Current Account, Reserves, REER
Vietnam’s external position remains strong, even though the current account has shifted from a surplus of 4.6% GDP in 2020 to an estimated deficit of 1% GDP in 2021. During the year, merchandise imports are thought to have risen by 26.2%, while exports rose by 18.8%. This differential reflects the impact of the lockdowns on exports and a 5.7% fall in the terms of trade, as import prices rose faster than export prices. Exports recovered rapidly after the restrictions were eased in late September, rising by 19% YoY in Q4.
Within manufacturing, labour intensive industries such as garments and footwear were more affected by the imposition of public health measures, and since the reopening they have been most impacted by labour shortages and supply chain disruptions. As a result, over the year there was a shift in the mix of exports towards higher value products such as phones and machinery, while higher prices boosted the value of metals exports significantly.
Exports by Product
Sources: Vietnam Customs, GSO, Haver Analytics and World Bank staff calculations
Despite the deterioration in the current account, international reserves rose by an estimated $12.3bn in the year to September, reaching the level of $107.7bn, equivalent to 3.7 months of imports. Remittances are expected to have risen by about 5% to $18.1bn in 2021 and, whilst FDI is forecast to be slightly lower than in 2020, it has remained resilient, with disbursements expected to be about $19.7bn over the year.
Foreign Direct Investment Commitment and Disbursement (USDbn)
Sources: MPI, Haver Analytics, and World Bank staff calculations
According to the World Bank’s assessment, the real effective exchange rate has risen by about 4.4% against the currencies of Vietnam’s major trading partners, offsetting a 7.3% depreciation between May 2020 and January 2021.
Exchange Rate Evolution
Sources: SBV, Vietcombank. Haver Analytics, and World Bank staff calculations
Credit and Banking Sector Health
The State Bank of Vietnam has maintained its accommodative monetary stance to support business during the health crisis. Credit growth (13% YoY in December) has remained consistently higher than nominal GDP growth, and accordingly there has been ample liquidity.
Despite this, and in the face of higher commodity prices, the rate of inflation, as measured by the CPI, has remained well below the SBV’s 4% target. Food prices, which comprise 36% of the basket, have been stable and lower rental and utility charges have offset higher fuel prices.
Consumer Price Index (Percent, YoY, NSA)
Sources: GSO, Haver Analytics, and World Bank staff calculations
On the other hand, manufacturing producer prices have risen from -0.4% in Q4 2020 to 4% in Q4 2021, as the higher cost of fuel and other commodities have pushed the cost of inputs higher. Since it normally takes a quarter or so for costlier inputs to feed into the PPI, the World Bank has suggested some caution is warranted, and it has highlighted the need for further improvements in productivity.
Producer Price Indexes (Percent, YoY, NSA)
Source: GSO
On the face of it, banking sector profitability, long an area of concern to the Bank, remains sound. Net interest margins rose from 2.9% in H1 2020 to 3.7% in H1 2021, and the return on assets and equity have increased to 1.5% and 20.6% respectively in the period to the end of June. The SBV’s policy has been to allow deposit rates to fall faster than lending rates, and its forbearance on the recognition of NPLs means that the impact of COVID on asset quality has not been fully reflected.
The preliminary NPL ratio for Q2 2021 was 3.7%, slightly lower than 3.8% at the same time in 2020. However, adjusting for potential NPLs from restructured loans, the SBV estimates the adjusted NPL ratio could be 7.2% and, according to the World Bank, “the SBV has not published an official number of systemwide NPLs with sufficient granularity since October 2020, raising concern that there may be disparities in calculation and reporting practices.”
Economic Outlook and Risks
Despite this, the World Bank continues to believe that the short to medium term prospects for the economy are positive.
Real GDP growth is expected to return to about 5.5% in 2022 and thereafter to stabilise at around 6.5%, assuming the pandemic is under control both domestically and internationally. (The Bank assumes real GDP growth of 3.8% in the EU, 4.4% in the US and 5.1% in China.)
In these conditions, an easing of the mobility and health restrictions are expected to support a recovery in services, and the World Bank is hopeful that foreign tourism will be reopened some time towards the middle of the year. Tourism constituted about 10% of GDP in 2019.
At the time the Bank was writing its report, the National Assembly was discussing a new fiscal support programme for 2022-23 and, although the details of this were not yet available, the World Bank supported the idea of a step up in fiscal support for safety nets, health and education expenditure, and public investment projects. Since faster expenditure in these areas can take time because of administrative and institutional bottlenecks, it has also suggested there might be a reduction in the rate of value added tax, to support domestic demand in the short term.
Since a part of the increase in spending could be funded by cash reserves, the Bank believes a more accommodating fiscal policy can be implemented without a major impact on the fiscal or debt balance in the short to medium term.
At the same time, the Bank has suggested that the looser monetary policies introduced to help businesses in 2020-2021 can be expected to be unwound starting in mid-2022. In part, such a move would be justified by the greater resort being given to fiscal support, as well as by the risks to inflation posed by past strong growth in the money supply.
The Bank sees a need for the banking sector to implement an effective and early resolution to NPLs, so that confidence is preserved when the forbearance measures are removed. The Bank has specifically pushed for the adoption of the Basle II capital rules for all operating banks.
The World Bank is hopeful that growth in the CPI will remain below the 4% threshold set by the SBV. This assumes an easing in supply-demand mismatches caused by the pandemic, and an easing in the upward pressure on commodity prices later in the year.
Selected Economic Indicators, Vietnam (2019-2023)
Sources: GSO, MoF, SBV, IMF, and World Bank staff calculations
Nonetheless, the Bank believes that the balance of risks is titled to the downside. Much will depend on the path of the pandemic, value chain disruptions and labour shortages. There is an expectation that, as their economies normalise, the US, the EU and China will start to normalise their monetary and fiscal policies.
Beyond 2022, the World Bank has highlighted three areas where the authorities might focus their attention:
- Fiscal consolidation: reforms in both revenue (administration and tax policy) and expenditure (planning and implementation of the investment programme)
- Social policy: increasing expenditures in health (health checks and nutritional follow-ups), education (provision of tablets and improved internet accessibility for virtual learning), social protection (electronic database to unify registry of potential beneficiaries and the provision of services)
- Financial sector reform: Gradually unwinding forbearance policies and ensuring that any support that remains does not raise the risk of moral hazard; strengthening the framework for NPL resolution and ensuring that the insolvency regime is effective; strengthening prudential supervision.
In the second half of its report, the World Bank looks beyond the short term outlook for the economy, to consider the challenges and opportunities of cleaner trade for Vietnam, and how these can best be managed to assist in implementing its vision of a more sustainable development model.
To read the full report, please use the following link to the World Bank’s website:
https://www.worldbank.org/en/country/vietnam/publication/taking-stock-vietnam-economic-update-january-2022
