Unlike the last time the fourth COVID-19 wave hit HCMC, cases, mostly of the Delta variant, have spread from Hanoi and Hai Phong in the north to central and the Mekong Delta provinces.

Its 4Q21 GDP print grew strongly by 5.8% y-o-y, overshooting market expectations for moderate growth (HSBC: 3.8%; Bloomberg: 3.9%). This brings its full-year GDP growth to 2.6% in 2021- a positive number in a challenging year, but also the slowest pace in the past 30 years. After all, it was a tough year for Vietnam, particularly for its commercial hub of Ho Chi Minh City (HCMC) and the surrounding provinces, which suffered four months of hard lockdowns until October. However, the good news is, the trough seems to have passed.

After experiencing its first quarterly contraction in a decade in 3Q, manufacturing activity resumed its pre-Delta COVID-19 variant expansion pace in 4Q, roaring 8% y-o-y.For 2021, with a growth rate of 6.4% y-o-y, manufacturing output remained a key pillar of Vietnam’s economy, reassuring investors’ confidence.

The positive recovery in manufacturing is also a reflection of Vietnam’s improving external sector. After the strict lockdown in 3Q21, Vietnam’s exports saw a swift recovery, growing almost 19% y-o-y in 4Q. Meanwhile, hard-hit textile and footwear exports also returned to preDelta COVID-19 variant levels. Overall, in 2021, Vietnam’s export growth jumped by 19% thanks to firm electronics and machinery exports, reflecting still-elevated global demand and the resilient supply chain in the north, where tech giants are located.

In Mr. Yun Liu, economist of the Hongkong and Shanghai Banking Corporation Limited’s view, that said, Vietnam’s external balance advantage was shrinking in 2021. Despite record-high exports, as a country heavily reliant on imports for its raw materials and intermediate goods, Vietnam also registered record-high imports, spiking by 26% in 2021. This led to a small trade surplus of USD 4.6 billion. While the full-year balance of payment (BoP) data is not available, a small trade surplus is unlikely to offset deficits in services and primary income. As such, Vietnam is likely to see a small current account deficit in 2021, possibly around 0.5% of GDP, putting downward pressure on the VND.

Apart from recovering manufacturing, Vietnam’s services also turned from the main drag in 3Q to the major support in 4Q. However, the recovery is uneven across sub-sectors. For one, ‘human health & social work activities’ and ‘finance & banking’ extended their strong y-o-y growth in 4Q. Also, consumer-facing services, such as wholesale and retail sectors, recovered from 3Q plunges, as the economy gradually re-opened on October 1, 2021. After all, mobility indicators have bottomed out from September’s trough of 60% to around 20% by the end of 2021. This has paved the way for improving retail sales, ending the year with marginal positive momentum, on a three-month moving average basis.

"That said, spending on discretionary goods remained in contraction, as shown by falling car sales, for example. While the mobility index has creeped up, there is a long way to go to reach the pre-pandemic level. Part of the reason was attributed to lingering COVID-19 risks, in particular rising Omicron variant concerns. However, part of the other equation was due to the still reeling labor market. While indicators pointed to an improvement in 4Q, the elevated unemployment rate and falling wages suggested lukewarm private consumption, which we estimate to be around 2% in 2021. Therefore, more direct cash transfers can be considered, especially for vulnerable households", Mr. Yun Liu said.

Despite Vietnam’s selected re-opening efforts from November, tourism has remained in the doldrums. Tourist arrivals exceeded 15k in December 2021, thanks to visitors from mainland China and Korea, two of Vietnam’s traditional source markets. However, the boost was still minimal compared to pre-pandemic days. Transport services barely grew in 4Q, while accommodation still contracted by more than 15% y-o-y. There is still a long way to go to return to pre-pandemic levels: transport and accommodation services were around 7% and 30% below their respective 2019 levels, making them two main laggards of the economy. "That said, the start of 2022 may bring some hope for these two sectors, as Vietnam has resumed commercial flights to eight main markets as of January 1, after two years of a pause", Mr. Yun Liu stressed.

Mr. Yun Liu believed Vietnam would be set to return to a firm broad-based growth track after concluding 2021 with a firm rebound from its worst contraction. On the one hand, manufacturing and exports are expected to continue to lead, partly supported by resilient FDI commitments. On the other hand, domestic demand will likely further recover as lingering restrictions are gradually phased out and the labour market recovers. "After two years of subdued growth, we expect Vietnam’s growth to accelerate by 6.5% in 2022. The authorities also set the 2022 growth target at "6.5-7%", a similar pace as in the pre-pandemic days", Mr. Yun Liu emphasized.

However, Mr. Yun Liu  said, the biggest growth headwind to bear in mind is the current fifth COVID-19 wave, not least with the highly transmissible Omicron variant. After dropping to November’s lows of 4k, the number of daily infections has soared again, jumping to 20k as of late. Unlike the last time the fourth COVID-19 wave hit HCMC, cases, mostly of the Delta variant, have spread from Hanoi and Hai Phong in the north to central and the Mekong Delta provinces.

"The good news is that Vietnam is in a better vaccine position to protect itself from imposing another lockdown. By the end of 2021, it will have fully vaccinated 70% of its population, with a focus on its booster drive.Health authorities have reduced the interval time from six to three months for booster shots. As Vietnam’s vaccine drive has accelerated since last October, this means that 1Q22 will be the main period when such efforts will be pushed. HCMC has led the country in giving booster shots to prioritised groups since early December, and the government targets finishing its booster campaign by the end of 1Q22. Therefore, how fast local restrictions can be removed and international travel be expanded will largely hinge on Vietnam’s response to the lingering pandemic", Mr. Yun Liu said.

One last word on inflation. While the economy gradually re-opens, price pressure has kicked in at a much slower-than-expected pace. Headline inflation decelerated to 1.8% y-o-y in December, falling short of consensus (HSBC: 2.1%; Bloomberg: 2.3%; Prior: 2.1%). This brings full-year inflation to 1.8% in 2021. While elevated transport costs (11% y-o-y) were the main driver of inflation, lower food prices, partly thanks to base effects, coupled with weak demand-pull inflation, drove the slowest growth of inflation since 2015. As economic activity normalises in 2022, Mr. Yun Liu expects price pressure to kick in, but the pace should be manageable. He forecasts headline inflation to grow 2.7% in 2022, below the State Bank of Vietnam’s (SBV) 4% inflation ceiling. While inflation is unlikely to be a main concern for the central bank in 2022, the health of the real estate market may come into greater focus.