Vietnam – No Stopping Country on the Ascendancy

After two decades of recording full employment and boisterous growth rates, Vietnam has taken a significant, though far from fatal, economic hit even as the country received near-universal praise for its deft handling of the Corona Pandemic. Though most of the nearly one million workers laid off during the first scare in March have since been rehired, average take home pay dipped by 5 percent according to the latest World Bank numbers.

The Ministry of Labour in Hanoi estimates that around 30 million workers – roughly half of the country’s workforce – were affected by the pandemic in some way. Used to watch its economy barrel ahead by 7 percent or more annually, the latest GDP data (Q2 2020) showed a measly 0.36 percent growth rate.

However, as GDPs plunge around the world, Vietnam’s continued economic expansion, albeit at a rather anaemic pace, is both remarkable and exceptional. Also noteworthy is the (corona-adjusted) International Monetary Funds’ forecast for growth over the full year to come in at 2.7 percent. The Asian Development Bank is more optimistic still and expects Vietnam’s GDP to regain most of its momentum and end the year on a high note with a 4.9 percent advance over 2019.

By contrast, the view from Hanoi is slightly less sanguine. The national economy put in its worst performance in 35 years whilst the global pandemic continues more or less unabated. The country now faces a ‘covid-19 trap’: Domestic demand has stalled as risk-averse households postpone or cancel consumption and investment plans and export-oriented industries – a major source of jobs and forex earnings – face a gradual slimming of order books.

All manufacturing sectors, with the sole exception of computer components, report a sharp decrease in the volume of overseas orders. Moreover, the collapse in demand has worsened significantly over the past weeks. Due to restrictions on cross border mobility, the tourism sector fears that just a fraction of the 20 million foreign visitors expected this year will turn up.

Good News

The good news is that Vietnam is relatively well equipped to take a hit. With a (public) debt-to-GDP ratio of barely 7 percent and a stable rating outlook, the government should have little trouble raising cash via bonds. Though the major agencies still rate the country at just below investment grade, Fitch has indicated that an upward adjustment is imminent.

Though its income may take a $6.2 billion hit, the government still enjoys enough fiscal wiggle room to deploy an ambitious stimulus programme. The country maintained its national accounts reasonably balanced for a nation undergoing accelerated development. So far, the Corona Pandemic has widened the expected fiscal deficit for this year by just 1.2 percentage points to -5 percent of GDP.

The government unveiled a $12.9 billion package to help businesses and households survive the pandemic. Most support is being offered as tax deferrals and rebates, and discounts on utility bills. An additional $2.7 billion has been freed to support unemployed workers. However, its disbursement suffered delays over bureaucratic hurdles. Many owners of small businesses have been unable to access emergency credit lines due to excessive demands for paperwork. Out of an estimated 350,000 eligible businesses, only about 70,000 managed to secure loans.

In its recent economic update on Vietnam, the World Bank suggests the country increase its economic footprint by tapping into the trend towards supply chain diversification. The way Vietnam tackled the Corona Pandemic – early and decisive – has not only created a lot of goodwill but also showed a mature and responsible society ready to meet the challenge without turning to excessive authoritarianism or clamping down on dissent.

World Bank (acting) country director Stefanie Stallmeister thinks that Vietnam may yet turn the table on covid-19 by rapidly exploring new drivers of growth such as the digitisation of the economy or the speeding up of a public investment programme to ready the country’s infrastructure for a return to high growth. Ms Stallmeister also sees opportunities in the ‘contact-free’ economy by promoting e-learning, digital payments, and data-sharing between societal actors, including government departments, to improve decision-making processes and the efficient implementation of their outcomes.

As part of its covid-19 response the government in Hanoi has fast-tracked a number of major public works projects such as the new north-south highway, two metro lines, and a new airport for Ho Chi Minh City – formerly Saigon.

Prime Minister Nguyen Xuan Phuc also gave the green light for a $9.3 billion resort to be constructed in the Can Gio district by Vingroup, the country’s largest privately-owned conglomerate. Slated for completion in 2031, the future megaresort represents the largest single investment in the country since the 1970s. Approval had been held up over environmental concerns but was granted after the politburo intervened and ordered the project to go ahead.

Better News

Perhaps the best news to emerge concerned the fast-track and unanimous approval by the National Assembly in June of the EU-Vietnam Free Trade Agreement (EVFTA) which took effect in August. The trade deal eliminates duties on 71 percent of Vietnamese shipments to the EU. In the other direction, 65 percent of exports will arrive duty-free at their destination. Vietnam has agreed to phase out all remaining duties over the next ten years. The EU promises to do likewise in seven years. After Singapore, Vietnam became only the second Southeast Asian country to sign a free trade deal with the European Union.

The EVFTA is seen as an important steppingstone towards Vietnam’s unstated goal of replacing the People’s Republic of China (PRC) as a hub of global manufacturing. The country is already home to the world’s third-largest apparel sector after Bangladesh and the PRC. Last year, garments and footwear counted for about $39 billion in forex earnings, about 20 percent of the total value of exports.

Electronics contract manufacturer Foxconn (of iPhone fame) heard the call and has already begun shifting part of its production to Vietnam. Nintendo and Google have followed suit.

With close to 100 million inhabitants, Vietnam represents the potentially third-largest market of the Association of Southeast Asian Nations (ASEAN). European exporters are particularly excited by the fast-growing spending power of the Vietnamese. Per capita GDP approaches the $3.500 per year mark usually considered a tipping point beyond which the sales volume of durables such as cars and domestic appliances takes off.

The country seems determined to expand its global reach via trade deals and is pushing the ASEAN to speed up the creation of the Regional Comprehensive Economic Partnership which seeks to add South Korea, Japan, and the PRC to the free trade area plus Australia and New Zealand. Late last year, India opted out of the talks over concerns that unrestricted trade may ‘adversely impact’ its people. Japan and the PRC have since asked India to reconsider. Meanwhile, Vietnamese entrepreneurs are urging the government to pursue a free trade deal with the United States as well.

Though the corona infection rate crept up in August, the Vietnamese government again reacted swiftly and decisively to contain the outbreak, closing beachside resorts, ordering local lockdowns, and introducing more stringent checks on people, livestock, and goods crossing the border with the PRC. It is suspected that the virus may have been reintroduced by travellers returning from up north.

Holding a steady course that keeps its society united, the government of Vietnam is not just weathering the storm but, whilst doing so, keeping a keen eye out for opportunities that may come knocking in the wake of the pandemic. With maturity and a clear sense of purpose, Vietnam is one of the few countries that may expect to do alright whatever shape the new normal takes.