Vietnam’s economy an ASEAN outlier

Sian Fenner
While other large Southeast Asian economies are expected to contract in 2020, Vietnam stands an anomaly
Lead Asia Economist at Oxford Economics

Vietnam’s GDP improved in the third quarter of 2020, rising 2.6% yoy as the easing in restrictions since late April led to a marked turnaround in service sector activity. Retail sales and domestic tourism also saw an uptick. And while the recovery in manufacturing output was somewhat disappointing, its momentum did improve in September as localised restrictions eased. 

Overall, the economy is still on track to record 2.3% real growth this year before picking up to 7.8% in 2021.  

The acceleration in GDP growth in Q3 was slightly weaker than expected, reflecting a softer recovery in manufacturing output. The reintroduction of localised restrictions in August dragged on activity in that month.

However, restrictions have eased once again and industrial production rose by 3.8% yoy in September, up from -0.6% in August. Manufacturing rose a solid 4.6% yoy in the latest month, underpinned by a strong rebound in computers and electronics. The rise in electronics output bodes well for exports, at least in the short term. Indeed, goods exports in US dollar terms surged 18% yoy in September.

Retail sales momentum also trended higher, albeit growth (5.3%) was still significantly slower than the 12% average recorded in 2019.

Exhibit 1: Vietnam: GDP by sector

Vietnam’s economic recovery is expected to gain further momentum through the rest of the year and into 2021, aided by accommodative macro policies. FDI and investment are also projected to improve through the rest of this year and in 2021. 

This is partly on account of renewed focus on US-China tensions that are likely to further support Vietnam’s attractiveness as a destination for manufacturing FDI inflows. However, the external outlook remains challenging after the initial post lockdown bounce in the third quarter, as most countries are still reeling from the impacts of the pandemic and trade is expected to remain subdued.

Moreover, services exports are likely to remain a drag on the recovery across all countries as travel restrictions and border closures are likely to stay in place for the foreseeable future.

Positive growth in 2020 despite pandemic

After rising 2.6% yoy in the third quarter, economic momentum is expected to continue to improve in the final quarter and into 2021. Indeed, after stalling in August, following some temporary localised restrictions, activity has bounced back as new coronavirus cases were quickly brought back under control.

We expect goods exports to recover further over the coming months. However, the pace of recovery is likely to be bumpy given uneven global demand. Meanwhile, protracted travel bans will continue to weigh very heavily on tourism and exports of services too.

Domestic demand conditions are expected to continue improving on the back of a pickup in FDI inflows. However, the improvement in household spending is likely to be gradual, amid increased unemployment, which reached a high of 2.7% in the second quarter. While growth is expected to gather momentum in the last quarter, we still forecast significantly slower average GDP growth this year of 2.3%, compared to 7% in 2019.

A strong rebound in growth is expected in 2021, amid rising FDI inflows and stronger construction activity. However, as we now assume a more prolonged period of social distancing measures, thereby hindering recoveries in both domestic and global demand, growth forecasts for 2021 have been slightly lowered – from an earlier 8% to 7.8%.  

Outside of external risks, there is a risk of sharp deterioration in bank profitability, squeezed capital adequacy and slower credit growth. This is particularly so in the event of another virus outbreak that can again lead to stringent lockdowns.

The outlook is mainly influenced by:

Rising electronics exports outweigh weaker textiles demand. Lower global demand and disruptions to Chinese intermediate goods production in the first quarter took a toll on Vietnamese exports. However, the relatively quick restart of activity, the easing in supply chain disruptions, and the solid global demand for electronics and scientific goods have seen exports rebound since May. We expect these factors to continue to offset weaker demand for clothing and we expect a solid recovery in 2021. The free-trade agreement with the EU, which came into effect in August, will further support growth. Still, the pace of recovery is likely to be bumpy given uneven global demand, although we expect Vietnam’s export recovery to outperform other Southeast Asian economies.

Continuing large hit to tourism. Tourism, directly and indirectly, accounted for 9% of GDP and 6.1% of employment in 2019, and around 40% of services activity. As such, international travel restrictions have hit the service sector hard and will continue to do so. To help offset the negative impact of fewer foreign visitors, the government has been promoting domestic travel. But our analysis suggests this will not be enough to offset the impact of lower international travel.

Exhibit 2: Tourism direct and indirect

FDI inflows to pick up in the second half of the year. FDI inflows fell 15% from January to June as the global pandemic saw firms postpone or cancel investment projects globally. However, we expect FDI inflows to Vietnam to pick up over H2 due to the successful containment of the virus, in addition to the country’s favourable labour dynamics and its proximity to China. Moreover, renewed US-China tensions and the ratification of the EU-Vietnam Free Trade Agreement are boosting Vietnam’s attractiveness as an FDI destination in the short and medium term.

Inflation averaging below 4% target during 2020. Headline consumer price index (CPI) inflation has moderated this year, just 3% yoy in September compared to over 5% in the first quarter as lower energy prices offset elevated food prices. Core inflation (excluding energy and food prices) has also eased over this period, to 2%. While petrol prices are set to rise somewhat from 2020 lows, this is likely to be offset by more favourable developments in food inflation and overall CPI inflation is expected to stay below the State Bank of Vietnam’s (SBV) 4% target for much of next year.

Supportive macro policies. The SBV has lowered the refinancing rate by 150 basis points to a low of 4.5% and reduced other benchmark interest rates. With inflation running below target, the SBV has the room to lower rates further if necessary. However, we expect it to adopt a ‘wait-and-see’ approach for now, given the positive signs that activity is now normalising.

Fiscal stimulus measures. The government has also implemented a fiscal package worth VND266 trillion ($11.4 billion), or 3.5% of GDP, to support the domestic economy, with measures including cash transfers to households and tax and land rental deferments. Additionally, the government plans to disburse 100% of public investment capital valued at VND686 trillion or around 9% of GDP. This includes VND225 trillion carried over from previous years, but as usual, disbursement is still very low.

Not all gloom

Despite the myriad challenges Vietnam’s economy is faced with owing to the coronavirus pandemic, its economic prospects remain brighter than those of the other key ASEAN economies of Indonesia, Malaysia, the Philippines, Singapore and Thailand, all of which are expected to witness contractions of varying degrees in 2020.

Exhibit 3: Asia: GDP growth forecasts

While the government has provided a fiscal stimulus package and has put in place supportive macro polices, the degree to which Vietnam’s economy can bounce back is still going to be heavily dependent on external factors such as global demand and trade, and the ramifications of the US-China trade war.

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Lead Asia Economist at Oxford Economics

Sian has over 15 years of experience in macroeconomic research and forecasting across emerging markets. She is currently a Lead Asia Economist for Oxford Economics responsible for the forecasts and research across key ASEAN economies. She specialises in macro-modelling and scenario analysis aimed at quantifying risks to the short- and medium-term outlook on different economies. Prior to joining Oxford Economics, Sian worked for Lloyds Bank as the lead emerging market economist. Sian spent the first five years of her career as an economist at the Australian Federal Treasury.

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