Vietnam to Maintain Strong, Steady Growth

10:52:30 AM | 5/11/2021

Vietnam’s economic growth is expected to rebound to 6.7% this year, despite the recent resurgence of the COVID-19 pandemic in nearby countries, and rise to 7% in 2022, said Andrew Jeffries, ADB Country Director for Vietnam, at an event releasing the latest Asian Development Outlook (ADO 2021) in Hanoi.

Manufacturing and processing industry is the engine of growth

Andrew Jeffries said, “Stagnant domestic consumption and weak external demand caused by the COVID-19 pandemic slowed down Vietnam’s economy last year, but the growth momentum remains strong this year and next, made possible by Vietnam’s success in controlling the spread of the virus. But significant risks remain this year and next, including the emergence of new coronavirus variants and a delay in the government’s vaccination plan.”

ADO 2021 says Vietnam’s economic growth will be boosted by export-oriented manufacturing, increased investment, and expanding trade. Industry is forecast to expand by 9.5% in 2021, contributing 3.5 percentage points to GDP growth. The sector got off to a strong start in the first quarter of 2021, when it grew by 6.3% from the first three months of 2020. The Purchasing Managers’ Index rose to 53.6 in March, its highest since January 2019. New foreign and local firms are expected to be established due to COVID-19 vaccines enabling greater mobility at home and, in the case of foreign investors, travel to Vietnam. The economic recovery of major trading partners will increase demand for manufacturing exports. Construction is expected to pick up quickly as the government continues to accelerate major infrastructure projects in 2021 and low interest rates stimulate property development.

According to Mr. Nguyen Minh Cuong, Chief Economist at ADB in Vietnam, services are expected to rebound by 6% in 2021, contributing 2.3 percentage points to GDP growth. The growth in services is coming from the digital transformation, increased spending on COVID-19 vaccines, buoyant business sentiment, and low interest rates. A stronger agriculture sector is expected this year on continued structural reforms, greater market access for agriculture exports under regional free trade agreements, and higher global food prices due to rising demand.

In addition, increased investment will be a key growth driver this year and next. Vietnam’s success in containing COVID-19 and the Investment Law, passed in January 2021, to reduce business regulations are expected to further attract foreign investment. Registered foreign direct investment increased by 17.8% in the first quarter of 2021 from the year-ago quarter. Overall investment growth will be further spurred by private investment, which has already risen substantially, stimulated by low interest rates and rising public spending.

Mr. Cuong also said that trade will remain robust in 2021, supported by strong economic recoveries in China and the United States, Vietnam’s two major trading partners, and the country’s participation in 15 major free trade agreements involving almost all advanced economies. Vietnam posted a US$2 billion merchandise trade surplus in the first quarter of 2021, with exports surging 34.3% to China and 32.8% to the US. Merchandise exports are forecast to rise by 8% this year and the next. Vietnam’s continued economic dependency on foreign direct investment - which will see increased imports of capital goods and manufacturing inputs - and rising oil prices will push imports to grow by 5%, narrowing the current account surplus to the equivalent 2% of GDP this year and 2.5% in 2022.

Containing the impact of COVID-19 on income and poverty

ADB calculations in December 2020 show the significant impact that the COVID-19 pandemic will have on income. In particular, the impact of the pandemic will reduce household per-capita income on average by 9.8% and the poorest income group will suffer a 10.2% income drop, while the poverty rate of households in the poorest income quintile will rise by 40%. Because rural households supply more migrant workers, they face bigger losses of remittances than urban households, and households headed by women will experience more losses of both domestic and international remittances than households headed by men.

To tackle the COVID-19 pandemic’s impacts on income and poverty, the Government, on 9 April 2020, passed Resolution 42, a social security program equal to 0.2% of GDP (approximately $0.5 billion) to provide cash transfers to individuals, households, and businesses. Resolution 42 is expected to help reduce the 2020 poverty rate by 1.3 percentage points to 4.9%. The program is expected to particularly benefit households headed by ethnic minorities, which are typically in the poorest income quintile, and those in rural areas, because their incomes have tended to be hardest hit by the pandemic. Progress in disbursing Resolution 42 funds has been slow. By the end of 2020, only half of the funds had been disbursed due to the lack of well-defined selection criteria and a dedicated disbursement system. Although Resolution 42 could be highly effective in reducing poverty, the program itself will not be enough to lift the most vulnerable groups out of poverty due to the size of the funds available and large poverty gaps.

Therefore, the cash transfer program needs to be strengthened to prevent further income losses among the poorest and most vulnerable groups. Because COVID-19’s impact on income has been highly heterogeneous, support to those working in the most affected sectors should be prioritized. Building a comprehensive monitoring and evaluation system for current and potential social assistance beneficiaries that also includes those in the informal sector would be useful for reaching those in need. A more sustainable long-term strategy should be to help the poor and vulnerable to diversify their livelihoods through, for example, short-term vocational training and improved access to microfinance for establishing new businesses.

By Anh Mai, Vietnam Business Forum