In the time of the pandemic, while some economies struggled and faced recession, Vietnam has remained resilient, growing by 2.9 percent in 2020 – among the highest growth rates in the world. According to IMF’s latest annual assessment, it is strong economic fundamentals, decisive containment measures, and well-targeted government support that helped Vietnam’s economy weather the storm of Covid 19.
COVID-19 impact and policy response
As the pandemic hit the economy hard, it seemed that economic fallout was unavoidable, especially for an emerging country like Vietnam. However, Vietnam’s economy posted a resilience score of 74.3 out of 100, outperforming many of the world’s most powerful economies including Singapore, Germany, the U.S, and the U.K. Right at the beginning of the pandemic, Vietnam has taken decisive steps to steer away from both health and economic fallout. Rapid introduction of containment measures, aggressive contact tracing, targeted testing, and timely isolation of suspected COVID-19 cases, resulted in a notably low record of infections and dead rates on a per capita basis. Thanks to the successful containment and policy support, Vietnam’s economy still expanded by 2.9 percent as domestic activities quickly rebounded and export values increased.
Despite the resilience of the economy in 2020, a sustained recovery also depends on safeguarding financial stability. Small and medium enterprises are the sectors that were hit the hardest by the pandemic, as they entered the crisis with a relatively weak financial position. COVID-19 has made their liquidity and solvency deteriorated, which led to the concern of financial stability through bank exposures. The government has implemented monetary, fiscal, and financial sector policies to help buffer the immediate risk of a wave of mass layoffs.
Even though Vietnam’s GPD grew by 2.9 percent in 2020, it is notable that this is the slowest pace in a decade, which reflected the negative impact of COVID 19 on the economy. Economic activities declined dramatically as mobility restrictions were implemented. The sectors that suffered the most were restaurants, hotels, retail, transportation, and low-tech manufacturing. In May, domestic activity slightly recovered as many businesses re-opened and the retail sector picked up, however, the demand for services remained low. Exports decreased considerably in the second quarter as external demand shrank and the supply chain was disrupted, however, recovered thanks to the improvement of the external outlook. Medical and protective equipment, as well as work-from-home-related electronics exports sharply increased. Since commodity prices went down and private demand dropped, merchandise imports remained weak. Credit growth climbed up to 12 percent in December, from 8.8 percent in May.
The labor market suffered from a significant hit due to the growth slowdown. The labor force has been affected by the pandemic by both the destruction of full-time jobs and the cut in wages as well as working hours. The labor force decreased by 4.2 percent in the second quarter, marking the first decline in 5 years before a slight rebound. The number of businesses with temporary operation suspension increased by 81 percent, somewhat offset by a 25 percent rise in firms resuming operations, suggesting continued business dynamism.
Projected robust recovery in 2021
Despite some economic scarring, Vietnam’s economy is expected to experience a robust recovery in 2021. It is projected that economic growth will strengthen to 6.5 percent as economic activities continue to be normalized, businesses recover, and private consumption and business investment pick up. Manufacturing and retail sales are expected to recover the fastest, while the travel and hospitality services will remain weak. Net exports will continue to play a major role in economic growth as external demand increases. Due to disruptions to domestic activity and the labor market, economic scarring is projected to slow down potential growth as labor-reallocation takes place slowly, and capital remains idle in the sectors that were hurt the most.
The authorities’ plans to scale down the budget deficit to 3 percent of GDP over the medium-term will help support fiscal buffers. Prudent fiscal policies are the focus of the authorities to balance fiscal sustainability for growth support. The authorities agree with the need to improve execution and coverage of policy support as recent public investment disbursement rates and coverage of social-safety programs are expanded. Given the uncertain look, fiscal policy should be adjusted to the pace of the recovery, however, the implementation should be more cautious to avoid depleting policy space. It is noted that the 2021-30 tax-administration strategy will contribute to mobilizing revenues over the medium term, and tax-upgrading policies are under study. A revised public-debt ceiling below 65 percent of GDP for 2021-25 is currently under consideration and is recognized as more prudent regarding the recent GDP re-basing.