Vietnam Economy Still Faces High Risks

9:19:50 AM | 10/6/2021

Despite its good resilience, Vietnam's economy has been facing a serious pandemic outbreak since April 2021. Restriction measures, aimed to contain the pandemic, have negatively affected economic recovery that was strong in the first half of 2021. If this pandemic is controlled by the third quarter of 2021 and restriction measures are gradually eased in the fourth quarter, the country’s GDP is expected to grow 4.8%, but the economy is still facing heightened risks.

This is reflected in the WB’s latest East Asia and Pacific Economic Update, Fall 2021.

The pandemic causes profound impacts on economy and society

After making relatively solid growth in the first half of the year, increasingly stringent restrictions derailed the recovery process. Vietnam's economy expanded 5.6% in the first half of 2021, driven by the industrial manufacturing sector growing at a pre-pandemic rate of 8% while the service sector contracted half from the pre-pandemic growth. Vietnam maintained a positive external economic position, with foreign exchange reserves reaching US$100 billion amid worsening balance of trade in goods and current accounts. Stricter social distancing measures and low vaccination rates hit economic activity. In August, retail sales sank 33.7% year on year while the Index of Industrial Production slumped 7.4%.

This outbreak deeply hurt the daily livelihoods of workers, businesses and households, although policy measures had been taken to minimize its impacts. Even before the outbreak and under relatively normal conditions, 30% of households reported a decrease in income in March 2021 from a year earlier. Prolonged social distancing and business closures worsened their livelihoods, especially for workers in the informal sector. The Government announced the second support package with a modest scale of VND26 trillion (US$1.1 billion) in July 2021 to provide financial support for affected workers. However, the effect of this support package will depend heavily on how it is executed by localities.

In addition, according to the World Bank, the financial sector may face an increasing risk of bad debt and monetary policy regulators will need to be more vigilant, especially with banks with pre-pandemic low capital adequacy ratios. Although the fiscal risk is currently not high and public debt stays sustained, caution must still be exercised, even with potential debts that may arise from state-owned enterprises (SOEs). The economy may also confront possible external risks. Although Vietnam's key export markets such as the United States, China, and the EU seem to be recovering, the pace is still uncertain due to the emergence of COVID-19 variants and differing vaccination progress. Moreover, Vietnam's exports are facing increasing competition from countries with stronger manufacturing activity.

More resources needed to mitigate adverse social impacts

The World Bank forecast that Vietnam's GDP may expand 4.8% in 2021 and recover to the pre-pandemic growth of 6.5 - 7% from 2022 onwards. This forecast is based on assumptions that mobility restrictions will help contain infections successfully by the end of the third quarter for the economy to rebound in the fourth quarter of 2021. A sustained global economic recovery will ensure strong demand for Vietnamese exports in key export markets such as the United States, the European Union and China. The recovery will also be supported by a mass vaccination rollout with 70% of adults vaccinated by mid-2022, helping prevent new severe outbreaks. However, the above forecast will still depend on downside risks, including a prolonged pandemic outbreak that triggers economic disruptions.

According to the report, from now till the end of 2021, monetary policies are expected to remain accommodative with some monetary policy tools enabling businesses to extend debt repayment deadlines. Fiscal policies will be more supportive with accelerating public investment projects, especially after mobility restrictions are lifted.

Besides the second social security support package, the Government is considering a tax support package for businesses. Given the available fiscal space, the WB believed that the Government needs to launch resources to minimize adverse social impacts and prevent negative risks to growth, especially if such risks heighten. In the coming time, authorities will need to pursue green growth and digitalization in order to enhance economic resilience and sustainability. While still-high new infections require social distancing measures, workers' incomes will continue to be severely affected. The Government will need to increase support levels and adopt monetary support programs to reach more households, workers in informal sectors and vulnerable people whose names are not in beneficiary lists. The Government's second support package for households has added more groups of affected workers and higher support for individuals. However, the current monetary support is a one-time, rather than multi-month support, as in the first package launched in April 2020.

By Anh Mai, Vietnam Business Forum