Vietnam’s GDP Growth Expected to Rebound to 6.6% in 2021: World Bank

11:19:35 AM | 29/4/2021

Vietnam’s exports are expected to perform strongly in 2021, though they face the risks of slackening international demand, said World Bank Vietnam in its recent report on Vietnam’s economy.

Vietnam’s economy is set to grow 6.6% in 2021 on the back of successful control of COVID-19 infections, strong performance by export-oriented manufacturing and robust recovery in domestic demand. Yet, the crisis has left a lasting impact on households, with 45% of households reporting lower household income in January 2021 than in January 2020. To reach upper-middle-income status by 2030, Vietnam’s development model needs to change to a knowledge-based, digitized and green economy.

Key conditions and challenges

Vietnam experienced sustained growth, averaging about 7% a year over the last decade, helping to create millions of jobs. This led to a sharp fall in poverty, from 20.7% in 2010 to an estimated 5.9% in 2020 (lower middle-income class poverty line (US$3.2/day 2011 PPP)). This success has relied on a steady integration with the global economy through rapidly expanding trade and foreign investments and growing investment on human and physical capital. But to transition to upper-middle-income status, Vietnam will have to address challenges such as a large low-skilled informal sector, an aging population, and forces of deglobalization, disruptive technology and climate change. The economy was affected by the April 2020 lockdown to contain the spread of COVID-19 virus and two subsequent outbreaks. But Vietnam was one of the few economies that grew during the pandemic. Exports performed exceptionally well, especially to the US, in part due to the trade diversion effect resulting from US-China tensions. The domestic economy has also bounced back, but has not returned to pre-COVID growth levels. Domestic demand was affected by COVID-19 preventative measures and by uncertainty about the timeliness of global roll-out of vaccines that would affect global recovery, which is necessary for sustained national economic growth.

While the aggregate economy has shown resilience and households have fared better than in most other countries, the crisis has left a lasting impact on the households. Preliminary results from the World Bank COVID-19 high-frequency household survey show that almost half of households’ report having lower income in January 2021 than in the year before. Fewer households are reporting declining incomes, but the share of affected households is still salient. About 28% of households experienced a decline in income in September 2020, compared to about 20% in January 2021. Female-headed households experienced larger declines in income than male-headed households. Disbursement of COVID-19 specific relief programs was short-lived and faced difficulties in implementation, highlighting a need for a more extensive, effective, and better targeted social protection infrastructure.

Recent developments

The GDP grew 2.9% in 2020, due to exceptional resilience in Vietnam’s export and domestic sectors, although this growth performance is significantly lower than the 7% growth rate in 2019. At the sectoral level, agriculture turned out to be the most resilient with an estimated growth rate of 2.7%. Industries and services grew 4.0 and 2.3%, respectively. The tourism-related sub-sectors have borne the brunt of the COVID-19 crisis with accommodation and catering services dropping by about 15.0% in 2020 compared to 2019, while the number of foreign visitors in 2020 was only 21% of that recorded a year ago. Fiscal and monetary policies have been accommodating. On the fiscal front, the authorities launched initiatives to support businesses through a deferral of tax payments, allocated funds to support households and individuals affected by the crisis and increased public investment disbursement by 40% (y/y) to bolster aggregate demand. This latter policy appears to have been the most effective. On the monetary front, the authorities reduced the reference rate three times during the year and granted flexibility to banks on forbearance to clients on loan terms. While NPLs are low, the authorities are monitoring the performance of the banking sector.

Outlook

The Socio-economic Development Strategy 2021-2030 sets the objective of Vietnam becoming an industrialized country and belonging to the group of upper middle- income countries by 2030. To achieve this goal, it needs to: (i) improve the quality of market-economy institutions and governance; (ii) develop human capital, science, technology and innovation; (iii) further integrate into the global economy; (iv) continue improving transport, energy and IT infrastructure and green and resilient megacities. The transition years will need to see major investments in human capital, innovation, and green infrastructure to increase productivity and transform the economy into a resilient and knowledge-based economy. Some of the major challenges to overcome include, an aging population, a relatively low skilled labor force, and the high environmental costs of the current growth model. The economy also remains vulnerable to external shocks given its export orientation. GDP growth is expected to rebound in 2021 reaching 6.6% and 6.5% in 2022 and 2023, respectively. Exports are expected to perform strongly in 2021, though they face the risks of slackening international demand if vaccinations continue to face slow roll-out, and growth in the US and EU, the main destination for Vietnam’s exports, falters. Domestic sector growth will pick up further once private demand recovers from ongoing COVID effects. Over the medium term, growth will settle closer to potential growth, on the back of manufacturing and services growth. On the demand side, recovery of private investment and consumption will replace the counter-cyclical policies extended during the crisis. Fiscal deficit and debt will remain sustainable while financial sector health will need to be monitored carefully. Based on the Lower -Middle Income Class poverty line (US$3.20/day 2011PPP), the poverty rate is projected to be 5.3% in 2021, slightly higher than the 5.1% forecast in the absence of COVID. The effects from COVID are not equitable. Households in the bottom income quintile have experienced on average continued income decline through January 2021, compared to households in the upper income quintile whose income decline has tapered off. Household income loss today will have longer-term impacts on spending. About 40% of households that still have lower income due to the COVID crisis said this decline has affected their plans, including home renovations, construction, starting a business, or purchase of a motor vehicle.

Source: Vietnam Business Forum