Vietnam’s economy and people are often described as ‘resilient’. Nowhere is this more befitting than in relation to the COVID-19 pandemic. After successfully tackling COVID-19, Vietnam still recorded 1.8 per cent GDP growth during the first half of 2020 despite negative growth in most parts of the world. Suiwah Leung specially for the East Asia Forum.
According to the World Bank’s July 2020 Taking Stock report, Vietnam’s recent economic performance is a result of its twin engines of growth — export demand and domestic consumption — firing sequentially during the first two quarters of 2020.
From January to mid-April, Vietnam’s exports recorded a 13 per cent per month increase before its trading partners, such as the United States, Japan and China, began contracting. During this period, domestic consumption was subdued because of strict social distancing and lockdowns. Then from mid-April to the end of June, the domestic economy was in recovery mode with manufacturing growing at 30 per cent while merchandise exports collapsed. The World Bank forecasts an annual growth rate of 2.8–3 per cent for Vietnam in 2020, and a return to pre-crisis growth of 6.8 per cent in 2021.
This forecast is subject to the government actively using fiscal policy to support growth in the very short-term, and the economy continuing to benefit from the trade and investment diversion in the medium-term through participation in regional free trade agreements like the EU–Vietnam Free Trade Agreement concluded in June 2020.
One of the immediate measures to support growth is to ease mobility restrictions given tourism contributes around 10 per cent to GDP growth. After months of very few COVID-19 infections and no deaths, reports in August swirled of some 1000 infections with 25 deaths originating from the Da Nang region, a popular domestic tourist destination. As at the end of September, the tally is reported to be 1100 cases of infections, 35 deaths, but no domestic transmission for 27 days. Hence restrictions imposed are again being lifted, and the economic impact from this episode may not be significant.
Other fiscal measures include ramping up spending on the approved public investment program, in particular spending on Official Development Assistance projects in the pipeline. Strategic support from the private sector, such as investment in the country’s digital infrastructure, is also being implemented.
In mid-August, the Ministry of Information and Communications announced the launch of the akaChain blockchain platform which helps companies shorten the time spent on tasks like electronic Know Your Customer procedures, credit scoring and customer loyalty programs. Improved security and transparency are also possible in future developments of this technology. In a country with a relatively young demographic, remote teaching and learning, as well as telemedicine, are advancements that have been given impetus by COVID-19.
The formal private sector is only one area that needs support. Vietnam’s informal private sector (in tourism and other services) is large, and can rebound faster than the formal sector once COVID-19 restrictions are eased. The World Bank report points out a number of risks associated with this short- to medium-term strategy.
First, in terms of Vietnam’s external position, strong export growth, foreign direct investment and remittance inflows in the last five years have resulted in a reasonably comfortable buffer of international reserves. Vietnam’s industrial structure is such that exports are strongly linked to imported inputs. So a significant reduction in merchandise exports is generally accompanied by a fall in imports so that the merchandise trade balance is not seriously affected. Paradoxically, this lack of backward linkage in Vietnam’s industrial structure is a serious impediment to rapid growth in the longer term.
Second, fiscal consolidation in the past three years means there is some space for a fiscal boost in the short run without significantly increasing the burden of public debt, which has fallen to around 55 per cent of GDP. Indeed, the expected uptick in public debt could add pressure to reinvigorate the privatisation of state-owned enterprises (SOEs) — a program that has been stalled since 2018. This would have significant long-term benefits.
Finally, monetary easing is necessary now, but could result in a further deterioration of loan quality and an increased amount of non-performing loans in the banking system. Management of this risk would test the effectiveness of the regulatory structures of the government necessary for long-term growth.
The fundamental reforms needed to achieve Vietnam’s ambition of breaking out of the middle-income trap remain unchanged. They include banking and SOE restructuring, and the building of effective and accountable public institutions. In a highly open economy like Vietnam’s, and during a period when the world economy has been badly hit by COVID-19, short-term resilience needs to be matched by a political will to continue with structural reforms that will keep building momentum for long-term growth.
While there might have been an element of luck in the short-term trade and investment diversion as well as in timing for handling the pandemic, good policy has generally been adopted and will continue to be crucial in ensuring Vietnam’s long-term economic growth.
Suiwah Leung is Honorary Associate Professor of Economics at the Crawford School of Public Policy, The Australian National University.