Vietnam’s GDP is expected to expand by about 4.8% in 2021 despite its robust economic performance in the first half of this year. This forecast, two percentage points lower than the projection in December 2020, accounts for the negative impacts of the ongoing COVID-19 wave.

This forecast was made in the latest edition of Taking Stock that highlights the economic pains associated with the most recent COVID-19 outbreak. The mobility restriction measures adopted by the Government to contain the pandemic have hit the economy domestically.

Facing serious risks

The Vietnamese economy robustly expanded by 5.6% during the first half of 2021 but faced serious internal and external risks, including a domestic COVID-19 outbreak, which has spread to most of the provinces since late April. Growth was fueled by the recovery of the industrial sector, which was back to its pre-pandemic growth rate of about 8% thanks to expanding manufacturing production and, to some extent, the good performance of the agriculture sector due to favorable weather conditions and the end of the African swine fever outbreak. In contrast, the services sector did not recover to its pre-pandemic growth rate partly because of its high sensitivity to restrictive mobility measures taken during the COVID-19 outbreaks. On the demand side, growth was driven by private consumption and to a lesser extent private investment, while the government resumed a less accommodating fiscal policy, and growth of imports outpaced growth of exports, turning to trade deficit while foreign investors were somewhat cautious. Disrupted supply chains and restricted activities in industrial zones as a result of spreading recurrence of the COVID-19 pandemic seemed to have forced manufacturers to temporarily close their factories or halt production activity.

Despite its relative resilience, the Vietnamese economy has been affected by the progressively more restrictive measures to contain the pandemic outbreak amid low vaccination rates.

The pandemic has also deeply affected the daily life of workers, businesses, and households. These impacts are, however, not easy to measure as they vary over time depending on the magnitude of the pandemic and the stringency of mobility indicators. Nevertheless, the common message is that many individuals have been under growing economic distress and the magnitude of this distress is rising due to the gradual deterioration of the economic situation in the country over the past few months.

The State Bank of Vietnam, the country’s central bank, continued its accommodative monetary policies, while the Government returned to a more neutral fiscal stance during the first half of the year. Credit expanded by about 15% in recent months, up from 10% to 12% in 2020, providing a welcome buffer to affected businesses. However, this policy can also lead to higher risks for the financial sector. The more neutral fiscal policy reflects a combination of higher revenue collection and lower capital expenditures, as only 28% of the annual target of the public investment program was disbursed at the end of the first half of the year.

Will Vietnam achieve growth of 6.5% in 2022?

Mr. Rahul Kitchlu, World Bank Acting Country Director for Vietnam, said, whether Vietnam’s economy will rebound in the second half of 2021 will depend on the control of the current COVID-19 outbreak, the effective vaccine rollout, and the efficiency of the fiscal measures to support affected business and households, and to stimulate the recovery.

According to the WB, Vietnam's economy may grow by 4.8% in 2021 and gradually move toward the pre-pandemic growth of 6.5% to 7.0%. from 2022 onwards. This new projection assumes that the current outbreak will gradually be brought under control, allowing the economy to rebound in the fourth quarter. This rebound will also be supported by the acceleration of the vaccination program, which should cover at least 70% of the adult population by mid-2022, preventing severe new outbreaks.

During the remainder of 2021, monetary policy will remain accommodative through the implementation of various monetary policy instruments and debt restructuring. The Government plans a faster execution of the budgeted public investment program, which may face initial difficulties due to the current mobility restrictions associated with the April outbreak, but should be at full speed in the fourth quarter.

“The authorities should also extend their financial assistance through a combination of cash transfers and subsidies, as they started to do in early July, even if its proper execution depends on its scope and ability to reach the workers who have lost their jobs. On the external front, these projections assume that a sustained global recovery will ensure continued strong demand for Vietnamese products in its main export markets,” the WB said.

As the economy recovers, supportive policies will gradually wind down. From 2022 onward, the monetary authorities will resume their prudent approach to the balance between supporting economic growth and managing inflation, while closely monitoring the health of the financial sector. Fiscal consolidation will be resumed in the medium term to ensure debt sustainability. According to the WB, the authorities will need to improve their revenue performance and expenditure efficiency, especially the quality of public investment, to meet the expected increase in infrastructure and quality social services Vietnam will need in the next decade.

However, these projections should be made with caution as serious uncertainties remain around the magnitude and duration of the pandemic, including the rise of new variants and the pace of vaccination in Vietnam and in the rest of the world. If these risks materialize, Vietnam’s economic recovery will be delayed, and the GDP growth rate in 2021 will be lower than the projected 4.8%. The convergence to the historical growth trend and fiscal consolidation in the medium term will also be slower than anticipated.

In particular, the World Bank said that Vietnam needs to watch for financial sector risks raised by the crisis. While new or restructured bank credit offers a welcome buffer to affected businesses, it also contributes to transferring the risk from the real economy to the financial sector. The monetary authorities will need to be vigilant about the rising risks associated with nonperforming loans, especially in the banks that were already undercapitalized before the pandemic. It would be useful to adopt a resolution plan for nonperforming loans, and to develop a well-defined mechanism for dealing with weak and troubled banks while continuing to recapitalize banks to meet Basel II requirements.

Notably, Vietnam needs to be aware of fiscal risks. While the Government still has sufficient fiscal space, with a debt-to-GDP ratio of around 55.3% of GDP as of the end of 2020, international experience has demonstrated that the fiscal situation could deteriorate relatively quickly if the current outbreak is not rapidly controlled or new outbreaks materialize in the coming months. The Government may be required to expand its fiscal assistance package, which has been modest so far, while revenue might be negatively affected by a weaker-than-expected economic rebound. At this stage, the fiscal risk appears under control but should continue to be closely monitored, especially as it relates to the financial health of state-owned enterprises, which could lead to contingent liabilities.