Vietnam Stays Resilient to External Shocks

10:24:39 AM | 5/18/2020

Fitch Ratings revised Vietnam's outlook from “positive” to “stable” and affirmed the sovereignty rating at BB.

The outlook revision reflects the impact of the escalating Covid-19 pandemic on Vietnam's economy through its tourism and export sectors, and weakening domestic demand. The affirmation reflects Vietnam's strong medium-term growth prospects based on its record of macroeconomic stability, low government debt levels and resilient external sector, including relatively large foreign exchange reserves.

According to the World Bank (WB), after showing some resilience with a GDP growth rate estimated at 3.8% in the first quarter of 2020, the economy was hit by restrictive measures introduced in April to keep the coronavirus disease in check. The index of industrial production (IPP) in April fell 13.3% compared to March or 10.5% year on year, which is the biggest decline ever recorded. Retail sales also declined 9.6% year-on-year due to rising uncertainty and travel restrictions faced by consumers (even when there was a shift to e-commerce). Passenger and freight carriage decreased by 27.5% and 7.2%, respectively.

According to the General Statistics Office (GSO), employment in processing and manufacturing industries were most heavily impacted with 1.2 million jobs affected during the first quarter, followed by wholesale and retail, 1.1 million, plus accommodation and catering services, 740,000. Among affected people, 59% were temporarily unemployed, 28% had to work in rotational shifts, and 13% lost their jobs. Unemployment among workers aged 15 years and above also reached a 5-year high, reaching 2.22% at end of March, up 0.07% against the previous quarter. As many as 18,600 companies temporarily suspended business in the first quarter, up 26% year-on-year. The International Labor Organization (ILO) estimated the pandemic could affect 4.6-10.3 million workers by the end of the second quarter.

Notably, the consumer price index (CPI) dropped sharply by 1.6% in April, causing the gauge to rise by only 2.9% year-on-year and 4.9% month-on-month. Prices fell mainly because domestic demand for foods and foodstuffs weakened and crude oil prices fell to record lows on the international market.

On the external front, Vietnam’s merchandise exports continued to grow in the first months of 2020, but at a slower pace than during the pre-COVID period, indicating weaker external demand and some disruption of global supply chains as well as the temporary ban on rice exports (already lifted). The value of merchandise exports is estimated to have increased 4.7% year on year in the January-April period compared to the 6.5% growth in the same period of 2019. The export value of the foreign-invested sector - the engine of Vietnam’s exports - grew by only 1.5% compared to 4.4% in the same period last year. While there are not yet official estimates, the trade service and income balance have significantly deteriorated due to the near total halt in foreign tourist arrivals, which saw a 98% decline in April 2020 compared to a year earlier, and the expected large decline in remittances.

In the first four months of 2020, committed foreign direct investment (FDI) amounted to US$12.3 billion, a year-on-year decrease of 15.5%. Surprisingly, the value of FDI commitment rebounded in April, up by 81% over March 2020 and 62% over April 2019.

According to the WB, Vietnam’s credit growth reversed to increase in March after slowing down in the first two months of 2020. The State Bank of Vietnam (SBV) reported that credit rose 1.3% by the end of March or 11% year-on-year. The SBV provided support through a package of measures introduced in early March to allow banks to restructure loans and lower interest rates on borrowers. It also considered liquidity support through credit growth for certain commercial banks that would contribute to more lending to businesses facing liquidity shortages.

Fiscal outturns in the first quarter of 2020 started to reflect the trends that are expected to materialize over the remainder of the year: declining revenue and higher spending. According to the Ministry of Finance, estimated budget revenue in the first quarter 2020 increased by only 1.8% compared to the same period last year. The result reflects better collection performance in the first two months before the slowdown in economic activity and the implementation of various tax deferrals that came into full effect in April. During the first quarter, total expenditure rose 8.7% year on year, which is about 5% higher than the GDP growth rate during this period. This increase is explained by the Government’s willingness to accelerate the implementation of key infrastructure projects.

According to the World Bank, Vietnam's economy may prosper again in the coming time. Fitch Ratings also affirms Vietnam's strong medium-term growth outlook, based on a stable macroeconomic background, low levels of government debt and a well resilient external economic sector.

By Quynh Anh, Vietnam Business Forum