Vietnam

MAJOR MACRO ECONOMIC INDICATORS

(e): Estimate (f): Forecast

RISK ASSESSMENT

Growth will converge to pre-pandemic levels 

Growth is expected to gain momentum in 2022 driven by ongoing recoveries in trading partners and domestic demand, but pandemic headwinds could linger at domestic and international levels. The government might extend restrictions if outbreaks persist. Consequently, this would continue to weigh on the manufacturing industry (17% of GDP) and agriculture supply chains through labour shortages. However, external demand should remain buoyant in 2022 especially for textile, garments and electronics, as its key trading partners, China, the EU and the U.S. recovered and Vietnam is no longer threatened by punitive tariffs from the latter, who labelled Vietnam as a currency manipulator in 2020. Foreign Direct Investment (FDI) inflows barely recovered in the first nine months of 2021, as factories reduced their production due to restrictions. However, it should bounce back as Vietnam remains attractive among foreign investors seeking diversification and moving out businesses from China. Tourism, which accounted for nearly 10% of GDP in 2019, has been hard-hit by the closure of international borders since March 2020. The sector should recover slowly in 2022, due to persisting travel restrictions in China (Zero COVID strategy) and cautiousness among Koreans. That being said, domestic tourism should continue to partly offset the impact thanks to government incentives. Household consumption (69% of GDP in 2019) should gradually recover provided the restrictions are eased, especially on factories and workers: the unemployment rate reached records in the second part of 2021, standing at 2.9% in September 2021, and time would be needed to reabsorb it. While domestic demand recovers, inflation should get closer to the 4% target in 2022. The SBV (the central bank) should therefore maintains its policy rate, or rise it back to pre-pandemic levels. Credit demand should bounce back in 2022 and will continue to benefit from credit relief measures until June 2022, through debt restructuring or lowering interest rates on existing loans. In contrast, non-performing loans are expected to rise in 2022. 

Fiscal deficit still high, current account strengthened 

The fiscal deficit is likely to remain relatively high as the impact of the COVID-19 outbreaks that developed in late 2021 could linger in 2022. Moreover, expenditures will increase, as the government seeks to accelerate ongoing public infrastructure projects, which were impeded by containment measures in the construction sites. However, revenues, supported by growth momentum, should balance out a rise in expenditures. The public debt-to-GDP ratio is set to dip. However, the debt is still exposed to currency fluctuations as 40% is denominated in foreign currency.

 
The current account surplus is set to rebound, driven by a higher trade surplus and robust external demand. The country has been benefiting from foreign manufacturing relocations and should continue to strengthen its export driven economy, hence the country’s trade balance. Imports should continue to strengthen with the revival in consumption and investment demand. Furthermore, Vietnam is among the world’s top 10 remittance recipient countries and its current account should also benefit from sustained remittances inflows (6% of GDP as of 2019) with the recovery in the main sources (the U.S., Australia and Canada). Foreign exchanges reserves remain adequate, equalling 3.5 months of imports as of July 2021.

Towards further cooperation with China

The Communist Party of Vietnam (CPV) has maintained a unitary government, which has centralized control over the state, media and military. The CPV re-elected Nguyen Phu Trong for a rare third five-year term as general secretary of the ruling Communist Party in early 2021. He will continue his current domestic agenda with a focus on the anti-corruption campaign. He should also give priority on developing a new leadership to be elected at the next party congress for a smooth transition, as the leader’s health has been deteriorating since 2019. Externally, relations with China improved recently, through trade facilitation between both socialist economies and a bilateral cooperation plan in the 2021-2025 period. The pandemic has also offered Beijing the opportunity to strengthen ties through its vaccine diplomacy amid pandemic-induced disruptions in Vietnam.  On the South China Sea dispute, China has been pressuring Vietnam to drop oil and gas projects from international oil companies. While the U.S. offered Vietnam its support to counter Beijing in the South China Sea, it is therefore unlikely to accept it in order to maintain close relations with China. 

Last updated: February 2022