Vietnam Economy Remains Resilient to External Shocks

8:54:03 AM | 6/4/2020

Although Vietnam remains significantly exposed to the Covid-19 outbreak and the ongoing turbulence in global financial markets, its economy has shown resilience to external shocks in the first few months of 2020. The country’s GDP was forecast to decrease from 6.5% to 4.9% in 2020.

The World Bank (WB) said this in its April 2020 Economic Update for East Asia and the Pacific, titled “East Asia and Pacific in the Time of Covid-19.” According to the WB, the medium-term outlook is broadly favorable, but significant downside risks are tied to adverse stronger and longer impacts of the coronavirus outbreak, weak external demand, and incomplete structural reforms. On the upside, Vietnam is strongly positioned to benefit from numerous free trade agreements that are coming into force over the forecast period.

Given its deep integration with the global economy, Vietnam was hit hard by the Covid-19 outbreak, with manufacturing, tourism, and transport activities falling abruptly during the first two months of 2020. It has been feeling the pain of the ongoing global financial turmoil, with declining equity prices, rising sovereign spreads and decreasing capital flows.

However, Vietnam’s economy remains resilient: In the first two months, exports have expanded by 8.0%, FDI inflows amounted to US$2.5 billion and retail sales went up by 5.4%. With an adequate policy buffer in hand, Vietnam appears to be well-positioned to overcome the ongoing health and economic crisis.

After moderating in the first three quarters of 2019, the headline consumer price index (CPI) surged as the result of higher food prices in the last quarter. During the first few months of 2020, inflationary pressures remained due to higher food prices related to the end of the year season and potential shortages associated with trade restrictive measures in response to the Covid 19 virus outbreak.

Vietnam’s monetary policy continued to balance the dual objectives of maintaining stability while supporting economic growth. After months of prudent monetary policy, the the State Bank of Vietnam (SBV) started to ease its policy stance in September 2019 and even further in recent weeks when SBV cut the key policy rate by 100 basis points and allowed commercial banks to restructure loan maturities to affected businesses in response to the epidemic crisis.

Vietnam’s external balances continued to improve in 2019, despite uncertain global trade developments, as the country reported a current account surplus for the second year in a row. Vietnam’s export activity expanded by about 8% in early 2020, showing their resilience to increasingly unfavorable external economic conditions.

The capital account surplus also remained sizeable, owing to sustained high FDI inflows, leading to the further accumulation of foreign exchange reserves, which increased from the equivalent of 2.8 months of import cover at end-2018 to about 3.5 months at end-2019. Concurrently, both the nominal and real exchange rates were relatively stable through 2019 and into early 2020.

For the region, according to the WB, the virus that triggered a supply shock in China has now caused a global shock. Developing economies in East Asia and the Pacific (EAP), recovering from trade tensions and struggling with Covid-19, now face the prospect of a global financial shock and recession.

“Sound macroeconomic policies and prudent financial regulation have helped most EAP countries to deal with normal tremors.  But we are witnessing an unusual combination of disruptive and mutually reinforcing events. Significant economic pain seems unavoidable in all countries. Countries must take action now - including urgent investments in healthcare capacity and targeted fiscal measures - to mitigate some of the immediate impacts,” said the WB.

In a rapidly changing environment, making precise growth projections is unusually difficult. Therefore, according to the WB, growth in the developing EAP region is projected to slow to 2.1% in the baseline and to negative 0.5% in the lower case scenario in 2020, from an estimated 5.8% in 2019.

By Anh Mai, Vietnam Business Forum