Vietnam Economy Remains Resilient

9:42:34 AM | 9/23/2020

Vietnam’s economy is expected to grow by 1.8% in 2020 amid the coronavirus pandemic and bounce back to 6.3% in 2021, according to a new report by Asian Development Bank (ADB).

According to Mr. Andrew Jeffries, Country Director of ADB in Vietnam, declining domestic consumption and weakening global demand due to COVID-19 have affected the Vietnamese economy more than expected. However, economic growth will remain resilient in 2020, largely due to the Government's success in controlling the spread of COVID-19. Economic growth will be supported by Vietnam's macroeconomic stability, increased public spending, and ongoing reforms aimed at improving the business environment.

ADB's analysis shows that the global recession and weakening domestic conditions, especially worsening unemployment and a significant decline in consumption, have hurt the economy more than expected. The economic outlook has been also threatened by an increase in new COVID-19 cases since the end of July 2020. Hence, the growth forecast for 2020 is revised downward from 4.8% in the ADO Report 2020 and 4.1% in the additional ADO report in June to 1.8% in this updated ADO report.

Notably, in 2021, investment will be boosted by improving public investment disbursement, supply chains shifted from China to Vietnam, the Chinese economy’s recovery and the EU- Vietnam Free Trade Agreement. The Japan External Trade Organization (JETRO) has announced a list of 15 Japanese enterprises that plan to transfer their production activities from China to Vietnam.

From the supply side, the agricultural sector will face difficulty in 2020 due to extreme weather and will continue to suffer due to weak external and domestic demand. The manufacturing sector will be held back this year due to weak exports, limited travel and reduced domestic demand due to loss of income and jobs, although it will rise again in 2021. Mobile phones and components, along with electronics, are still the top export items of Vietnam, accounting for 18% and 16% of total export turnover respectively. In the first eight months of 2020, exports of phones and components decreased by 5% year-on-year. Falling incomes and limited mobility will also hamper the recovery of domestic and international tourism.

Inflation can be pushed up by rising commodity prices and increased liquidity by accelerating public investment. However, inflation will remain low in 2020, lower than the State Bank of Vietnam's target of 4.0%, due to persistent low growth and spending.

Lending will remain weak even though the central bank has taken supportive measures. As a result, bank credit is forecast to increase only 10% this year, much lower than the central bank's target of 14.0% year-on-year growth.

A matter of concern is that the unemployment rate is likely to rise. A joint study by the International Labor Organization and the ADB predicts that 548,000 young Vietnamese workers will lose their jobs if the pandemic continues and this number will be 370,000 even after the pandemic has been controlled.

The current account surplus is expected to fall to the equivalent of 1.0% of GDP in 2020 and recover slightly, to 1.5% by 2021. Although exports will decline in the last months of the year, imports are expected to decline even more, keeping the balance of trade in surplus. However, this surplus is not an indicator of economic health, as it arises from both declining production and demand. Meanwhile, the pressure that makes the current account most likely to decrease is coming from remittances, which are forecast to drop by 18.0% in 2020.

Facing the above reality, ADB forecasts that Vietnam's economy in the near future will face many difficulties, in the context of the global economic recession and the domestic slowdown being worse than expected. However, Vietnam is showing stronger resilience than most similar economies, and the medium and long-term outlook remains positive.

By Lan Anh, Vietnam Business Forum