pandemic.

With debt/GDP standing at 55.3% at the end of 2020, the World Bank believes Vietnam continues to enjoy fiscal space, but it suggests that the authorities need to watch out for fiscal risks, as experience in the pandemic elsewhere has shown how quickly fiscal pressures can increase if circumstances prove averse.

Short to Medium Term Prospects
The World Bank has cut its growth forecast for the current year from 6.8% to 4.8%, but it expects real GDP growth to return to its pre-pandemic rate of 6.5% to 7% from 2022 onward.

Near-term risks are thought to lie to the downside, depending on the pace of the roll-out of vaccinations and the evolution of the pandemic both domestically and internationally. The recovery in the United States, Europe and China is underway but is considered to be fragile.

Nevertheless, even in a low case scenario, the World Bank is suggesting real GDP growth of 3.2% in 2021 and 5.5% in 2022 is achievable.

As growth normalises, monetary policy is expected to return to a neutral stance, in order to stabilise inflation. This is expected to remain below the 4% policy rate set by the Central Bank.

The authorities are expected to resume their policy of fiscal consolidation and, as a result, the deficit is expected to drop from 6% of GDP in 2021 to 5.9% in 2022 and 5.4% in 2023.

The current account is expected to remain in surplus, although this is expected to decline from 4.6% GDP in 2020 to about 0.5% GDP in 2021.

Vietnam’s international competitiveness should ensure that exports continue to expand and this trend should be reinforced by the decision to continue the policy of diversifying trading partners through initiatives such as the Regional Comprehensive Economic Partnership. Revenues from tourism are expected to recover as the country re-opens to international visitors in 2022-2023.

FDI flows are expected to recover to pre-COVID levels as Vietnam revamps its integration with global value chains and as, internationally, governments and MNCs seek to diversify their sources of production.

Vietnam – Merchandise Trade Balance ($bn, 3mma, NSA)

Risks
The World Bank cautions that the authorities need to monitor carefully the rise in financial sector NPLs, whilst pushing for the adoption of Basel II capital rules for all operating banks. It believes that a robust warning system is required to identify potential risks at individual banks and for the system, and that a clear exit strategy for loan forbearance measures needs to be established. It is in favour of adopting an early resolution plan for nonperforming loans, which avoids the risk of bad loans burdening the system and stifling growth over the longer term.

It also recommends that administrative reforms are required to enhance the efficiency of tax revenues and that efforts need to be made to ensure these are used to finance infrastructure and social services that will make the economy more sustainable, digitally transformed and productive.

To read the World Bank’s full report, please use the following link:

https://www.worldbank.org/en/news/press-release/2021/08/24/vietnam-s-economy-is-forecast-to-grow-by-about-4-8-percent-in-2021