ADB: Vietnam’s economic growth among the highest in Southeast Asia

9:59:04 AM | 14/4/2020

Vietnam's economic growth is expected to decline sharply to 4.8% in 2020, from the initial supply shocks as a result of the Covid-19 pandemic affecting Vietnam’s principal trade and investment partners, according to the Asian Development Outlook (ADO 2020) report released by the Asian Development Bank (ADB).

Slowing growth

The outbreak spiraled into a new stage in March when it came to affect all of Vietnam’s principal trade and investment partners like the European Union (EU), China, South Korea, Japan, and the United States. In Vietnam itself, the number of Covid-19 infections has continued to climb. The impact on Vietnam could therefore be severe, creating shocks to both supply and demand in almost every area of the economy. Growth decelerated to 3.8% in the first quarter of 2020 from 6.8% in the corresponding period in 2019.

On the demand side, travel restrictions held down growth in domestic consumption in the first quarter of 2020. Growth in retail sales dropped to 4.7% in the first quarter of the year from 12.0% in the same period last year. Inflow and disbursement of foreign direct investment (FDI) have already slowed. In January and February 2020, foreign investment registration shrank by 23.6% against a year earlier, while disbursement dropped by 5%. With the sharp contraction in global trade, export growth is therefore forecast to ease to 5.3% in 2020, and import growth to 4.7%, before exports recover to 7.8% growth in 2021 and imports to 6.8%.

On the supply side, export-oriented manufacturing managed to weather headwinds in January-February with sufficient inventories of inputs, which the prolonged supply chain disruption has since exhausted. As manufacturing occupies a substantial share of industry, sector expansion thus fell to 6.2% in February 2020, from 9.2% a year earlier.

ADB's analysis shows that the manufacturing purchasing managers’ index, a leading indicator, fell from 50.6 in January 2020 across the threshold at 50 into contractionary territory to 49.0 in February - the first such drop in over four years. Output fell at the fastest pace in five years, while new orders shrank for the first time since November 2015, partly a result of lower export sales and decline of orders from economies affected by Covid-19. Manufacturing has been further disrupted by travel restrictions that prevented the return after the Lunar New Year in late January of skilled workers from China and South Korea, as well as by 14-day compulsory quarantine for those exposed to infected people.

Industry growth slowed to 5.1% in the first quarter of the year from 8.6% in the same period last year. An enterprise survey conducted in March by the National Advisory Council for Administrative Reform found 74% of surveyed firms expecting to shut down operations temporarily if the outbreak is not controlled by June 2020.

The current account balance is expected to fall into deficit equal to 0.2% of GDP this year, recovering to a 1.0% surplus in 2021. The financial account will also be hit by the outbreak. As of 24 March 2020, the stock market index had plummeted by 31.4% since the end of 2019.

As the outbreak persists, demand for agricultural exports from Vietnam will continue to fall. Separately, agricultural production is suffering severe salinity intrusion in the Mekong Delta. Services have so far been the sector hardest hit by the outbreak. Growth in services was halved to 3.2% in the first quarter of 2020 from 6.5% in the corresponding period in 2019.

Strong recovery prospects

To support affected businesses, the government unveiled in early March 2020 a US$10.8 billion (0.4% of GDP) relief package of debt restructuring and lowered and waived interest rates and fees. The Government recently launched a fiscal package worth US$1.3 billion that reduces taxes and fees for affected firms and defers tax payment. The budget support from the government is expected to widen. The State Bank of Vietnam (SBV) cut policy rates by 0.5-1%, lowered interest rate caps on dong deposits of less than 6 months and on short-term dong lending to prioritized sectors.

If the outbreak is contained within the first half of 2020, growth should rebound to 6.8% in 2021 and remain strong over the medium and long term.

“Despite the deceleration in economic activity and the downside risks posed by the Covid-19 pandemic, Vietnam’s economic growth is projected to remain one of the highest in Southeast Asia,” said ADB Country Director for Vietnam Eric Sidgwick.

According to ADB, drivers of economic growth - a growing middle-income class and a dynamic private sector - remain robust. The middle class in Vietnam is one of the fastest growing groups in Southeast Asia. According to Boston Consulting Group, the middle class has doubled in size since 2014 to 33 million, or a third of the population.

The business environment similarly continues to improve. The disbursement of public investment has improved significantly, growing by nearly 18% in January-February 2020 over the same period in 2019. Disbursement will continue to improve in 2020 as this is a priority fiscal measure in response to Covid-19.

In particular, the large number of bilateral and multilateral trade agreements in which Vietnam participates promise the improved market access essential for an economic rebound after Covid-19. Containment of Covid-19 in China and that market’s likely return to normal will help revive global value chains and facilitate economic recovery in Vietnam.

By Anh Mai, Vietnam Business Forum