Vietnamese economy on the rebound

The re-emergence of the COVID-19 pandemic in 2021 caused Vietnam’s GDP decline to 2.5%, from the estimate of 4.8%.

Macro indicators remain stable

The appearance of new variants of COVID-19 virus in 2021 slowed down the world economic recovery. In addition, the pandemic caused disruption to the global value chain, increasing the price of raw materials, which was a big challenge for production and business activities of many countries.

General Director of the General Statistics Office Nguyen Thi Huong said that Vietnam’s GDP in 2021 is estimated to have increased by 2.58% compared to that of 2020 due to the serious impact of the COVID-19 pandemic, particularly the prolonged social distancing in the third quarter of 2021 in many localities.

The agricultural sector expanded by 3.18% in 2021, contributing 0.29 percentage points to the growth rate of the whole economy. The manufacturing industry continued to be the growth engine of the whole economy with a growth rate of 6.37%, contributing 1.61 percentage points to the growth rate of the whole economy.

The negative growth of a number of service industries such as transportation, warehousing, accommodation and catering services has reduced the overall growth of the service sector and the entire economy. Meanwhile, the health sector and social assistance activities achieved the highest growth rate in the service sector with an expansion of 42.75%. Financial, banking and insurance activities increased by 9.42% while information and communication rose by 5.97%.

In such a context, 119,800 enterprises withdrew from the market, with most of them established less than five years with small capital scale.

The timely issuance and implementation of Government Resolution No. 128, dated October 11, 2021, made an important contribution to restoring production and promoting the market, creating confidence among businesses. The survey results of business trends in the manufacturing industry showed that enterprises were optimistic about production and business activities in the first quarter of 2022 with 81.7% of enterprises assessing their business as stable and better than in the fourth quarter of 2021.

According to the Foreign Investment Department (Ministry of Planning and Investment), total foreign investment capital registered in Vietnam including newly registered capital, adjusted capital and capital contributions and share purchase by foreign investors reached 31,15 billion USD as of December 20, 2021, up 9.2% compared to 2020.

It can be said that the import and export of goods continued to be the bright spot of the economy with the total import and export turnover of goods reaching 668.5 billion USD in 2021, up 22.6% over the previous year.

According to Deputy Governor of the State Bank of Vietnam Dao Minh Tu, the State Bank of Vietnam adjusted interest rates appropriately amid the difficulties caused by the pandemic, creating favourable conditions for credit institutions to continue to reduce lending interest rates and to support the recovery of the economy.

As of December 24, 2021, the total means of payment increased by 8.93% compared to the end of 2020, while capital mobilisation of credit institutions soared by 8.44% and credit growth of the economy reached 12.97%.

Notably, economist Phung Duc Tung commented that the stock market grew strongly despite the complicated developments of the pandemic. Vietnam’s stock market recorded many new records in 2021 with VNIndex reaching 1,500 points, stock market capitalisation increasing by 45.5%, and the average transaction value rising by 257.5 % compared to the average of the previous year.

According to the General Statistics Office, the consumer price index in 2021 (CPI) only advanced by 1.84% over the same period in 2020, the lowest increase since 2016. Average core inflation in 2021 rose by 0.82% over that of 2020.

Problems during the recovery

According to World Bank Lead Economist and Programme Leader for Vietnam, Macroeconomics, Trade & Investment, Jacques Morisset, Vietnam is facing many obstacles in restarting the economy after a prolonged period of social distancing. However, the positive developments observed in the last months of the year indicate that the economic situation will continue to improve and that growth will be strongly boosted in the coming months.

Fiscal policy interventions will also be effective for Vietnam's economy, including tax exemptions and reductions, the acceleration of the implementation of public investment projects, and providing aid to subjects in need.

Some international observers also commented on the Vietnam’s medium-term outlook in the next five years that Vietnam will continue to be one of the fastest growing emerging markets in Asia. The expected drivers are that Vietnam has a relatively large workforce with qualifications being improved compared to other competitors in Southeast Asia in addition to having relatively low labour costs.

Capital expenditure is expected to increase rapidly, indicating that multinational companies will continue to pour capital into Vietnam while the government will continue to spend on infrastructure. Vietnam is also an attractive destination when companies consider moving production lines to Asian countries.

In addition, Vietnam will also benefit from the growing network of Free Trade Agreements (FTAs) and the Regional Comprehensive Economic Partnership Agreement (RCEP) effective from January 1, 2022.

The Vietnam Institute for Economic and Policy Research (VEPR) proposed a scenario that if the pandemic re-emerges, resulting in the closure of production in some localities, then labour shortage may occur accompanied with high costs and shrink in many sectors, especially the agriculture sector. Accordingly, the extent of the impact of COVID-19 on the agro-forestry-fishery, manufacturing, and service sectors will be more severe than at present.

Economist Pham The Anh said that the serious economic downturn in the third quarter of 2021 with heavy socio-economic consequences will take a long time to overcome. High cost-push inflation is a risk that needs to be closely watched, and any monetary easing requires extreme caution.

Economist Can Van Luc said that, the non-performing loans of the banking system increased to about 2.3% by the end of 2021, while non-performing loans including bad debts sold to Vietnam Asset Management Company (VAMC) and restructured debts are forecast at over 7% for 2022.

In general, experts agree that the prospect of economic recovery depends greatly on the strategy to deal with the pandemic in the near future because the support packages are still limited. In the current context, Vietnam may temporarily accept a higher-than-normal budget deficit to support social security and businesses to resume production. However, once the pandemic is over, fiscal disciplines need to be strictly adhered to in order to avoid long-term fiscal and public debt risks.