Vietnam’s economy to rebound in new year

11-Jan-2022 Intellasia | VIR | 5:02 AM Print This Post

Vietnam saw GDP contract by 6.2 per cent in Q3 2021, which dragged the country’s GDP growth for the first nine months of the year to a historic low of 1.4 per cent.

Underemployment impaired domestic demand, as did slow social support. A strict lockdown caused labour shortages in HCM City and surrounding provinces. Trade sustained growth with a mild surplus of $225 million in the first 11 months. Rapid vaccinations in September and October slowed the spread of the virus and the economy began to improve in Q4. However, the prospects of a strong economic rebound in Q4 are clouded by high infection rates, continued mobility restrictions in some provinces, and limited labour supply in key cities. Further, slower-than-expected disbursement of public investment will hinder the intended boost to domestic demand.

Against this backdrop, the Asian Development Bank (ADB) has revised its economic growth forecast for Vietnam down to 2.0 per cent in 2021 from a 3.8 per cent forecast in September. The growth forecast for 2022 remains at 6.5 per cent, as expanding vaccination coverage may accelerate GDP growth.

The State Bank of Vietnam (SBV) maintained an accommodative monetary policy since the beginning of the pandemic. Banks have been encouraged to restructure existing loans, provide new, cheaper loans, and reduce interest rates and fees to support businesses affected by the pandemic. Concomitantly, the SBV has given banks leeway on reporting non-performing loans. Subdued demand in Vietnam will hold inflation at 2.2 per cent in 2021, less than earlier forecasts, but the projection for 2022 is revised up to 3.8 per cent on the volatility of global price movement and pressure coming from a weaker VND against the US dollar if capital outflows happen due to a more front-loaded response of advanced economies to curb inflation.

The timely shifting by the government to a new strategy to safely adapt and respond to the pandemic has allowed businesses to resume economic activity. The impressive vaccination rates would support the bounce-back of manufacturing and services. Vietnam’s market access from multiple free trade agreements will continue to aid trade and investment. Public investment is also expected to boost economic recovery.

However, the major downside risks to the recovery in 2022 remain. The pandemic with its new variant Omicron could potentially slow global recovery in 2022. The volatility of global price movements and the anticipated fiscal and monetary tightening of advanced economies in 2022 would cause uncertainties for global financial conditions, affecting Vietnam’s recovery.

To support economic recovery and sustain growth in the medium and long term, the following policy measures are strongly recommended.

Firstly, since this is a health-induced economic crisis, the health solution plays a decisive role, while macroeconomic policies can serve as complementary instruments. This means continued vaccinations and booster shots remain critically important. While fiscal policy would take the centre stage, it must work in harmony with monetary policy to support recovery.

Next, positive outcomes of the fiscal consolidation and Vietnam’s effective public debt management have created sufficient fiscal room for Vietnam to respond to emerging fiscal needs in the short term. The country can afford a higher budget deficit and increased public debt in the next two years to support the economy. However, in the longer term, when the economy gradually recovers and the need for fiscal support decreases, it is important to expand the revenue base, strengthen revenue management, and improve the efficiency of state budget expenditures to re-establish fiscal discipline within the next 3-5 years.

Further, fiscal support packages play a vital role, not only during the pandemic but also during the transition phase towards recovery. Policymakers need to set appropriate targets for each period to develop a support package on a large enough scale as Vietnam’s current fiscal stimulus package is less than 2 per cent of GDP. This could be raised to an appropriate level that meets the criteria of timely, targeted, long enough, and inclusive actions to achieve expected results. In the short-term, fiscal priorities should be set on health spending, safeguarding social security to vulnerable groups, and assisting the business sector.

Moreover, public investment should continue to be one of the main drivers for growth. Investment in sustainable infrastructure will bolster the recovery. Speedy disbursement of public investment is therefore critical to ensure its intended multiplier impacts.

Lastly, in the implementation of health as well as economic solutions for the recovery and normalisation of the economy, greater regional cooperation among countries is needed. Such cooperation is also important to facilitate trade recovery and help revive affected sectors such as tourism, which require cooperation and alignment on mobility-enhancing measures such as vaccine passports.

https://vir.com.vn/vietnams-economy-to-rebound-in-new-year-90513.html

 

Category: Economy, Vietnam

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